Question

What are some of the benefits of a thorough review of the financial statement?

Answer 1

A complete review of financial statements helps the reviewer to assess the financial position of the organisation. The income statement allows one to assess the profitability of the business and for this various ratios such as operating profit ratio and earnings before interest and Taxes are used. The balance sheet of the business allows one to assess the capital structure and the liquidity position of the business.

Cash flow statements are also used to understand the cash inflows and outflows and their sources. The reviewer can use various efficiency ratios such as total asset turnover and inventory turnover ratios to understand efficiency of the business as a whole. An assessment of the financial statements allows the assessor to understand the level of debt that has been taken by the business and this enables him to decide whether the business is creditworthy.