Page 703 - Accounting Principles (A Business Perspective)

17. Analysis and interpretation of financial statements

Management may disclose in an accounting policy statement, its policies regarding their business practices and
those accounting policies that were followed in preparing the financial statements. Conflicts of interest will be
identified and discouraged.

Professional financial analysts, such as those working for stock brokerage firms and those employed to help
evaluate possible merger and acquisition candidates, typically go "beyond the numbers" in analyzing a company.
They usually visit the company, interview management, and assess the physical facilities and plans for the future.
They are interested in evaluating such factors as the competence and integrity of management. Professional
financial analysts form an overall impression of the company by giving all of the data and other information the
"smell test". In other words, does everything seem legitimate or are there possible significant hidden factors that
have not yet been identified which makes one think that something is not right.

The future looks bright. Needed changes will be made to maintain public confidence in financial reporting.
Protecting the public interest should be paramount in the future.
This chapter concludes our coverage of financial accounting. It is likely you will continue on with studies in
managerial accounting. It is important to realize that it is impossible to completely separate financial and
managerial accounting information into neat packages. Managers use both the published financial statements and
managerial accounting information in making decisions. Also, some of the concepts covered in managerial
accounting (e.g. job costing and process costing) have a direct impact on the formal financial statements. Many
accountants are attracted to managerial accounting because it is not constrained by having to conform to generally
accepted accounting principles. Instead, management accountants can provide to management whatever

information in whatever form management requests.

An accounting perspective:

Uses of technology

The Journal of Accountancy peridically publishes articles on Internet resources to encourage
greater use of technology by accountants. One of the best in this category is called “Smart Stops on
the Web”, a series authored by Megan Pinkston. (For example, see this one from 2007):
http://www.journalofaccountancy.com/Issues/2007/Jun/SmartStopsOnTheWebArticle.
You may want to investigate this article and some of the others in the series and then visit some of

the websites they list. There is no doubt that the Internet will only grow in importance in the
future. The more you know about it, the more marketable you will be upon graduation.

Understanding the learning objectives
• A company's financial statements are analyzed internally by management and externally by investors,
creditors, and regulatory agencies.

• Management's analysis of financial statements primarily relates to parts of the company. Management is
able to obtain specific, special-purpose reports to aid in decision making.
• External users focus their analysis of financial statements on the company as a whole. They must rely on
the general-purpose financial statements that companies publish.

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