Financial Accounting: In an Economic Context

ASSESSING THE BUSINESS ENVIRONMENT

The analyst must first learn about the company, its industry, and how the company and industry relate to the overall economy. What is the nature of the company's operations, and what strategy is the company using to generate profits within its industry? What is the company's industry, who are the major players and the company's competitors, and is it easy or difficult for outside firms to enter the industry? What are the relationships between the company and its suppliers and customers, and who holds the bargaining power? Finally, when the overall economy booms or goes into recession, how are the company's sales and profits affected? How quickly do the company's sales and profits change when the indices of overall economic activity change? An astute analyst addresses these questions before reviewing the financial statements. The answers provide a forward-looking perspective on the company and create a useful context in which to interpret the financial statements. They also help the analyst to target key items in the financial statements for especially close examination.

One way to quickly gain a sense of a company's operations and how other experts view its future prospects is to access investment services, such as Moody's (moodys.com), Value Line (valueline.com), Dun & Bradstreet (smallbusiness.dnb.com), and Standard & Poor's (spglobal.com). These information sources provide extensive analyses of the operations and financial position of many ...