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Financial Reporting

In: Business and Management

Submitted By vitalijsk
Words 745
Pages 3
Week 1
Financial reporting and its analysis has an important role in the information intermediaries (auditors, press, financial analysts) and financial intermediaries (banks, insurance companies, mutual funds) functioning. Information intermediaries and financial intermediaries use the information from the financial reports to investigate the investment opportunities and find the “good” ones (Palepu, Healy & Peek, 2013).
The “lemons” problem explains the problem in identifying the “good” and “bad” ideas being offered in the market (Holod & Peek, n.d.). The “bad” ideas are valued by investors at an average level, as they know that in the market there are both types of ideas. This approach, unfortunately, leads to less attractive conditions of financing to the owners of “good” ideas; the proportion of “bad” ideas increases.
The identification of “good” investments can be performed by following the four steps (Palepu, Healy & Peek, 2013): * Business strategy analysis * Accounting analysis * Financial analysis * Prospective analysis
All the above analysis get the information from the financial statements, publically data available, from business application context that consists of credit analysis, debt analysis, general business analysis and other details on corporate business (Palepu, Healy & Peek, 2013).
The business strategy analysis is a tool to form the performance expectations using industry data and competitive strategy data. Accounting analysis assess accounting policies in the company, evaluates its quality. Ratios and cash flow analysis are the key elements in the financial analysis. Based on the results of these analyses the forecast and valuation of business can be made that is prospective analysis (Palepu, Healy & Peek, 2013).
The purpose of these steps is to understand the company, its business nature and performance better, to...

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