a) Elaborate the uses of financial statement analysis.

(Tutor, may I know above question is also can be said as benefit of financial statement analysis?)

b) Discuss the important of financial market, then illustrate with a diagram the flow of funds from lenders to borrowers in a financial system with explanation..

(Tutor, would like to seek your advice about this question, is it I need to explain about detail such as Who is the surplus units, deficit units, direct finance and financial market? Why they do so. Financial market have any benefit for national and global economy? also the functions of financial immediacies (Institutions) and why are they important to server and borrower. Is it correct?)

 

a) Financial statement analysis is the process of analyzing a company's financial statements for decision-making purposes. External stakeholders use it to understand the overall health of an organization as well as to evaluate financial performance and business value. Internal constituents use it as a monitoring tool for managing the finances.

b) Financial markets provide a place where participants like investors and debtors, regardless of their size, will receive fair and proper treatment.

They provide individuals, companies, and government organizations with access to capital.

Financial markets help lower the unemployment rate because of the many job opportunities it offers.

Step-by-step explanation

a) The financial statements of a company record important financial data on every aspect of a business's activities. As such they can be evaluated on the basis of past, current, and projected performance.

In general, financial statements are centered around generally accepted accounting principles (GAAP) in the U.S. These principles require a company to create and maintain three main financial statements: the balance sheet, the income statement, and the cash flow statement. Public companies have stricter standards for financial statement reporting. Public companies must follow GAAP standards which requires accrual accounting.1 Private companies have greater flexibility in their financial statement preparation and also have the option to use either accrual or cash accounting.

Several techniques are commonly used as part of financial statement analysis. Three of the most important techniques include horizontal analysis, vertical analysis, and ratio analysis. Horizontal analysis compares data horizontally, by analyzing values of line items across two or more years. Vertical analysis looks at the vertical affects line items have on other parts of the business and also the business's proportions. Ratio analysis uses important ratio metrics to calculate statistical relationships.

There are three main financial statements that every company creates and monitors: the balance sheet, income statement, and cash flow statement. Companies use these financial statements to manage the operations of their business and also to provide reporting transparency to their stakeholders. All three statements are interconnected and create different views of a company's activities and performance.

Uses of Financial Statements

1. Bridging the Gap in Management

Financial statements basically reflect a company's financial performances. They show profits and liabilities of the business. They show how successful a company's decisions have been. Since shareholders have access to these statements, they can gauge their company's performance. This further helps in bridging the gap between lapses in management and expectations of owners.

2. Availing Credit from Lenders

Every business needs to borrow funds for functioning. They have to rely on lenders like banks and financial institutions for this purpose. Financial statements play a huge role in this purpose. Since they show a company's liabilities, debts and profits, investors can use them to make informed decisions.

3. Use for Investors

Investors also extensively use a company's financial statements to asses its finances. That helps them figure out how the company's solvency will be in the longer term. Thus, the better a company's financial position is, the greater the investment it will receive.

4. Use for Government

Governmental policies pertaining to corporates depend heavily on financial statements. This is because these statements depict how companies are functioning in general. The government can use this information to decide taxation and regulatory policies.

5. Use for Stock Exchanges

Regulatory bodies like SEBI and stock exchanges like BSE and NSE also use financial statements for many reasons. SEBI can assess a company's internal matters using them to ensure the protection of investors. Even stock advisers require them to frame their quotes. They are also a great source of information for stock traders and investors.

6. Information on Investments

The shareholders of a company rely on these statements to understand how their investments are paying off. If a company is earning profits, they might decide to invest even more money. On the contrary, stagnant profits or even losses will prompt them to pull out. Despite all these uses of financial statements, there are some limitations to them as well.

b)  1) Financial markets provide for the efficient allocation of resources within the economy. The financial markets provide businesses and governmental entities access to capital. They also provide employment to many thousands of individuals who work in the financial industry. Financial markets are common to each country, and they play a major role in the economic growth of the country. Such markets act as an intermediary between savers and investors, or they help savers to become investors. On the other hand, they also help businesses to raise money to expand their business.

Financial institutions (intermediaries) perform the vital role of bringing together those economic agents with surplus funds who want to lend, with those with a shortage of funds who want to borrow. In doing this they offer the major benefits of maturity and risk transformation.

Financial markets help to efficiently direct the flow of savings and investment in the economy in ways that facilitate the accumulation of capital and the production of goods and services.

The financial system plays a vital role in the economic development of a country. It encourages both savings and investment and also creates links between savers and investors and also facilitates the expansion of financial markets and aids in financial deepening and broadening.

The Functions of Financial Markets are as follows:

• Price Determination.
• Funds Mobilization.
• Liquidity.
• Risk sharing.
• Easy Access.
• Reduction in transaction costs and provision of the Information.
• Capital Formation.

Types of financial markets

• Capital markets which consist of:
• Commodity markets, which facilitate the trading of commodities.
• Money markets, which provide short term debt financing and investment.
• Derivatives markets, which provide instruments for the management of financial risk.

2) All economic units can be classified into one of the following groups: households, business firms, and governments. Each economic unit must operate within a budget constraint imposed by its total income for the period, and can have one of three possible budget positions: a balanced budget position, a surplus position, and a deficit position. The mismatch between income and spending for individuals and organizations creates an opportunity to trade. The financial system provides channels to transfer funds from savers (or lenders) to borrowers. Financial markets issue claims on individual borrowers directly to savers (direct financing). Financial institutions or intermediaries act as go-betweens by holding a portfolio of assets and issuing claims based on that portfolio to savers (indirect financing). This matching process makes households and businesses better off by allowing them to plan their purchases and savings according to their needs and desires, which improves the economy's efficiency and people's economic welfare.

The financial system provides three key services for savers and borrowers: risk-sharing, liquidity, and information.

First, since individuals prefer stable returns on the assets they hold. Investors tend to hold a collection of assets (portfolio) which overall provides a relatively stable returns (diversification). The financial system provides risk-sharing by allowing savers to hold many assets.

Second, an asset is more liquid if it can be easily exchanged for money to purchase other assets or exchanged for goods and services. Financial markets and intermediaries provide trading systems for making financial assets more liquid.

Third, one of the most prominent frictions in the financial markets is asymmetric information. Financial markets institutions and intermediaries produce useful information of potential borrowers to investors. 

A financial intermediary is an institution that facilitates the flow of funds between individuals or other economic entities. A financial intermediary is an institution that facilitates the flow of funds between individuals or other economic entities having a surplus of funds (savers) to those running a deficit of funds (borrowers). Banks are a classic example of financial institutions. Banks provide a safe and accessible environment for individuals and economic entities to deposit excess funds Additionally, banks also provide a service by packaging deposits into loans that are made available to economic agents (individuals and entities) in need of funds.

Though, perhaps the most well-known of financial intermediaries, banks represent only one intermediary within a larger group. Other financial intermediaries include: credit unions, private equity, venture capital funds, leasing companies, insurance and pension funds, and micro-credit providers.

Major functions of financial intermediaries

As noted, financial intermediaries provide access to capital. However, in conjunction with increasing access to funds, through their ability to aggregate funds, intermediaries also reduce the transaction and search costs between lenders and borrowers.

By repurposing funds from savers to borrowers financial intermediaries are able to promote economic growth by providing access to capital. Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.

Returning to the example of a bank used above, banks convert short-term liabilities (demand deposits) into long-term assets by providing loans; thereby transforming maturities. Additionally, through diversified lending practices, banks are able to lend monies to high-risk entities and by pooling with low-risk loans are able to gain in yield while implementing risk management.

Financial intermediaries can assist with increasing the incentive to save through developing financial products that offer ease of liquidation but provide a higher return than a savings account. In this manner, financial intermediaries are a significant component to the transformation of savings into investment. Mutual funds, pension obligations, insurance annuities, and other forms of savings marketed by financial intermediaries all consist of stocks, bonds, and cash balances, which in turn pay for the investment capital that increases productivity, efficiency and output of goods and services.