Question

A close friend of yours, who is a history major and who has not had any college courses or any experience in business, is receiving the financial statements from companies in which he has minor investments (acquired for him by his now-deceased father). He asks you what he needs to know to interpret and evaluate the financial statement data that he is receiving. What would you tell him?

Short answer

It is recommended that an adequate understanding of the nature and constraints of accounting, as well as the usefulness of financial statement instruments, be obtained.

Step-by-step solution

Meaning of Financial Statement

Reports used by stakeholders, potential investors, and other users of financial statements for the purpose of analyzing the financial data of a company are called financial statements.

Interpreting and Valuing Financial Statement Data

In order to properly assess and evaluate financial statement information, the friend must:

1. Understand the nature and constraintsof accounting.
2. Be familiar with accounting and business language.
3. Have some professional expertise.
4. The nature of the financial statement analysis and the tools it accrues with.