Financial Statement Analysis and Financial Forecasting

4300 words 18 pages
Financial Statement Analysis and Financial Forecasting

4.1 Introduction. The lesson will consist of basic financial statements, its relevancy, reliability and quality as a basis for making decisions. Focus on the decision-making role of accounting system has to be elaborated. Also ratio analysis as decision tool with forecasting models is discussed. The basis concept of preparation of financial statement and its usefulness is included with ratio analysis. Cash flow analysis and financial planning with forecasted financial statement are covered.

4.2 Source of Financial Information. Accounting is the guide-post for management. A firm should know the financial implications of its operations. The financial score of the firm is kept by the
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Net income, which is an indicator of the firm’s profitable operations, is the amount by which revenues earned during a period exceed expenses incurred during that period. If the firm’s operations prove to be unprofitable, total expenses will exceed total revenues and the difference is referred to as net loss.

4.3.5 Concept of Profit. There are useful profit concepts as given bellow; Gross profit (GP) or gross earning is the difference between sales and cost of goods sold (CGS). CGS includes manufacturing cost. Profit / earning before depreciation, interest and tax (PBDIT) is equal to revenues minus all operating expenses except depreciation, interest, and taxes. Operating profit / earning (OP/E) is difference between gross profit / earning and operating expenses consisting of general and administrative and selling expenses and depreciation. (OP/E= GP/E – OEXP - DEP). Profit / earning before tax (P/EBT) is the difference between profit / earning before interest and taxes and interest charges. (P/EBT = P/EBIT - INT). Profit / Earning after Tax or Net profit / earnings is the difference between profit before tax and taxes (NP or NE = PBT - TAX).

4.3.6 Functions of the Income Statement. The income statement matches revenues and expenses to determine the firm’s net income. It represents a flow of economic data, flow of revenues and expenses during a period of time. The statement also helps to reveal changes in the balance sheet from the


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