Analysis of financial statements is a deliberative process in order to help evaluate the financial position and results of operations in the present and past, in order to determine the estimates and predictions are most likely about the condition and performance of companies in the future. Analysis of financial statements, but in fact many in the present study the authors use financial ratio analysis because this analysis is more frequently used and simpler.
Financial ratio analysis is the comparison between the two / group financial statement data in a given period, the data can be among the data from the data sheet and income statement. The aim is to give a picture of weakness and the financial ability of the company from year to year. The types of financial ratio analysis is:
a. Liquidity Ratio
This ratio is useful to measure a company’s ability to meet its short term obligations. There are 3 (three) types of liquidity ratios are used, namely:
1) Current Ratio
2) Acid Test Ratio
3) Position Cash Ratio
b. Solvency ratio
This ratio is useful to measure a company’s ability to meet all obligations (short-term debt and long-term debt). There are 4 (four) solvency ratio is used. namely:
1) Total Debt To Equity Ratio
2) Total Debt To Total Assets Ratio
3) Long Term Debt To Equity
4) Long Term Debt To Total Assets
c. Profitability ratios
This ratio is useful to measure a company’s ability to generate profits in a given period. There are 4 (four profitability ratios are used, namely:
1) Return On Equity (ROE)
2) Return On Assets (ROA)
3) Net Profit Margin
4) Gross Profit Margin
The purpose of financial analysis is to evaluate the performance of companies on the present and the past and to assess whether the performance can be maintained. There are two important tools in financial analysis:
a. Ratio Analysis
This analysis includes a comparison of the ratio between a company with other companies in the same industry, the ratio between the time a company or other fiscal period or the ratio of a reference standard.
b. Cash Flow Analysis
This analysis focuses on cash flow statements, which provide information about incoming and outgoing cash flow companies, which are classified into operating activities, investing and financing activities, and disclosures about the activities of non-cash investing and financing activities periodically. For example, if the company has generated positive cash flow from operations.
1. Ratio Analysis
There are two problems to be addressed when conducting ratio analysis in an international environment:
a. Whether cross-country differences in accounting principles lead to significant differences in the numbers of reported corporate financial reports from different countries?
b. How far the differences in culture and economic conditions of local competition and hamper interpretation of the size of the accounting and financial ratios, although the accounting measurements are presented from a different country back in order to achieve “comparability of accounting”? Some evidence that strongly suggests the existence of large differences between countries in profitability, leverage, and the ratio and number of other financial reports from accounting and non accounting factor.
c. How big is the difference in the financial statement items are caused by differences in national accounting principles? Hundreds of non U.S. companies that listed shares on U.S. securities exchanges perform a reconciliation footnote disclosures that provide evidence against this claim, at least in the context of the differences between the accounting value under U.S. GAAP and non U.S. GAAP.
A previous study on reconciliation of financial statements by foreign issuers prepared by the SEC with sufficient information. About half of the 528 non U.S. issuers under study reveals a material difference between income reported their financial statements according to GAAP net income of U.S.. Five different types of financial statements expressed by a large number of issuers are:
1. Depreciation and amortization
2. Deferred Costs
3. Deferred tax
5. Foreign currency transactions
This study shows that more than 2/3 issuers who disclose a material difference in earnings report that profit under U.S. GAAP is lower than the non-GAAP earnings in the U.S.. Nearly half of them reported earnings difference is greater than 25%. twenty-five of the 87 issuers that reported earnings under U.S. GAAP is greater than on non U.S. GAAP reporting differences greater than 25%. Sam results were also found for the reconciliation of shareholders’ equity. Overall, the evidence in this SEC study showed that differences in the financial statements under U.S. GAAP and U.S. GAAP is non material for most companies.
2. Cash Flow Analysis
Statement of cash flows are very mendetal is required under U.S. GAAP, UK GAAP, IFRS, and accounting standards in a growing number of countries. Measures related to cash flow analysis is very useful especially in international because not too influenced by differences in accounting principles, compared with earnings-based measures of cash flow statement If not presented, often found it difficult to calculate cash flow from operations and the size other cash flows to settle based on actual earnings.
Mechanisms to Overcome
To address the cross-country differences in accounting principles, some analysts present the foreign accounting resize according to a group of internationally recognized principles or according to other, more general basis. Some others develop a complete understanding of accounting practices in a particular group of countries and restricting their analysis to firms located in these countries.
Choi D.S. Frederick & Meek K. Gary. , 2005. INTERNATIONAL ACCOUNTING, BOOK 2 ISSUE 5. New York: Four Salemba.