ABSTRACT
A superficial analysis of the financial statements of a business entity will reveal the extent to which it has accumulated wealth over its accounting period. However, financial statements calculate profit and net wealth using a number of pieces of financial information, namely, figures for expenses, income, assets and liabilities. A detailed analysis of the constituent components of a set of financial statements will reveal considerable information concerning the financial well being of the business to which they relate which cannot be deduced from knowing only the net profit and the book value of the business. Issues such as efficiency and risk are best assessed through a detailed analysis of the constituent components of financial statements. Having said this, it is important to appreciate that any review of the financial well being of a business entity should encompass analysis of information from a number of sources-reliance on the accounts alone is unlikely to produce a balanced overall picture although the conclusions would still be instructive. A further point to bear in mind is that financial statements are the result of the exercise of judgment by those who compile them who may have in mind the achievement of certain presentational objectives when drafting the accounts. To put it another way, whilst concepts and standards of accounting practice are sometimes required to be applied in the compilation of financial statements, both leave scope for interpretation which, in many cases, will allow two different accountants to present the same accounting issue in different ways, possibly producing different results, and the accountants will be able to show they have complied with appropriate concepts and standards. One business may adopt a particular accounting convention whilst another may choose a different one to deal with the same issue. A typical example of where this might occur is in the treatment of depreciation of fixed assets (see Chapter 8).
