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Financial Statements as a starting point for Managerial Accounting Reports
Financial information in the article is represented by specific figures that reflect the company’s performance over the previous financial year. The figure representing sales for the period ended in 1997 shows revenue from its sales of the phones amounted to $8.7 billion. Operating earnings had increased by 76% to a value of $616 in just a period of one year. This translates to $350 million in operating profits from the second quarter of the year 1997 to the second quarter of June 1998, which is a full fiscal year. The total assets owned by Nokia amount to $9.8 billion in that year. The manger expects the country to grow at an average of 25-30%. With the estimates of about 550 million new mobile phone users across Europe, Asia and the Americas, Nokia expects to dominate or outgrow such predictions that the larger mobile phone market share. Nokia had an operating margin of 18%, which is arrived at by expressing the net profit as a fraction of the sales, this shows that the total profits after deduction of the expenses and divided by the sales. This figure would enable users to be able to come up with the values for the total profits and the values for the expenses that were accrued in relation to that financial year
In accounting, Horizontal analysis refers to the comparison of financial information with information relating to more than two previous financial periods or the whole set of financial statements. This enables the managers, owners of the business to make decisions in relation to the business’s operations. It also enables them to focus on the deviations from the set targets; this is referred to as management by exception. The information derived from such comparisons of statements aids managers in drawing conclusions as to whether the entity is proving to be profitable enough to continue operating. Thus, relevant information such as analysis in relation to the article is the ratio on the net profit to sales (margin). It helps to analyze the cost of sales, and if the targets in sales have been met and thus aid in scrutiny of the causes of such disparities to help in the determination of investment decisions.
Vertical analysis is the act of proportionately analyzing items in a line, such that the line items are represented as fractions of other items. In a balance sheet, the common items are the assets and so the line items are represented as fractions of the assets. In the income statement, the common item is sales, which is used to arrive at the net income, so the line items in the income statement are expressed as fractions of sales such as margins, markups. Vertical analysis is clearly depicted in the article, it is represented by a margin of 18%, which is arrived by deducting the total expenses from the gross profit, and the result is then divided by the sales amount. Such an analysis helps management in knowing the related costs of products, the profits realized after deduction of the total expenses and the relation to sales. Thus, such information helps to conclude if the cost of sales is logical in relation to the profits realized and the need to make adjustments if necessary.
An internal decision maker requires actual values to help any user of the information to get a clear and precise view of the state of affairs of the entity. Accounting proportions given in financial information represent certain state of financial health, either healthy or unhealthy. An analysis of the information in the financial statement helps an internal decision maker in the determination of the kind of action that would be warranted by the different outcomes. Inconsistent data or data that has been merely estimated would result in making of decisions that would not be consistent with the actual information. This would result in wrong decisions that would be detrimental to the existence of the entity.
References
Friedlob,T.G., & Schleifer,F.L.L. (2003). Essentials of financial analysis. New York, NY: John Wiley and Sons Publishers
Vance,E.D. (2003). Financial analysis and decision-making: tools and techniques to solve financial problems and make effective business decisions. Indianapolis, IN: Mcgraw Hill Professional Publishers.
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