Chapter 3: Using Financial data to Measure and Assess Financial Performance

Part 1 of Chapter 3

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  • Using Financial data to measure and assess performance
    • Weaknesses of financial data in judging performance
      • published accounts focus on profitability and liquidity of business and ignores other objectives that may be more important for the business
      • different accounting methods may be employed
      • financial performance is influenced greatly by external factors
      • some valuations are partially subjective
      • some firms may 'window dress' - manipulate accounts to provide a favourable view on the date they are prepared
      • accounts show what has happened not why they happened
    • Strengths of financial data in judging performance
      • can help to calculate profit levels of a firm
      • can help people to understand sources of capital and see how reliant it is at borrowing
      • can help to assess whether it is worth buying shares in the business
      • can help people to discover company's liquidity position
      • can help to note if profit is of high quality
      • can help people to calculate net assets of a business, to assess its overall worth
      • can help to see if profit is being utilised in a sensible way
      • can help people to assess the size of the business
    • Company Accounts
      • Users of company accounts
        • managers
        • employees
        • owners and investors
        • governement
        • competitors
        • suppliers
        • customers
        • local community
      • required by law in order to show financial strengths and weaknesses of an organisations recent performance and current situation
      • can be used to assess the potential of a business
      • both documents are based on historical data and show what has happened in the recent past
      • Purpose of company accounts
        • securing and maintaining finance
        • statutory obligations
        • monitoring and controlling performance

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