ABM 21

In one whole sheet of yellow paper, answer the following questions briefly and concisely:

1.) Give the importance of financial statements to the following group of sectors:

a. Shareholders
Shareholders are responsible for several independent and dependent decisions
for the business and their investments in the business. They tend to interfere with
corporate decisions and investments by supporting or objecting to a corporate decision.
Mainly, they use the financial statements provided by the company for such
responsibilities that will benefit their shares by assessing the liquidity, solvency of the
corporate, and to know the return on equity (ROE) and the productivity of the business
whether it is worth investing and increasing the volume of their investments or pulling out
their investments.

b. financial managers
Financial managers are obligated to a wide range of financial decisions for the
company. The financial manager's skill and familiarity with the business operation and
financial statements will determine the productivity and the future of the company. In
order for them to be familiar with such operations, costs, gains, and losses have to be
assessed. Hence, the role of the financial statement is crucial to every movement and
decision of the financial manager.

c. creditors
Creditors have to go through a process of assessing the business and its
capability to pay its liability before lending any of its assets to a business. Financial
statements on the other hand provide all the necessary information that any creditors
can analyze in order to assess a business' capability. Hence, through financial
statements, creditors will be able to estimate the eligible cost a business can borrow, the
payment deadline, interest to add, etc.

2.) Why do financial statements undergo different methods of

Analysis?

Financial statements have to go through multiple different methods in order to

isolate the necessary areas needed by the different groups of sectors such as investors,
creditors, and financial managers. Through these separate methods, there would be an
ease in analysis and other areas that will not be shown in a particular statement will be
presented to which it belongs. Having it go through different methods provides a laser
focus attention on the company’s productivity and clarification of the rightful amount to
be accounted since these methods support another financial statement.

3.) Discuss how the horizontal analysis of financial statements is conducted.

Horizontal analysis is used to analyze a financial statement of different periods of
time of a business by comparing the data provided in these statements. It is basically
conducted or performed by comparing a base year to a comparison year (can either be
present or not), which comparison year has to be more in the near present that the base
year. It uses a simple changes-percentage formula to get the percentage of changes,
while the amount of change is obtained by simply subtracting the base year from the
comparison year. Through such analysis, the company will be able to assess the
productivity and growth their business they have gone through.