Financial Statements: Importance And Valuation Essay.

Financial statements are considered as an essential component of the companies and organizations. The statements relate to the projection of values estimated for the business processes. Typical examples of the financial statements are the balance sheets, income statement and cash flow statement (Palepu, Healy and Peek 2013). The commonality of the term “statement” in all the three data bears correlation with the presentation of the financial calculation to the stakeholders, shareholders and agency partners. The following provides an in-depth description of each of the highlighted examples.

Balance sheet reflects the expenditure of the companies and organizations in terms of the business procedures. The word “balance” is the return amount that the personnel achieve from the suppliers and the agency partners. Timely payment of this balance maintains the stability in the relationship between the native organization and the stakeholders and shareholders (Minnis and Sutherland 2016). The maintenance of sheets for calculating the costs of the business activities enhances the clarity of the personnel regarding the financial parameter. The tabular format of the sheets is an addition to this clarity. Utilization of Microsoft excel for creating the balance sheets reduces the chances of misplacing the balance sheets.

Income statement is one of the other elements of financial statements. As a matter of specification, this statement includes the sources from where the companies and organizations achieve an escalation in the profit margin (Fulmer and Ployhart 2014). Consideration of the losses is also a part of this calculation, which brings to the forefront the areas, which needs improvement for the betterment of the companies and organizations. Using Microsoft Excel for the presentation of the income statement helps the personnel to monitor the business procedures in an advanced manner.

Cash flow statement is another item of the financial statement. The basic functionality of this item is to present the flow of cash, from the internal environment of the companies and organizations to the external environment, in the form of statements (Trugman 2016). The utilization of tabular representation is beneficial in this item also, as it provides the partners with an easy grasp over the attempted cash that is being transmitted to the external agencies. Maintenance of consistency in the execution of evaluation highlights the errors within the calculations. This step of evaluation reduces the chances of errors in the financial statements.

Valuation can be considered as an appreciation for the tasks carried out by the individuals. This valuation equalizes with the attributes of motivation and encouragement, which generates and urge among the individuals to expose better performance (Konchitchki and Patatoukas 2013). In the business context, this valuation has different connotations in different respects. Conjunction of the meaning of valuation with motivation, it attains the connotation of appraising the performance exposed by the employees. Increasing the frequency of these appraisals reflects the true essence of the attribute of valuation.

Balance Sheet

Viewing it from monetary issues, valuation attains the connotation of setting prices for the business processes. This projects the approach of the personnel towards the financial activities. This connotation establishes relevancy with the requirements of the current literature review. Delving deep into the issue, the aspect of valuation finds its applicability in case of determining the pries of the assets and liabilities of companies and organizations (Dichev 2017). The major drive behind the execution of valuation is the analysis of the financial activities in order to achieve an understanding about the tax obligations.

The theoretical framework enlivens the valuation of the assets and liabilities of companies and organizations. Typical examples in this direction are the absolute value model, relative value model and option pricing model. Effective utilization of the absolute value model helps the personnel to calculate the value of the assets and liabilities in the near future. Prior estimations of this sort is an added advantage in terms of averting financial crisis, such as heavy tax obligations, fluctuating pries, high interest and exchange rates and inflation among others (McNichols and Stubben 2015). The related models, such as multi-period model, disunted ash flow model, Gordon models prove beneficial for the personnel in terms of presenting error free mathematical alulations.

Relative value model is assistance for the personnel in terms of determining the value of the products and services, through the execution of thorough market research. Exposure of conscious approach in this direction provides the companies and organizations with the opportunity to enjoy competitive advantage over the contemporary brands.

Option pricing models apply for the assets, which possess optional investment choice (Barth 2013). Basically, this is a complex model, however, rational approach towards the indulgence into fair competition with the contemporary brands. This “fairness” aligns with the basic concepts of the valuation.

Valuation authenticates and validates the financial business procedures for companies and organizations. This valuation enhances the clarity of the personnel in terms of tax obligations, which is a support for the creation and development of financial items, such as balance sheet, income statement and ash flow statement.

Perceiving the valuation in terms of accounting, comparing two balance sheets, helps in the development of an error free balance sheet. This consists of clearly presented values of the assets and liabilities (Hail 2013). There are several methods, which helps the personnel to valuate the balance sheet. Some of these are international accounting principles. Within this, an essential component in the first in first out (FIFO) valuation, which calculates the amount of the assets and liabililities, by taking into consideration the earlier resources. Herein, lays the appropriateness of the adjective “first”. “In” and “out” can be correlated with the inbound and outbound ash logistic that is stipulated for the execution of the business procedures.

Income Statement

Income statement can be valuated with the help of the market research (Sinclair and Keller 2017). As a matter of specification, market research makes the personnel aware of the market scenario, which is assistance in terms of setting the prices of products, services and the raw materials required for carrying out the business processes. Presentation of the valuation in terms of tables and excels for sending the statement to the clients adds authenticity, validity and reliability to the financial activities.

Discounted cash flow method is used for the valuation of cash flows. Optimization of the estimated costs enhances and upgrades the personnel capacity towards luring the investors (Macve 2015). Market research also finds applicability here. Enhanced knowledge of the market survey enables the personnel to estimate the cost of the products, services and the raw materials. Advanced estimations in this directions safeguards the companies and organizations from the financial crisis. Maintenance of consistency in the execution of evaluation highlights the errors, which needs rectification. Keeping the provision of discounts for the investors is also accounted within the valuation process. This step needs the assistance from the Trade Union members for understanding the tax obligations, which might act as an obstacle in setting the price of the products and services. Exposure of rational approach in this direction helps in calculating the potential opportunities, which would generate an urge among the investors to expand their business (Schmeisser et al. 2014).

The financial assets and liabilities of companies and organizations help in the valuation process. Authenticity of the financial items results in the authentic valuation. There are certain specifications within the aspect of authenticity. The financial statements of the public sector companies are valuated by the certified and registered accountants. Herein, lays the significance of the legislations, which develops accuracy in the financial activities. Chartered accountants are also hired by the public sector companies in case of valuating the financial statements (Miao,  Teoh and Zhu 2016).

The story is different for the private sector companies. Governmental assurance is missing in case of the financial statements. Within this, there are certain exceptions, such as, operation in regulated industry and absence of the need for audits and accounts. The major drive behind this is to add maximum value to the profit margin, considering the tax obligations (Chen et al. 2016). Countering this, governmental assurance in terms of the financial statement valuation is of utmost importance as the private sector companies operate on the managerial terms. In view of this motive, there are high tendencies of inaccurate financial calculations.

Cash Flow Statement

Along with this, Generally Accepted Accounting Principles (GAAP) is also used by the companies and organizations to valuate their balance sheets, income statements and cash flow statements. The phrase “generally accepted” relates with the legal parameters that binds the accounting activities of the companies and organizations. Creation of the balance sheet, with the help of GAAP, helps the personnel to preserve the market value of the products and services (Brigham and Ehrhardt 2013). Attachment of the phrase of “generally accepted” bears correlation with the transparency within the business procedures.

Pondering upon the word principles, it highlights the importance of regulations in order to avert the situations of illegal means for the development of the financial statements. Compliance and adherence to the market legislations, such as competition policies, supports the personnel to estimate authentic prices for the products and services. Presentation of this estimation in the tabular formats in excel contradicts the situation of misplacing these official items (Bingham and Kiesel 2013). The aspect of using excels, projects technological advancement for the companies and organizations. Effective utilization of the software SolveIT eases out the process of calculations much easier for the personnel. Along with this, computerized balance sheets, income statements and cash flow statements results in the effective monitoring of these financial items.

The highlighted facts emerge successful in providing an insight into the concepts related to the financial statements. The diversity within the discussion of the literature review enhances the preconceived knowledge of the readers in terms of the valuation process, which validates the financial items (Brigham and Ehrhardt 2013). The sectorial specifications in case of the valuation process enliven the actuality of the process. The inclusion of theoretical framework for the valuation process broadens the scope and arena of the personnel in terms of valuing the created financial statement.

Perceiving the aspects from various perspectives adds new shades to the pre-existing financial terms. One such example is the statement, which is considered legalizes the transmission of the financial reports to the clients and the agency partners (Schmeisser et al. 2014). One of the other connotations is the transparency in the financial aspects of the businesses, which maintains the stability in the relationship between the companies, organizations and the stakeholder and shareholders.

Apart from this, one of the other parameters is the regulatory framework, which acts as a protective cover watch over the business activities undertaken by the companies and organizations. Herein, lays the appropriateness of the Generally Accepted Accounting Principles (GAAP). Within this, the certification and registration of the hired accountants also finds their applicability in terms of averting the situations of producing erroneous financial statements (Macve 2015).

In spite of projecting all these key areas, the literature fails to highlight the use of social media for valuation of the financial statements. Incapability in this direction makes the literature review as lagging behind in terms of modern and technological advancement. Countering this, modern and technologically advanced software automatically calculates the values of the products and services upon their placement within the cells of Microsoft excel (Hail 2013). Counter arguing this, market research is an essential component here, in terms of making the personnel aware of the software in demand within the market.

References

Barth, M.E., 2013. Measurement in financial reporting: the need for concepts. Accounting Horizons, 28(2), pp.331-352.

Bingham, N.H. and Kiesel, R., 2013. Risk-neutral valuation: Pricing and hedging of financial derivatives. Springer Science & Business Media.

Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.

Chen, C.W., Collins, D.W., Kravet, T.D. and Mergenthaler, R., 2016. Financial statement comparability and the efficiency of acquisition decisions.

Dichev, I.D., 2017. On the conceptual foundations of financial reporting. Accounting and Business Research, pp.1-16.

Fulmer, I.S. and Ployhart, R.E., 2014. “Our Most Important Asset” A Multidisciplinary/Multilevel Review of Human Capital Valuation for Research and Practice. Journal of Management, 40(1), pp.161-192.

Hail, L., 2013. Financial reporting and firm valuation: relevance lost or relevance regained?. Accounting and Business Research, 43(4), pp.329-358.

Konchitchki, Y. and Patatoukas, P.N., 2013. Taking the pulse of the real economy using financial statement analysis: Implications for macro forecasting and stock valuation. The Accounting Review, 89(2), pp.669-694.

Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.

McNichols, M.F. and Stubben, S.R., 2015. The effect of target-firm accounting quality on valuation in acquisitions. Review of Accounting Studies, 20(1), pp.110-140.

Miao, B., Teoh, S.H. and Zhu, Z., 2016. Limited attention, statement of cash flow disclosure, and the valuation of accruals. Review of Accounting Studies, 21(2), pp.473-515.

Minnis, M. and Sutherland, A., 2016. Financial statements as monitoring mechanisms: Evidence from small commercial loans. Journal of Accounting Research.

Palepu, K.G., Healy, P.M. and Peek, E., 2013. Business analysis and valuation: IFRS edition. Cengage Learning.

Schmeisser, W., Mohnkopf, H., Hartmann, M. and Metze, G., 2014. Innovation Performance Accounting. Springer.

Sinclair, R. and Keller, K.L., 2017. Brand value, accounting standards, and mergers and acquisitions:“The Moribund Effect”. Journal of Brand Management, pp.1-15.

Trugman, 2016. Understanding business valuation: A practical guide to valuing small to medium sized businesses. John Wiley & Sons.