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Research Paper on the Key Uses and the Key Abuses of Financial Statements and Ratios

3 pages
612 words
Boston College
Type of paper: 
Research paper
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The financial statements are properly prepared documents interconnecting an entitys financial activities to organizations such as the management, investors and tax officials. The unit of financial statement normally includes four major entitys: income statement, a balance sheet, statement of changes in equity as well as the cash flow statement. The presentation of the financial statement is structured such that it is accepted by the regulatory and accounting personnel.

Every entity as part of the financial statement has distinct practical functions, they are discussed as flows:

The balance sheet reports the companys liabilities assets together with the ownership equity.

The income statement reports on the expenses and the profits of a company to demonstrate the profit and loss made in a given financial period.

Cash flow statement reports the change in the influence of the cash and cash equivalents, splitting the analysis down to financing, investing, and operating.

The financial statement is abused when the auditor fails to balance the accounts and derive the correct figures of the companys financial status.

While the financial ratio or accounting ratio compares the two elements of the financial statement, like the relationship of the current liabilities and the current assets. The use of the financial ratio is to analyze different aspects of the companys financial and operating performance like the liquidity, efficiency solvency and profitability. The trend of these ratios over a period of time is evaluated to check whether they are deteriorating or improving. The ratio is useful in comparing the companies across the industry, both big and small, to detect their strength and weakness. An example where ratio applies between two competing companies that produce the same goods and services, for example, Toyota and Mercedes Benz, the two are leading automobile manufacturers, the investors of shareholders will evaluate the rations of the two to determine their stability and the one that is viable to invest on.

In the article by Altman (1968), he speaks of the misuse of the financial ratio in the business world, he asserts that analysts misuse these ratios leading to the misleading and confusing and misleading conclusion of the companies financial positions. Furthermore, he stated that the assumptions that an individual organization's ratio is similar with its complement industry ratio are the basis of the problems in many applications of the financial ratios.

When the U.S. Congress approved NAFTA, there was the strong trade union and labor opposition. Do you agree with labor's opposition?

NAFTA agreement was signed into law on December 8, 1993 by Clinton who was then the president of US, the law was effected on January 1, 1994. The goal of the NAFTA agreement was to remove the trade and investment barriers between Canada, US and Mexico Zamora, 1995).

I agree with the notion that the Trade Union and the labor opposition became stronger when the NAFTA was approved by the U.S Congress. The reason for this is because NAFTA allowed more US jobs to operate outside the US, therefore reducing the level of jobs in the US. The Organized labor intensely condemned NAFTA basically because of the loss of jobs of the industries that were operating within the United States. The trade unions like the United Steel Workers (USW) and the United Auto Workers (UAW) demands that approximately one million jobs have been lost because of the approval of NAFTA which affected many of the manufacturing jobs (Zamora, 1995).



Zamora, S. (1995). NAFTA and the Harmonization of Domestic Legal Systems: The Side Effects of Free Trade. Ariz. J. Int'l & Comp. L., 12, 401.

Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The journal of finance, 23(4), 589-609.

Corcell, F. A. (1984). Financial Statement-Analysis and Interpretation. Com. LJ, 89, 412.


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