Financial analysis involves the use of various financial statements. These statements do several things. First, the balance sheet summarizes the assets, liabiiities, and owners' equity of. business at a moment in time, usually the end of a year or a quarter. Next, the income statement summarizes the revenues and expenses of the firm over a particular period of tin.rr. again usually a year or a quarter. Though the balance sheet represents a snapshot of the firmfinancial position at a moment in time, the income statement depicts a summary of the firmprofitability over time. From these two statements (plus, in some cases, a little additionainformation), certain derivative statements can be produced, such as a statement of retainec earnings, a sources and uses of funds statement, and a statement of cash flows. (We conside: the latter two in the next chapter.)
In analyzing financial statements, you may want to use a computer spreadsheet progran. For repetitive analyses, such a program permits changes in assumptions and simulations to done with ease. Analyzing various scenarios allows richer insight than otherwise would be th case. In fact, financial statements are an ideal application for these powerful programs, an: their use for financial statement analysis (both external and internal) is quite common.
In the US, the Financial Accounting Standards Board (FASB) determines the accounting standards used to prepare, present, and report a corporation's financiai statements bv issuing Statements of Financial Accounting Standards (SFAS). Collectively, these statements make up what is knoum as the US GenerallyAcceptedAccounting Principles (US GAAp, or simply GAApi. Global capital markets demand global accounting standards and global regulatory cooperation. With a goal of developing global accounting standards, the International Accouniing Standards Board (IASB) has the responsibility for developing International Financial Reporting Standards (IFRS). In 2005, all European Union (EU) countries adopted IFRS. In addition, many countries outside of Europe, including fapan, rely on accounting standards largely equivalent to IFRS. The IASB works closely with the FASB, and other national accounting standard setters, toward "convergence" in accounting standards around the worid. Convergence is a process of getting closer. Convergence of accounting standards aims to narrow or remove differences so that investors can better understand financial statements prepared under different accounting frameworks.