Impact of Financial Statement Analysis on Decision Making Process Assessment 3 Answer
A brief summary of theory and progression in the field
The main objective of this literature review is to analyse the impact that financial statement analysis has on the decision-making process of investors. This report will identify whether investors are considering the financial position of the company represented through financial statements before making an investment in a particular company through the Australian stock exchange. This type of analysis will help in evaluating the nature and perception of investors in the stock market.
According to the views presented by Qureshi and Hunjra, main factors that are affecting the decision-making process of investor are Heuristics, risk aversion, use of financial tools and firm-level corporate governance. According to this literature review, it can be said that financial tools play an important role in deciding the investment decisions of investors (Qureshi & Hunjra, 2012). Financial tools are based on financial data provided in financial statements such as ratio analysis. Corporate level governance can also be identified with the help of financial data and non-financial data provided in financial information at the end of annual reports. Therefore it can be said that one of the important factors according to Qureshi and Hunjra that is contributing to the decision-making process of investor is financial information.
There are some authorized that have represented some conflicted opinion on this matter. According to them, financial data is limited in a certain category of investors and for certain category of business organizations. Financial data is not to use universally for making investment decisions and there are other factors that influence the decision-making process of investors (Pandey, Chaubey & Tripathi, 2016). The main purpose of this report is to conductor critical analysis of the subject matter under consideration. It is expected that this literature review will help in understanding both perspectives and analyse a variety of factors affecting the decision-making process of the investor.
Common theme/ finding across the four articles
All four articles used for conducting the literature review has ultimately concluded that the rule of financial statements is very important for investors while taking investment decisions. All of the authors have suggested that it is very important for an investor to analyse the financial position of the company rather than only focusing on the demand for stock in the market. From long term perspective analysis of financial statement is very essential as financial statements can represent to future growth perspective of a company.
These articles also suggesting that stock exchange regulatory authorities are also providing recommendations to the investor to analyse financial statements and the financial position of the company before making an investment. Uneducated investment can impact the overall economy as well as the stock market, therefore the importance of using financial information in the decision-making process is very high.
These research paper has also concluded that the investment is made after analysing the financial position of the country have provided a better return to their investors as compared to investors that are not considering the financial position of the company. According to the role of stockbrokers and stock, the analyst has increased over a period of time. The stock brokers and stock analysts are analysing the financial position of the company with the help of financial data and recommending and facilitating investors to make an investment decision. In such a situation, it can be said that investors are considering financial data indirectly through stockbrokers in their decision-making process.
It is also discussed that a major focus of all the investors is on profitability generated by the organization rather than focusing on other aspects of the business as solvency, liquidity and managerial efficiency. This is due to the fact that it is very easy for an investor with limited background of accounting knowledge to evaluate the profit generated by the organization and growth in profit over the period of time (Alam, Alam & Mushtaq, 2016). This type of information is clearly mentioned by organizations in their financial statements.
Difference themes/ finding across the literature review
Some of the authors have represented different views on the use of financial information while making investment decisions. According to Norman, there are various factors that are influencing the role of using financial statements in the decision-making process. One of the primary factors that influence the use of financial statement is knowledge of investor in relation to accounting and finance. If a particular investor does not have any basic knowledge of accounting and finance then there is a high probability that two such investors would not use financial data while making an investment (Norman, 2012). Such an investor will analyse the trend of the market selling price of a particular stock before making an investment. If the trend of the market selling price is increasing then the investor will make investment otherwise investor will conduct trend analysis for some other stock.
According to author another important factor that is affecting the use of financial statement is the use of accounting standards issued by the Australian accounting standard board. It is the responsibility of the Australian accounting standard board to amend accounting standards in accordance with the changes in the business environment and these accounting standards are required to be followed by every business organization. The audit is conducted by a business organization to ensure that management is following these rules and regulations are developed by AASB. Educated investors are using financial data to make investment decisions only if the financial statements are audited and auditor of the company has expressed that all the accounting standards are properly followed by the organization. This is due to the fact that the management of the company can be able to represent its actual financial position through financial statements only if these accounting standards are properly followed.
Another different theme identified across the literature review is the use of financial statements by small and medium-sized investors. Use of financial data from the financial account is limited to large investors as they are taking a heavy risk on their investment. Small and medium-sized investors are taking advice from financial brokers and financial advisors to make investment decision rather than dedicating efforts and time for following a structured investment process (Qureshi & Hunjra, 2012). On the basis of critical analysis of subject matter under consideration, it can be said that the use of financial statement is limited to a certain category of investors. These category of investors are investing the heavy amount in the stock market and they have basic knowledge of finance and accounting.
The managerial implication can be defined as the method of summarising the result in terms of action. On the basis of this literature review, it can be said that the use of financial information to make an informed stock investment decision is very important. Overall returns of the label on stock investments will increase significantly if investors are evaluating the financial performance of the company before making an investment. Investors can easily identify the future growth perspective of a particular business organization by analysing their profitability, liquidity, and solvency. Information provided by the chairman of the company in the director’s report can also be very helpful in making such a decision. For example, if the chairman has proposed to undertake a particular project in the future then there is a probability that the market price of such company will increase significantly after the acquisition of such a project.
Apart from that, it is important to analyse various factors before depending on the financial data in financial statements. First of all the management of the company should ensure that all the accounting standards are followed while preparation of financial accounts as these accounting standards helps in presenting the actual value of computer financial statements. In addition to that investors should have knowledge about the manner in which financial data provided in financial statements can be used for analysing the future perspective of the company. In addition to financial statements, some additional analysis strategies should also be used for making investment decisions such as risk-return analysis. This will help in supporting the conclusions made with the help of financial statement analysis.
Limitations and future research direction
According to this literature review, it can be said that primary limitation was that none of the research articles has collected actual data from investors to evaluate whether they are actually using financial statements or not. Majority of this research paper is based on secondary data which is already collected for another purpose by some different author. It is suggested that in the future, data should be collected from actual investors in the Australian Stock Exchange. This will help in evaluating whether the investors are actually using the financial data before making investment decisions in the current business environment.
In addition to that, researchers can also define the growth rate on return available to investor’s data using financial data and growth rate on return available to investors that are taking advice from stockbrokers and financial advisors. This will help in ensuring conducting financial data analysis by the investor himself or herself will be more profitable or not. Factors other than financial statement analysis that considered by investors before making investment decision should also be analysed in future research.