Please, respond to the attached two classmate main posts. See attachment for more instructions. Thanks
Instructions for the classmate classmate response (around 125 words each) Please, respond to the below two classmate main posts. (Please, the responses need to be a discussion, not an evaluation. You can agree with them and add/comment about their response. No citation required) Thank you Classmate discussion posts Discussion 1: David Greco Financial analysis is the process by which investors and creditors make the determination whether to offer an organization capital via a debt instrument, or provide capital via an equity transaction. Financial statements are the main tool used to complete the analysis (Subramanyam, 2014). Financial statements are periodic reports produced by organizations to present statistical information as to the successes or failures of the organization. Financial statements present a snapshot of the organization’s assets, liabilities and equity position. Additionally, statements show progress over time with respect to income received, expenses accrued and profits earned. Other elements of financial statements show the movement of cash through the business (Subramanyam, 2014). Financial statements are important to users in their comparative nature and potential to predict future performance (Subramanyam, 2014). The statements of an organization can be compared not only to past statements from the same company, but also to equivalent statements from other companies in the same industry. An investor targeting a specific industry might well compare statements from multiple companies in that industry to determine which company might best warrant investment with reported figures such as dividends paid or ratios like return on investment. Potential creditors might review past statements from an organization to see how revenues have grown over time, and how those revenues have impacted a ratio such as accounts payable turnover (Subramanyam, 2014). Financial analysis is reliant upon the faithful representation of the company’s statements for an accurate analysis. While financial statements are the primary tool in financial analysis, it is important for users to note that statements are not the only factors to be considered. For example, a limitation of financial statements is that they intend to express performance through numbers (Arthur, 2019). If a company is relying on innovation for revenues and marketshare, an examination of financial results might not depict potential for a significant breakthrough. Additionally, while companies in similar industries should have comparable statements, not all companies utilize the same accounting procedures (Arthur, 2019). Those differences might result in different valuation of assets. While financial statements provide a wealth of valuable information, users would benefit from examining all aspects of the business environment. References Arthur, L. (2019). What Are the Limitations of a Company's Financial Statements? Retrieved from Chron.com: https://smallbusiness.chron.com/limitations-companys-financial-statements-23764.html Subramanyam, K. (2014). Financial Statement Analysis . New York: McGraw-Hill Education. Discussion 2: Cheryl Johnson The Financial Statements are the Income Statement, Balance Sheet, Cash Flow Statement and Statement of Shareholders’ Equity. These statements communicate information about the company’s performance and aid users in their decision-making when conducting financial analysis. Both internal and external users analyze the financial statements to ascertain the changes in the company’s use of resources and the resulting effect on the entity’s financial position (Accounting Tools, 2018). The analysis helps determine if the company is stable and will continue as a going concern, how liquid the company is in terms of paying bills and investors, the solvency of the business and the profitability of the company for example to invest in projects. Further, the financial statements are important to decision-makers in the computation of financial ratios and the analysis and comparison of past and current performance and how the company is trending in the industry. (Subramanyam, 2014). Financial analysis has its limitations. A major limitation is the company’s exposure to fraudulent transactions. This element is not stated on the financial statements. However, the effect is shown in the bottom line of the income statement resulting in increased profit. For instance, the company has padded its revenue showing increased sales of 25% above actual sales. The resulting increased profits would mislead users of the financial statements into believing that the company is more profitable than it really is. Another limitation of financial analysis is inflation. Inflation affects the company’s assets and liabilities from one accounting period to the next. All the time, long term assets and liabilities are under-valued. An asset or liability stated on the previous years financial statements is worth less than the current year’s assets and liabilities. Further, internal controls or the lack thereof and other management deficiencies affecting the company’s performance are not stated on the financial statements. These factors affect the company’s use of resources, result in losses and affects the company’s profitability. None of these factors are reported in the financial statements used by decision makers in the conduct of financial analysis. Also, the financial statements report historical information about of past performance. Users of the financial statements are interested to know if the company will survive and the company’s future performance. (Subramanyam, 2014). References: Accounting Tools. November 28, 2018. Financial statements. Retrieved from https://www.accountingtools.com/articles/2017/5/10/financial-statements Subramanyam, K. R. (2014). Financial Statement Analysis (11th ed.). New York, NY. McGraw Hill Education.