Financial statements: Measuring a company’s fiscal fitness

May 13 2014, 08:58 IST
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SummaryA financial statement is essentially a company's report card, which helps stakeholders assess the firm's fiscal health.

commitments and contingencies, legal proceedings, related-party transactions, business acquisitions and disposals, which are essential elements for an investor.

Management discussion and analysis

All firms typically include a section in their annual reports where the management discusses a variety of issues such as nature of the business, industry structure and development, opportunities, threats, past results, future outlook, risk and concerns. The discussion by the management is arguably one of the most useful parts of a company’s annual report apart from financial statements. However, other than excerpts from financial statements, information included in the management commentary is typically unaudited.

Auditor’s reports

Financial statements presented in companies’ annual reports are required to be examined by an independent accounting firm as per the specified standards. The independent auditor then provides a written opinion on the financial statements. An unqualified audit opinion states that financial statements give a ‘true and fair view’ and are ‘fairly presented’ in accordance with applicable accounting standards.

This is known as a ‘clean’ opinion. Alternatively, a ‘qualified audit opinion’ is one in which there is some scope of limitation or exception to accounting standards. An adverse audit opinion is issued when an auditor determines that financial statements materially depart from accounting standards and are not fairly presented.

To conclude, when looking at the financial statements, investors should review the company's sources of information, economy, industry and the comparable firms in order to assess the company’s future.

P Saravanan

The writer is an associate professor of finance and accounting at IIM Shillong

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