How to Determine Financial Statement Quality


The quality of a financial statement depends on how useful its information is to the company in making an accurate assessment of its past, present and future economic activity. The information must be relevant to the decisions the company faces and must be reliable in its reporting and calculation of figures. Financial statements should help a company determine, among other things, compensation and benefits for its executives, returns for shareholders, and any credit, market or operation risks.

Make note of the relevant figures and statistics from the financial statement that are necessary to determine business decisions for a certain area of the company. Are all of the useful and relevant figures for your decision available on the financial statement, or is some information not reported?

Review relevant information from any feedback given on the financial statement. Is the feedback neutral and accurate, or does it seem biased for the purpose of influencing a certain behavior or result not in accordance with the company's economic condition?

Compare and contrast the information on the financial statement for the company’s current economic condition with the information from the company’s past economic conditions to determine trends within the company. Is there enough relevant information for you to make an accurate analysis of the company’s current economic condition and an accurate forecast for its future economic condition?

Make note of the available options concerning company decisions as listed on the financial statement and determine the validity of these options based on the company’s current economic condition and its future economic conditions, according to your previous forecast.

Tips & Warnings

  • Because different accounting methods can yield different results using the same information, the information on a company's financial statement should utilize similar accounting methods and policies from period to period to ensure an accurate and consistent representation of economic data. If the company changed any accounting policies since the previous financial statement, then it must receive a preferability letter from external auditors acknowledging the change in policy. The financial statement must explain why the new policy is preferred over the previous policy. The statement should also report whether the company consulted with the SEC (Securities and Exchange Commission) over any accounting issues since the previous financial statement.

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