Financial Reporting and Ethics - The Institute of Chartered ...

FINANCIAL REPORTING AND ETHICS(a)(b)A progressively increasing amount of fixed assets without acorresponding increasing net profit; a fair inference is that theassets are not profitably employed either because of underutilization of such assets or because selling prices have not beenappropriately adjusted to cover the enhanced cost of such assets.Where short term liabilities, like bank overdraft or bank loan, donot decrease or actually increases – a fair inference is that thefirm’s position has not been sufficiently attractive to support theissue of shares or debentures to fund the firm’s operations.4.5 TOOLS OF ANALYSIS AND INTERPRETATION TION OF FINANCIAL STATEMENTSTEMENTSAnalysts and interpreters of financial statements will usually employ acombination of the following items:(a) Ratios(b) Cash Flow Statement(c) Value Added Statement(d) Profit and Loss Account(e) Balance Sheet(f) Notes to the AccountsIn making use of the above, the following approaches may be employed:(i) Comparison of absolute/raw figures as shown in the financial statements,for example figures may indicate that sales have increased by 250,000,fixed assets by 300,000, etc.(ii) Ratio Analysis: This is the most widely used tool in the analysis andinterpretation of financial statements.(iii) The Cash Flow Statement will assist in revealing the true liquidityposition of an enterprise. This is because the statement provides aninsight into the ability of an enterprise to generate cash and cashequivalents as well as the pattern of utilization.(iv) Value Added Statement, on the other hand, helps in measuring theefficiency of the enterprise in terms of value added per employee orper naira.4.6 PROCESS OF INTERPRETATION TION OF FINANCIAL STATEMENTSTEMENTSThe process of interpretation of financial statement entails the following:(a) Calculating the ratios considered to be appropriate and relevant for thepurpose of the analysis.(b) Comparison of the ratios with similar ratios which could be the firm’sown past ratios, target ratios (projected ratios), industry or competitor’sratios.(c) Trend analysis or time series analysis of the ratios so calculated.(d) Vertical and horizontal analysis of financial statements.(e) Inter-firm analysis.72