Author: indiafreenotes

Risk and uncertainty are often used interchangeably in financial management literature. However, there are differences between the two and they represent strictly different ideologies. In this brief article, we will highlight the points that differentiate these two terms, risk and uncertainty, when they are used in Finance parlance.

Risk is the process of potential loss for a firm. The concept of risk is broad in finance. In finance, the risk is associated with a bad outcome occurring or a good outcome not occurring at all. For instance,

• If the income falls down below a certain mark, it is a risk for the company.
• If the business grows 10% instead of the projected 20% rate, that is also a kind of risk for the company.

Uncertainty

Uncertainty refers to an absence of certainty, that is, there is no guarantee of something happening in the present or the future. There is an absence of a given outcome in uncertainty. Since the outcome of an event is not certain, there is hardly any measure of uncertainty. That is, we cannot measure uncertainty in the business world. It is a process that can just be stated but not measured.

For example, let’s say that a business can earn 10% or 20% of profit within the next two years. However, it is uncertain because we cannot measure it. So, there is a kind of probability attached to uncertainty which is improbable in the case of risk.

Risks & Uncertainties in International Finance

When an organization decides to engage in international financing activities, it takes on additional risk along with the opportunities. The main risks that are associated with businesses engaging in international finance include foreign exchange risk and political risk.

These challenges may sometimes make it difficult for companies to maintain constant and reliable revenue. In this article, we’ll review the strategies companies can employ to reduce the impact of the risks they face from doing business internationally.

Foreign exchange risk occurs when the value of an investment fluctuates due to changes in a currency’s exchange rate. Foreign exchange risk is also known as FX risk, currency risk, and exchange-rate risk. When a domestic currency appreciates against a foreign currency, profit or returns earned in the foreign country will decrease after being exchanged back to the domestic currency. Due to the somewhat volatile nature of the exchange rate, it can be quite difficult to protect against this kind of risk, which can harm sales and revenues.

The risk occurs when a company engages in financial transactions or maintains financial statements in a currency other than where it is headquartered. For example, a company based in Canada that does business in China; i.e., receives financial transactions in Chinese yuan reports its financial statements in Canadian dollars, is exposed to foreign exchange risk.

Uncertainties in International Finance

Uncertainty is one concept in finance and accounting that should be deeply understood. Business owners, as well as investors, want to access credible and honest financial statements during times of uncertainty.

Through generally accepted accounting principles, including those that are from the Financial Accounting Standards Board, there are now processes that can be used to identify, record, and disclose uncertainty. Using accounting principles consistently makes it possible to compare financial records from various periods.

How to Turn Uncertainty into an Advantage

The only thing certain thing about uncertainty is that it can happen anytime, and when it does, no company is exempt from feeling its effects. Therefore, the most effective thing to do is to prepare for it and turn it into an advantage. Here’s how:

1. Forecasting is essential

Companies who rely on annual budgets are finding themselves in shallow waters nowadays because the figures may no longer be applicable even before a specific financial year is over. This is why forecasting and updating plans regularly are important.

2. Shift to automation

Manual collection of data takes up more time than actually analyzing it, which is why it is often too late when problems are identified. Business organizations should shift to automation because it cuts the time needed for data collection and analysis.

3. Efficient reporting of finances

Automation also contributes to achieving financial reports that are efficient and accurate.

4. Self-service is key

Stakeholders are an important component of an organization, which is why providing self-service apps is helpful. For example, users can use a specific app that lets them open their accounts and evaluate the data by themselves. This not only gives them the freedom to do so anytime it is convenient for them but it also frees up work for the organization’s IT team, letting them concentrate on more important processes.

A change in a country’s balance of payments can cause fluctuations in the exchange rate between its currency and foreign currencies. The reverse is also true when a fluctuation in relative currency strength can alter balance of payments.

Balance of Payments and Exchange Rates

A balance of payment is a statement of all transactions made between entities in one country and the rest of the world over a specific time frame, such as a quarter or a year. Two dynamics are in play which links a country’s balance of payment and changes in the value of its currency: the market for all financial transactions on the international market (balance of payments) and the supply and demand for a specific currency (exchange rate).

Exchange Rate Impacts:

The relationship between the BOP and exchange rates can be illustrated by use of a simplified equation that summarizes BOP data:

BOP = (X-M) + (CI-CO) + (FI-FO) +FXB

• Where: X is exports of goods and services,
• M is imports of goods and services,
• (X-M) is known as Current Account Balance
• CI is capital outflows,
• CO is capital outflows,
• (CI-CO) is known as Capital Account Balance
• FI is financial inflows,
• FO is financial outflows,
• (FI-FO) is known as Financial Account Balance
• FXB is official monetary reserves such as foreign exchange and gold

The effect of an imbalance in the BOP of a country works somewhat differently depending on whether that country has fixed exchange rates, floating exchange rates, or a managed exchange rate system.

a) Fixed Exchange Rate Countries. Under a fixed exchange rate system, the government bears the responsibility to ensure a BOP near zero. If the sum of the current and capital accounts does not approximate zero, the government is expected to intervence in the foreign exchange market by buying or selling official foreign exchange reserves. If the sum of the first two accounts is greater than zero, a surplus demand for the domestic currency exists in the world. To preserve the fixed exchange rate, the government must then intervence in the foreign exchange market and sell domestic currency for foreign currencies or gold so as to bring the BOP back near zero. It the sum of the current and capital accounts is negative, an exchange supply of the domestic currency exists in world markets. Then the government must intervene by buying the domestic currency with its reserves of foreign currencies and gold. It is obviously important for a government to maintain significant foreign exchange reserve balances to allow it to intervene effectively. If the country runs out of foreign exchange reserves, it will be unable to buy back its domestic currency and will be forced to devalue. For fixed exchange rate countries, then, business managers use balance-of-payments statistics to help forecast devaluation or revaluation of the official exchange rate. Normally a change in fixed exchange rates is technically called devaluation or revaluation, while a change in floating exchange rates is called either depreciation or appreciation.

b) Managed Floats. Although still relying on market conditions for day-to-day exchange rate determination, countries operating with managed floats often find it necessary to take actions to maintain their desired exchange rate values. They therefore seek to alter the market‘s valuation of a specific exchange rate by influencing the motivations of market activity, rather than through direct intervention in the foreign exchange markets. The primary action taken by such governments is to change relative interest rates, thus influencing the economic fundamentals of exchange rate determination. A change in domestic interest rates is an attempt to alter capital account balance, especially the short-term portfolio component of these capital flows, in order to restore an imbalance caused by the deficit in current account. The power of interest rate changes on international capital and exchange rate movements can be substantial. A country with a managed float that wishes to defend its currency may choose to raise domestic interest rates to attract additional capital from abroad. This will alter market forces and create additional market demand for domestic currency. In this process, the government signals exchange market participants that it intends to take measures to preserve the currency‘s value within certain ranges. The process also raises the cost of local borrowing for businesses, however, and so the policy is seldom without domestic critics. For managed-float countries, business managers use BOP trends to help forecast changes in the government policies on domestic interest rates.

c) Floating Exchange Rate Countries. Under a floating exchange rate system, the government of a county has no responsibility to peg the foreign exchange rate. The fact that the current and capital account balances do not sum to zero will automatically (in theory) alter the exchange rate in the direction necessary to obtain a BOP near zero. For example, a country running a sizable current account deficit with the capital and financial accounts balance of zero will have a net BOP deficit. An excess supply of the domestic currency will appear on world markets. As is the case with all goods in excess supply, the market will rid itself of the imbalance by lowering the price. Thus, the domestic currency will fall in value, and the BOP will move back toward zero. Exchange rate markets do not always follow this theory, particularly in the short-to-intermediate term.

The International Centre for Settlement of Investment Disputes (ICSID) is an international arbitration institution established in 1966 for legal dispute resolution and conciliation between international investors and States. ICSID is part of and funded by the World Bank Group, headquartered in Washington, D.C., in the United States. It is an autonomous, multilateral specialized institution to encourage international flow of investment and mitigate non-commercial risks by a treaty drafted by the International Bank for Reconstruction and Development’s executive directors and signed by member countries. As of May 2016, 153 contracting member states agreed to enforce and uphold arbitral awards in accordance with the ICSID Convention.

The centre performs advisory activities and maintains several publications.

Governance

ICSID is governed by its Administrative Council which meets annually and elects the centre’s secretary-general and deputy secretary-general, approves rules and regulations, conducts the centre’s case proceedings, and approves the centre’s budget and annual report. The council consists of one representative from each of the centre’s contracting member states and is chaired by the President of the World Bank Group, although the president may not vote. ICSID’s normal operations are carried out by its secretariat, which comprises 40 employees and is led by the secretary-general of ICSID. The secretariat provides support to the Administrative Council in conducting the centre’s proceedings. It also manages the centre’s Panel of Conciliators and Panel of Arbitrators. Each contracting member state may appoint four persons to each panel. 15 In addition to serving as the centre’s principal, the secretary-general is responsible for legally representing ICSID and serving as the registrar of its proceedings. As of 2012, Meg Kinnear serves as the centre’s secretary-general.

Features of the ICSID Convention

The ICSID Convention provides the basic procedural framework for conciliation and arbitration of investment disputes arising between ICSID Member States and investors that qualify as nationals of other Member States. It is a treaty among Member States establishing an independent, impartial and self-contained system.

ICSID proceedings are delocalized from domestic procedures. This means that local courts do not intervene in the ICSID process. Some implications of the self-contained system and other main features include:

• Awards in ICSID Convention arbitrations are final and binding, and may not be set aside by the courts of any Member State (Article 53 of the Convention).
• The limited post-award remedies available are set out in the Convention itself (Articles 49 to 52 of the Convention).
• All Members States, whether or not parties to the dispute, recognize and enforce ICSID Convention monetary awards as final judgments in any Member State (Article 54 of the Convention).
• Once disputing parties consent to ICSID arbitration and unless they agree otherwise, they accept ICSID arbitration as the exclusive remedy (Article 26 of the Convention).
• A Member State cannot give diplomatic protection to any of its nationals which have consented to arbitration under the Convention, except in limited circumstances (Article 27 of the Convention).
• The place of proceedings, i.e., where hearings are held, has no legal significance in Member States (Articles 62 to 63 of the Convention).
• Participants enjoy immunity from legal process in the conduct of the proceedings (Articles 21 to 22 of the Convention).

The International Finance Corporation (IFC) is an international financial institution that offers investment, advisory, and asset-management services to encourage private-sector development in less developed countries. The IFC is a member of the World Bank Group and is headquartered in Washington, D.C. in the United States.

It was established in 1956, as the private-sector arm of the World Bank Group, to advance economic development by investing in for-profit and commercial projects for poverty reduction and promoting development. The IFC’s stated aim is to create opportunities for people to escape poverty and achieve better living standards by mobilizing financial resources for private enterprise, promoting accessible and competitive markets, supporting businesses and other private-sector entities, and creating jobs and delivering necessary services to those who are poverty stricken or otherwise vulnerable.

Since 2009, the IFC has focused on a set of development goals that its projects are expected to target. Its goals are to increase sustainable agriculture opportunities, improve healthcare and education, increase access to financing for microfinance and business clients, advance infrastructure, help small businesses grow revenues, and invest in climate health.

The IFC is owned and governed by its member countries but has its own executive leadership and staff that conduct its normal business operations. It is a corporation whose shareholders are member governments that provide paid-in capital and have the right to vote on its matters. Originally, it was more financially integrated with the World Bank Group, but later, the IFC was established separately and eventually became authorized to operate as a financially autonomous entity and make independent investment decisions.

It offers an array of debt and equity financing services and helps companies face their risk exposures while refraining from participating in a management capacity. The corporation also offers advice to companies on making decisions, evaluating their impact on the environment and society, and being responsible. It advises governments on building infrastructure and partnerships to further support private sector development.

The corporation is assessed by an independent evaluator each year. In 2011, its evaluation report recognized that its investments performed well and reduced poverty, but recommended that the corporation define poverty and expected outcomes more explicitly to better-understand its effectiveness and approach poverty reduction more strategically. The corporation’s total investments in 2011 amounted to $18.66 billion. It committed $820 million to advisory services for 642 projects in 2011, and held $24.5 billion worth of liquid assets. The IFC is in good financial standing and received the highest ratings from two independent credit rating agencies in 2018.

IFC comes under frequent criticism from NGOs that it is not able to track its money because of its use of financial intermediaries. For example, a report by Oxfam International and other NGOs in 2015, “The Suffering of Others,” found the IFC was not performing enough due diligence and managing risk in many of its investments in third-party lenders.

Functions

Investment services

The IFC’s investment services consist of loans, equity, trade finance, syndicated loans, structured and securitized finance, client risk management services, treasury services, and liquidity management. In its fiscal year 2010, the IFC invested $12.7 billion in 528 projects across 103 countries. Of that total investment commitment, approximately 39% ($4.9 billion) was invested into 255 projects across 58 member nations of the World Bank’s International Development Association (IDA).

The IFC makes loans to businesses and private projects generally with maturities of seven to twelve years. It determines a suitable repayment schedule and grace period for each loan individually to meet borrowers’ currency and cash flow requirements. The IFC may provide longer-term loans or extend grace periods if a project is deemed to warrant it. Leasing companies and financial intermediaries may also receive loans from the IFC.

Though loans have traditionally been denominated in hard currencies, the IFC has endeavored to structure loan products in local currencies. Its disbursement portfolio included loans denominated in 25 local currencies in 2010, and 45 local currencies in 2011, funded largely through swap markets. Local financial markets development is one of IFC’s strategic focus areas. In line with its AAA rating, it has strict concentration, liquidity, asset-liability and other policies. The IFC committed to approximately $5.7 billion in new loans in 2010, and $5 billion in 2011.

Advisory services

In addition to its investment activities the IFC provides a range of advisory services to support corporate decisionmaking regarding business, environment, social impact, and sustainability. The IFC’s corporate advice targets governance, managerial capacity, scalability, and corporate responsibility. It prioritizes the encouragement of reforms that improve the trade friendliness and ease of doing business in an effort to advise countries on fostering a suitable investment climate. It also offers advice to governments on infrastructure development and public-private partnerships. The IFC attempts to guide businesses toward more sustainable practices particularly with regards to having good governance, supporting women in business, and proactively combating climate change. The International Finance Corporation has stated that cities in emerging markets can attract more than $29 trillion in climate-related sectors by 2030.

Asset management company

The IFC established IFC Asset Management Company LLC (IFC AMC) in 2009 as a wholly owned subsidiary to manage all capital funds to be invested in emerging markets. The AMC manages capital mobilized by the IFC as well as by third parties such as sovereign or pension funds, and other development financing organizations. Despite being owned by the IFC, the AMC has investment decision autonomy and is charged with a fiduciary responsibility to the four individual funds under its management. It also aims to mobilize additional capital for IFC investments as it can make certain types of investments which the IFC cannot. As of 2011, the AMC managed the IFC Capitalization Fund (Equity) Fund, L.P., the IFC Capitalization (Subordinated Debt) Fund, L.P., the IFC African, Latin American, and Caribbean Fund, L.P., and the Africa Capitalization Fund, Ltd. The IFC Capitalization (Equity) Fund holds $1.3 billion in equity, while the IFC Capitalization (Subordinated Debt) Fund is valued at $1.7 billion. The IFC African, Latin American, and Caribbean Fund (referred to as the IFC ALAC Fund) was created in 2010 and is worth $1 billion. As of March 2012, the ALAC Fund has invested a total of $349.1 million into twelve businesses. The Africa Capitalization Fund was set up in 2011 to invest in commercial banks in both Northern and Sub-Saharan Africa and its commitments totaled $181.8 million in March 2012. As of 2018, Marcos Brujis serves as CEO of the AMC.

Sustainability

IFC Sustainability Framework articulates IFC’s commitment to sustainable development and is part of its approach to risk management. IFC’s Environmental and social policies, guidelines, and tools are widely adopted as market standards and embedded in operational policies by corporations, investors, financial intermediaries, stock exchanges, regulators, and countries. In particular, the EHS Guidelines contain the performance levels and measures that are normally acceptable to the World Bank Group and that are generally considered to be achievable in new facilities at reasonable costs by existing technology.

Green buildings in less developed countries

The IFC has created a mass-market certification system for fast growing emerging markets called EDGE (“Excellence in Design for Greater Efficiencies”). IFC and the World Green Building Council have partnered to accelerate green building growth in less developed counties. The target is to scale up green buildings over a seven-year period until 20% of the property market is saturated. Certification occurs when the EDGE standard is met, which requires 20% less energy, water, and materials than conventional homes.

A common size income statement is an income statement in which each line item is expressed as a percentage of the value of revenue or sales. It is used for vertical analysis, in which each line item in a financial statement is represented as a percentage of a base figure within the statement.

Common size financial statements help to analyze and compare a company’s performance over several periods with varying sales figures. The common size percentages can be subsequently compared to those of competitors to determine how the company is performing relative to the industry.

• In financial statement analysis, it is used to compare companies that operate in the same or different industries or to compare the performance of the same company over different time periods.
• Further, it helps a financial analyst establish a relationship between each of the accounts in the income statement and the total sales and eventually helps ascertain how each of the accounts affects the total profitability.
• From an investor’s perspective, it gives a clear picture of the various expense accounts, which are subtracted from the total sales to generate the net income.

Advantages

• It helps in assessing the trend in each line item of the income statement w.r.t. across time periods. Any unusual variation can be easily identified through this technique.
• It can facilitate comprehending the impact of all line items of the income statement on the company’s profitability as it expresses them in terms of the percentage of total sales.
• It can be used to compare the financial performances of different entities irrespective of the scale of operation as it is expressed in terms of percentage.

Disadvantages

• Some of the experts find common size income statements to be useless as there is no approved standard benchmark for the proportion of each item.
• A comparative study based on a common size income statement will be misleading if there is a lack of consistency in its method of preparation.

Limitations

• It does not facilitate the decision-making process due to the lack of any approved standard benchmark.
• One can’t write-off the risk of window dressing of financial statements as the actual figures are not required since the analysis is limited to percentage.
• At times it also fails to identify the qualitative elements during the evaluation of the performance of a company.
• It can be misleading for a business that is impacted by seasonal fluctuations.

A comparative analysis is one of the widely used tools to analyze financial statements. It is an act of comparing the report for 2 or more financial years or any given period. A comparative balance sheet is one of the most sought financial statements by the business. The biggest advantage of comparing financial statements over time is discovering trends, analyzing the findings and taking suitable decisions.

To define comparative financial statements, it’s a financial statement which represents the financial position over different periods of time. The financial position is represented in a comparative form to give an idea of financial position at two or more periods.

Generally, two financial statements are prepared in comparative form for financial analysis

Included in a Comparative Balance Sheet

The line items that are included in a comparative balance sheet are the same that are included in an individual balance sheet. The general categories included are: assets, liabilities, and equity. The categories are further broken down into current assets, current liabilities, long-term assets, and long-term liabilities.

More specifically, common balance sheet items are as follows:

Current assets:

• Cash
• Accounts receivable
• Inventory
• Prepaid expenses

Long-term assets:

• Fixed assets
• Long-term investments

Current liabilities:

• Accounts payable
• Accrued expenses (such as payroll and payroll taxes)
• Notes payable

Long-term liabilities:

• Long-term bank loans
• Other long-term debt

Equity:

• Common stock
• Retained earnings

Format:

Advantages of Comparative Balance Sheet

• Trend Indicator: It shows the company’s trend by putting several years’ financial figures in one place like an Increase or Decrease in profit, current assets, current liabilities, loans, reserves & surplus, or any other items that help investors make the decision.
• Comparison: It is effortless to compare the figures for the current year with the previous years as it gives both the years’ figures in one place. It also assists in analyzing the data of two or more companies or subsidiaries of one company.
• Compare performance with the Industry Performance: Helps to compare one company’s performance with another company or the industry’s average performance.
• Ratio Analysis: Financial ratio is derived from the balance sheet items. The comparative balance sheet’s financial ratio of two years of two companies can be derived to analyze the company’s financial status. For example, the current ratio is derived with the help of current assets and current liabilities. If the current ratio of the current year is more than the last year, it shows the company’s liabilities have been reduced from last year against the existing assets.
• Helps in Forecasting: It also helps in forecasting because it provides the past trend of the company based on which the management can forecast the company’s financial position.

Limitation/Disadvantages

• Inflationary Effect is not Considered: While preparing the comparative balance sheet, the inflation effect is not considered. Therefore, only a comparison with other balance sheets will not give the correct picture of the company’s trend.
• Uniformity in Policy and Principles: Comparative balance sheets will not give the correct comparison if two companies have adopted different policies and accounting principles while preparing the balance sheet or if the same company has adopted other accounting methods in two additional years.
• Market Situation and Political Conditions not Considered: While preparing the comparative balance sheet, marketing conditions, political environment, or any factor affecting the company’s business are not considered. Therefore, it does not give the correct picture every time. For example, suppose the overall economy is going down in the current year, or the political condition is unstable compared to last year. In that case, it will decrease the demand, and general company sales will experience de-growth, not because of its performance but external factors.
• Misleading Information: Sometimes, it gives misleading information, thus, misguiding the person who reads the comparative balance sheet. For example, if a product was unavailable for last year and is available for the current year, it will show a 100% change over the previous year. It implies that one needs to read the complete financial statement, not just a comparative balance sheet.

A Comparative Income Statement shows the operating results for several accounting periods. It helps the reader of such a statement to compare the results over the different periods for better understanding and detailed analysis of variation of line-wise items of Income Statement.

• Comparative Income Statement format combines several Income Statements as columns in a Single Statement, which helps the reader analyze trends and measure the performance over different reporting periods.
• It can also be used to compare two different companies’ operating metrics. Such Analysis helps in comparing the performance with another business, which can analyze how companies react to market conditions affecting the companies belonging to the same Industry.
• Thus Comparative Income Statement is an essential tool through which the result of operations of a business (or, say, the operation of the business of different companies) over multiple accounting periods can be analyzed to understand the various factors contributing to the change over the period for better interpretation and analysis.
• It helps various stakeholders of the business and the Analyst community to analyze the impact of business decisions over the company’s top line and bottom line and helps identify various trends over the period, which otherwise would have been difficult and time-consuming.
• Comparative Income Statement shows absolute figures, changes in absolute figures, unlimited data in terms of percentages, and an increase (or decrease) in percentages over the different periods. With the help of a Comparative Income Statement format in one snapshot, a company’s performance over different periods can be compared, and changes in expense items and Sales can be easily ascertained.

Comparative income statement analysis

To understand your financial data, do a comparative income statement analysis. There are two ways you can look at information: horizontal and vertical.

Each kind of analysis gives different insights into business performance. The analyses help you make sense of your comparative profit and loss statement and see patterns.

Horizontal analysis

A horizontal, or time series, analysis looks at trends over time. You can see growth patterns and seasonality. When calculating growth, look at the percentage of change between accounting periods.

Vertical analysis

A vertical, or common-size, analysis looks at the relative size of line items. It allows you to compare income statements from different-sized companies. To compare competing businesses, find the percentage of revenue for each line item.

Income statements of companies of different sizes. It shows each item on the Income Statement as a percentage of Base figures (usually the Sales figure) with the statement. Under this, all components of Income statements are shown as a percentage of sales, such as Gross Profit, Net Profit, Cost of Sales, etc., which makes it very handy to use even when comparing differently as it removes the Size biases and makes the analysis more straightforward and understandable. It is mostly used for individual statements for a reporting period but can also be used for timeline analysis.

Reasons:

As a small business owner, you need to measure performance. If you don’t, how do you know if the decisions you make for your business are working? Looking at a comparative income statement helps you analyze profitability over time.

You can use a comparative income statement to look at important financial figures. Patterns in past figures can guide you in the future. For example, you compare last year’s return on investment (ROI) to the current year. This tells you if the money you put into your business brings in a greater amount of income.

Comparative income statements can also reveal if your costs and revenues are consistent. Let’s say in three years your cost of goods sold (COGS) goes from 25% of sales to 40% of sales. By recognizing the increase, you can find solutions to reduce COGS.

Business investors use comparative income statements to look at different companies. The comparison helps them decide which business is a better investment.

Advantages of a Comparative Income Statement

Spikes and dips in revenues and expenses are immediately obvious when this format is used, and can then be investigated by management. In particular, one could use the report to discern patterns in sales from month to month that might be used to forecast future sales.

• It makes analysis simple and fast as past figures can easily be compared with the current figures without referring to separate past Income Statements.
• It makes comparisons across different companies also easy and helps analyze the efficiency both at Gross Profit Level and Net Profit Level.
• It shows percentage changes in all income statement line items, which makes analysis and Interpretation of Top Line (Sales) and Bottom Line (Net Profit) easy and more informative.

Disadvantages of a Comparative Income Statement

The results of this comparison may not be useful if an account has been shifted into a different line item at some point during the reporting period. Such a change would cause a downward spike in one line item and an upward spike in another line item. Consequently, such changes in reporting should be as infrequent as possible, or all clustered at the beginning of a fiscal year.

• Financial Data reported in the Comparative Income Statement is useful only if the same accounting principles are followed to prepare such statements. If the deviation is observed, such a Comparative Income Statement will not serve the intended purpose.
• A comparative Income Statement is not of much use in cases where the company has diversified into new business lines, which have drastically impacted Sales and profitability.

Financial analysts play a critical role in an organization’s daily operations. At a high level, they research and utilize financial data to understand the business and market to see how an organization stacks up. Based on general economic conditions and internal data, they recommend actions for the company to take, like selling stock or making other investments.

A financial analyst is responsible for a variety of research tasks in order to inform investment strategy and make investment decisions for their company or clients. This can include things like evaluating financial data, examining current events and market developments, examining an organization’s financial statements, and creating financial models to predict future performance. Depending on the position, analysts can monitor macroeconomic trends or have a narrow focus on specific sectors and industries. These roles are data-intensive and require strong mathematical and analytical skills. Given the value of their role, financial analysts can be employed by large corporations such as investment banks, insurance companies, mutual funds, hedge funds, pension funds, securities firms, investment firms, private equity groups, venture capital firms, government agencies, and similar types of organizations.

Of course, this is just skimming the surface of a financial analyst’s responsibilities. Here are some of the more specific tasks these professionals might perform for a company, according to the Corporate Finance Institute:

Gather and organize information: Whether it’s a company’s historical financial reports and accounting data or macroeconomic information and industry research, an analyst must know how to find, collect and organize vast amounts of information relevant to their business and industry. They use their research skills to review internal databases and reports from government agencies and enter them into a database, like an Excel spreadsheet.

Examine financial statements: A company’s financial statements hold a wealth of important information for a financial analyst. Using these documents (and those sorted into internal databases), they are able to determine the value of the organization. This is one of the most important responsibilities of financial analysts, as this information guides their recommendations and serves as a benchmark for the company’s performance.

Recommend investments: After analyzing all of this information, financial analysts develop a forecast about the market and how the company will perform in the future. This is where they must use their outside knowledge alongside the financial calculations to make recommendations to company officials or investment bankers. A financial analyst will create a portfolio filled with reports backing up their recommendations.

A financial analyst must be prepared to take on many responsibilities. They must conduct research and financial analysis, connect with management teams and company officials and generate written reports and presentations. This is different from an accountant who would be concerned with a company’s financials from an operational perspective, rather than the big-picture, strategic angle of a financial analyst.

Financial analysts work in a number of different industries, including securities, commodities, contracts, investment banking and other financial services. And while the general responsibilities of this role are outlined above, the Bureau of Labor Statistics noted that a financial analyst can choose a specialization based on their professional capacities.

Here are some of the specific roles someone with this expertise can take on:

Fund management: These analysts exclusively work with hedge or mutual funds. They assist management teams and evaluate their strength to help make investment decisions in line with current market trends.

Portfolio management: Every organization wants a strong portfolio. This requires the right balance of products, services, industries and global regions in which to invest, helping the longevity and success of their company. Financial analysts use their expertise to analyze market and business data to recommend a positive investment strategy and measure results.

Ratings analysis: This niche analysis focuses on guiding businesses or government agencies through the best strategies to pay down debts, like bonds. These analysts are heavily involved in understanding a company’s debts and the risk involved if it was unable to repay them.

Risk analyses: As the title suggests, a financial analyst specializing in risk assesses the company’s financial strategy to locate potential sources of loss. However, unlike the previous role, these analysts aim to reduce the risk involved with financial investments and maximize profits.

A senior financial analyst, on the other hand, would take a more active role in building a financial model, forecasting trends and making business recommendations. That’s because they may have a master’s degree with a discipline in finance and more years of experience in the industry or with the company itself. They typically lead a team of analysts and manage workflows to ensure reports and recommendations are ready when business leaders need them.

Most financial analyst job descriptions, whether buy-side or sell-side, include the following key responsibilities:

• Research industry-specific financial developments including broad economic trends and business trends
• Analyze financial statements to evaluate investment opportunities
• Create financial modeling for investors to find profitable investments
• Recommend individual investments and collections of investments
• Asses the performance of stocks, other types of investments, and bonds
• Translate financial data into detailed presentations and easy-to-understand financial reports
• Communicate with C-suite executives from client companies to understand company needs
• Stay up to date with new technologies and market conditions