Economic sciences/7.accounting and audit

Turgenbayeva Aiida

Alfarabi Kazakh National University, Kazakhstan

Challenges while performing a financial analysis of a company

The process of financial analysis of company’s performance may be ineffective or not fully reflect real situation within company due to number of obstacles that arise with financial analysis.

The following essay will highlight the main reasons that prevent financial analysis from being sound and accurate.

The problem of reliable analysis. The good financial analysis is limited to audited financial statement which should be accurate and complete enough for information to be analyzed. However here the other reason arises which is there is no such exact science as financial analysis, that is it does not lead to specifically right answers. Future of a company can never be predicted with exact accuracy; therefore financial analysis is more suitable for forming sound questions and quality assessment of a company’s capabilities rather than trying to come up with unambiguous definitive answers.

Differences in accounting methods and financial information representation. Numerous accounting methods and financial information representation do not fully reflect the realities of current economic situation within the country – for example, many kinds of investment in intangible assets are considered as costs of current period because of tax system pressure. In addition to that, despite the regulations policies designed to unify the representation of financial statements for comparability purposes, the preparation process of the financial statement may differ under accounting policies adopted by the enterprise as companies can use multiple accounting methods.

As an example financial reports can be based on the cash flow or the accounting on an accrual basis when recording transactions in the books comes from the time of the transaction. Other examples include the ability to use the LIFO inventory valuation method ("last in, first out") or FIFO ("first in, first out"), and the ability to apply accelerated or straight-line depreciation of fixed assets. The differences in

Inaccurate assessment of financial situation. In assessing the financial situation of the company analyst is primarily interested in the assets (the company owns), liabilities (debts) and equity (invested by the owners). Inaccurate assessment of true company condition can occur due to number of circumstances. First, the assets are generally recorded on historically accurate (actual) value, market price at the time of acquisition. During periods of inflation or deflation, asset accounting at cost may lead to differences between the carrying value and the current value in real economic terms.

Second, the notion of liquidity means the ability of the enterprise to quickly turn assets into cash (at market or close to the price), or how soon should the obligation be repaid. Any kind of asset that can be converted into cash within the normal operating cycle, called the current (circulating) assets. Unfortunately, determining the current status is not based on the sequentially operating cycle; current assets include the majority of the assets and liabilities / which can be converted into cash or which shall be payable within a year. This difference leads to the fact that the current status of assets and liabilities in the financial statements shall be subject to interpretation in some areas raises some serious problems.

Most businesses operating cycle is less than one year, which complicates the work of the analyst, because the current state is analyzed in terms of the ratio of current assets to current liabilities. The difference between the two forms is the net working capital.

Third, equity can be viewed in two ways:

From an accounting point of view - the initial and subsequent investment of the owner and the entire net income is not distributed in the company since its inception;

From financial point of view - as the difference between the value of assets and equity commitments.

The latter definition requires knowledge of the analysts of the market value of the assets to assess the potential income that can bring certain assets of the company.

Continued operation. This concept assumes that the company operates in its current form for a period sufficient to use its assets for their intended purpose, and to pay off debts within the normal activity. This concept is also known as the concept of a going concern.

If the company does not fall under this definition, the analyst meets practical problems: it is necessary to determine whether reliable valuation of the assets of the company in the financial records is done, if not whether there is no overvalued equity. If the company is bankrupt, the assets may have to be liquidated for the sole purpose - to immediately repay the debt; such circumstances would lead to the fact that the result will be significantly lower than the value stated in the financial statements.

Completeness. Some important information is missing in the financial statements. For example, the list of outstanding orders or contracts for delivery may be important, and only an experienced analyst who knows the company can obtain such information. For example, the company produces a variety of products, while the income statement shows only the total sales. Analysts may require a breakdown of sales and costs by product or geographic areas.

As have been said above the main obstacles while performing financial analysis of a company’s condition are the problem of reliable analysis, differences in accounting methods that arise due to different accounting policies within the firm, inaccurate assessment of financial situation of a firm, incompleteness of a financial statement and differing views on notion of liquidity.