The use of a financial statement will be to reflect the fiscal strength or weakness of a organization. Internally, it is used by a company to produce fiscal decisions like hiring new workers or layoffs. When companies are financially struggling they look to lower cost and the quickest way to reduce costs would be to eliminate employees. Today in a struggling economy, employees are regarded as costly obligations, and companies and governments are working to reduce those liabilities as much as they can.
Knowing financial statements help owners and managers make better choices monitoring the business and strategy for future growth. Financial statements provide a crystal clear understanding of the business’ strengths and weaknesses. They are critical for business owners that intend to succeed and expand their small business.
Although financial statement analysis is an extremely useful instrument, it has two limitations. Both of these limitations involve the comparability of financial data between businesses and the need to look past ratios. Comparison of a single firm with another can provide valuable clues regarding the financial health of an organization. Unfortunately, differences in accounting methods between businesses sometime makes it hard to compare the companies’ financial information. As an instance if one company values its inventories from the LIFO method and a different company by average price method, subsequently direct comparisons of financial data like inventory valuations are and price of goods sold between the two businesses could be deceptive. Some instances enough information are presented in foot notes to the financial statements to restate data to a comparable basis. The analyst should remember the lack of comparability of the data before drawing any definite conclusion. Nevertheless, despite this limitation in mind, comparisons of key ratios with different businesses and with industry averages frequently indicate avenues for additional investigation.
A company’ financial statements are an immediate relationship of how well a company is performing and if they are in a position to hire new employees or layoffs. Another alternative for companies to lower costs is by simply sending as much work abroad in which the salaries are much lower and in which the regulatory is significantly simpler. Nowadays, most large corporations only want as many U.S. workers as absolutely needed. In a world where labor was globalized, a few businesses shell out enormous amounts of cash to American workers when they could save paying lower wages to employees overseas. In the old days, a individual could go to college, get a good paying job with a single company for 30 decades and retire with a nice pension. Unfortunately for the current generation, corporations do not have exactly the same loyalty, as soon as a business reaches a fiscal barrier; a few of the easiest and quickest ways to decrease costs is to remove its workers.
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