The Information Offered by Financial Statements on the Company's Performances

Abstract

This paper sets out to analyze the main information that financial statements must contain, as well as the main evaluating indicators of the financial performance. The increase of the information needs of the users for the financial statements concerning the performance of the company has determines an increase of the role that it has begun to play the account of profits and loss in the structure of the financial statements, the enterprise offering in this manner information presented and recognized in an unitary way regarding the performance. Any successful business owner is constantly evaluating the performance of his company, comparing it with the company's historical figures, with its industry competitors, and even with successful businesses from other industries. To complete a thorough examination of your company's effectiveness, however, you need to look at more than just easily attainable numbers like sales, profits, and total assets. You must be able to read between the lines of your financial statements and make the seemingly inconsequential numbers accessible and comprehensible. There are many well- tested ratios out there that make the task a bit less daunting. Comparative ratio analysis helps you identify and quantify your company's strengths and weaknesses, evaluate its financial position, and understand the risks you may be taking. [PUBLICATION ABSTRACT]

Headnote

Key words: performance, ratio, financial position, statements

Abstract:

This paper sets out to analyze the main information that financial statements must contain, as well as the main evaluating indicators of the financial performance.

The increase of the information needs of the users for the financial statements concerning the performance of the company has determines an increase of the role that it has begun to play the account of profits and loss in the structure of the financial statements, the enterprise offering in this manner information presented and recognized in an unitary way regarding the performance.

Any successful business owner is constantly evaluating the performance of his company, comparing it with the company's historical figures, with its industry competitors, and even with successful businesses from other industries. To complete a thorough examination of your company's effectiveness, however, you need to look at more than just easily attainable numbers like sales, profits, and total assets. You must be able to read between the lines of your financial statements and make the seemingly inconsequential numbers accessible and comprehensible.

There are many well- tested ratios out there that make the task a bit less daunting. Comparative ratio analysis helps you identify and quantify your company's strengths and weaknesses, evaluate its financial position, and understand the risks you may be taking.

The concept of performance can be defined and quantified by means of an assembly of indicators or qualitative criteria: profit, rentability, growth, productivity, output, brand image etc.

Generally, performance expresses:1

* either the result of an action: in most cases, the word "performance" is associated with the positive result of an action, with the good result obtained in a certain field of activity;

* or, success: performance is associated with success, the success in a certain field;

* or an action leading to success.

Performance is also defined as a competitive state of the enterprise, reached by a level of efficacy and productivity ensuring it a durable presence on the market.1

The high interest for accounting information aims at the enterprise internal and external partners: managers, shareholders, employees, investors, suppliers, clients, public organisms etc.

Their concerns obviously refer to different fields, fact that materializes in different decisions in business, respectively, in the necessity of using a proper approach for their elaboration.

This variety of users and activities, leads to a variety of objectives, presented in table no.1

The concept of performance refers to a judgment on the result and on the way the result is reached, taking into account the manner this result is reached and the realization conditions. The measuring of performance goes beyond the simple observation; it has the objective of decision-taking allowing the improvement of the performance conditions.

The financial indicators used for measuring the enterprise performance are very diverse, the largest classification being in classical and modern indicators.

The traditional financial indicators reflect the historic performance of enterprises, having a limited relevance in foreseeing their future evolution.

The modern financial indicators are based on the concept of value creation, having a powerful relevance concerning the expression of the real financial performance. The maximization of these indicators' value leads to the creation of value, to the increase of the company's global value. The main modern indicators are:

* Market Value Added - MVA;

* Goodwill;

* Economic Value Added - EVA;

* The rentability rate of the invested capital;

* The rentability rate of cash flows;

* Shares' output.

The statistics realized over the last 30 years demonstrate that in the USA the market value was greater than the accounting value for more than 2/3 of the studied cases. The market value is greater than the accounting value when the company has intangible assets, such as the researchdevelopment capacity, the skills of managers and employees, information system, patents, inventions, good-will.

The Canadian specialists1 consider that financial ratios can be classified in six main types:

* liquidity ratios measuring the capacity of enterprise to honour its short-term liabilities;

* ratios concerning the debt management that shows in what degree the company is financed by credits

* ratios concerning the assets management, measuring the company's degree of efficacy in using its assets;

* the profitability ratio, measuring the general efficacy of the managerial team;

* the growth ratio measuring the capacity of the company to maintain its economic position when the economy is in a period of expansion;

* market value ratios measuring the capacity of the managerial team to create a market value greater than the costs and investments implied in the business.

A great part of these ratios are used in the Romanian business environment, as well.

Ratio analysis2 is used by analysts and managers to assess company performance and status. Ratios are not meaningful when used on their own, which is why trend analysis (the monitoring of a ratio or group of ratio over time) and comparative analysis (the comparison of a specific ratio for a group of companies in a sector, or for different sectors) is preferred by financial analysts. Another analytical technique of a great value is relative analysis, which is achieved through the conversion of all balance sheet (or income statement items) to a percentage of a given balance sheet (or income statement) item.

Although financial analysts use a variety of sub groupings to describe their analysis, the following classifications of risk and performance are often used:

* Liquidity. An indication of the entity's ability to repay its short-term liabilities, measured by evaluating components of current assets and current liabilities.

* Solvency. The risk related to the volatility of income flows often described as business risk (resulting from the volatility related to operating income, sales and operating leverage) and financial risk (resulting from the impact of the use of debt on equity returns as measured by debt ratio and cash flow coverage).

* Operational efficiency. Determination of the extent to which an entity uses its assets and capital efficiently, as measured by asset and equity turnover.

* Growth. The rate at which an entity can grow as determined by its retention of profits and its profitability measured by the return on equity (ROE).

* Profitability. An indication of how a company's profit margins relate to sales, average capital, and average common equity. Profitability can be analyzed through the use of the Du Pont analysis.

Tabel no.2 provides an overview of some of the ratio that can be calculated using each the classification areas discussed above.

The goal of financial analysis1 is to assess the performance of a firm in the context of its stated goals and strategy. There are two principal tools of financial analysis: ratio analysis and cash flow analysis. Ratio analysis involves assessing how various line items in a firm's financial statements relate to one another. Cash flow analysis allows the analyst to examine the firm's liquidity, and how the firm is managing its operating, investment, and financing cash flows.

The balance sheet, as image of the financial position, reflects the capacity of the enterprises to adapt to the environment changes, by the help of the controlled economic resources (assets), the structure of the financing, (equities and liabilities) and also by the help of some economical-financial indicators about liquidity and solvency. Information about the economic resources controlled by an enterprise and its capacity in the past to modify these resources is useful in predicting the ability of the enterprise to generate cash and cash equivalents in the future.

The income statement, as image of the enterprise's performances, reflects the capacity of the enterprise to generate profit. The information are useful in order to anticipate the ability of the enterprise to generate cash flows by using the existing resources (expenses) and also the efficiency in using new resources (profit or loss).

IASC/FRS pays a great attention to the loss and profit account, as a component part of financial statements as the information on profitability that it contains "is necessary for the assessment of the potential changes of the economic resources the enterprise can control in the future".

IAS I norm specify the fact that "the financial statement must present the true and fair view of the financial position, the financial performance and the cash flows of an enterprise", and indicates the information to be presented either in the profit and loss account or in notes (annex) so that they offer a true and fair view of the enterprise performance.

Information about performance of the entity should be provided in the income statement.

Minimum information on the face of the income statement includes:

* Revenue;

* Finance costs;

* Share of the profits or losses of associates and joint ventures;

* Tax expense;

* Discontinued operations;

* Profit or loss;

* Profit or loss attributable to minority interest;

* Profit or loss attributable to equity shareholders of parent.

The enterprises will have to present, either in the profit and loss account, or in the notes to the profit and loss account, an analysis of expenses using a classification based either on the nature of expenses or on their functions within the enterprise (the production function, the commercialization function and the administration function).

The profit and loss account is the synthesis document rendering information on the enterprise performance by means of flows determining the result, understood, mainly, as variation of own capitals during a financial year, that is, it indicates in what degree it accomplished its profit-oriented objective.

Taking into consideration the different meanings of the "performance" concept, we may conclude that it is defined by the users of accounting information according to their own interests.

Footnote

1 Niculescu, M., Diagnostic financiar (Financial diagnosis), vol. 2, Economic Publishing House, Bucuresti, 2005, p. 42

Footnote

1 Niculescu, M., Lavalette, G., Strategii de credere (Growth strategies), Economic Publishing House, Bucuresti, 1999, p. 256

Footnote

1 Halpert, P., Weston, J. F., Brigham, E., Finante manageriale (Managerial finance), Economic Publishing House, Bucuresti, 1998, p. 102

2 Hennie van Greuning , International Financial Reporting Standards - A practical guide, lrecson Publishing House, Bucuresti, 2005, p. 27-31

Footnote

1 Palepu, K.G., Healy, P.M., Bernard V.L., Business Analysis Valuation Using Financial Statements, South-Western Educational Publishing, USA, 1999, p. 317-333

References

Bibliography

Halpert, P., Weston, J. F., Brigham, E. 1998. Finante manageriale (Managerial finances). Bucuresti: Economic Publishing House

Hennie van Greuning, 2005. International Financial Reporting Standards - A practical guide. Bucuresti: lrecson Publishing House

Niculescu, M. 2005. Diagnostic financiar ( Financial diagnosis). Bucuresti: Economic Publishing House

Niculescu, M., Lavalette, G. 1999. Strategii de credere (Growth strategies). Bucuresti: Economic Publishing House

Palepu, K.G., Healy, P.M., Bernard VL. 1999. Business Analysis Valuation Using Financial Statements. USA: South-Western Educational Publishing