Chapter 2
Summary of financial
This is not a treatise on financial analysis, but rather a consideration of
the interrelations existing between the various components of the bal-
ance sheet and income statement and financial ratios which it is essen-
tial to understand in the preparation of cash flow forecasting.
In particular, we are concerned with the interrelationships existing between
the income statement, balance sheet, and various financial ratios summa-
rizing their interrelationships, and which can be manipulated with ‘cash
drivers’ to project key accounts.
We therefore touch upon these topics as they relate to the manipula-
tions required in effecting financial analysis.
The accounting process is divided into two basic elements, recording
and reporting of financial information. The emergence of the large-scale
limited liability company has been the single most important factor
stimulating the need for financial reports. The larger and more complex
the company, the more remote the management can become from day-to-
day operations, and the more reliant they have to become on account-
ing information. In addition, the company that borrows money will need
to demonstrate its financial solidity to its bankers, and financial state-
ments are used by bankers and others as part of the basis for lending
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In recent years, there has been recognition that there may be a large
number of different parties with a legitimate interest in a company’s
the equity investors – existing and potential shareholders
the loan creditors – including existing and potential holders of deben-
tures and loan stock, and providers of short-term unsecured loans and
the company’s bankers
the company’s employees
the analysts/advisers – this will include financial analysts and journal-
ists, economists, researchers, stockbrokers etc.
customers, trade creditors and suppliers
tax authorities, supervisory bodies, local authorities
the general public – including taxpayers, consumers, political parties,
and consumer and environmental groups.
Each of the groups will have a common interest in the financial statements
of a company, but will use the information as the basis for different types
Table 2.1 Comparison between continental European and Anglo-Saxon
accounting systems
Continental European Anglo-Saxon
Capital markets Mainly from banking sector Mainly stock markets
Culture State-focussed Individualistic
Legal system Law provides detailed Rules from standard
accounting rules setting bodies
Fiscal system Accounting/tax closely Accounting not
connected influenced by tax rules
Examples of Belgium Australia
countries Germany Great Britain
France Ireland
Italy The Netherlands
Japan Singapore
Switzerland USA
Users of information Creditors, taxman, investors Notably investors
Accounting principles Prudence True and fair principle
Summary of financial statements
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