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The Statement of Financial Performance Is Based on Data Relating to Past Transactions and Events. Hence the Statement of Financial Performance Is of No Use to an Investorð²ð‚™s Decision Making Process.

Essay by review  •  July 5, 2011  •  Essay  •  406 Words (2 Pages)  •  979 Views

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The statement of financial performance is based on data relating to past transactions and events. Hence the statement of financial performance is of no use to an investor’s decision making process.

Discuss the above statement

The statement of financial performance is useful towards an investor’s decision making process as it contains a wealth of useful information regarding the performance of a business during a specific time period.

Using a statement of financial performance is an alternative way to measure profit. Many decisions are based on profit and risk and therefore significant in predicting future profits and getting feedback on decisions. With regular production of statements of financial performance managers are able to compare the performance against budget and identify any problems which they can deal with immediately. For example, David Jones was hoping its loss-making Foodchain group would break-even with its competitors (Woolworths and Coles Myer) the following year by opening six more stores around Australia.

The main data in the statement of financial performance are revenues, expenses, and net profit/operating surplus or net loss/deficit of an entity for a certain time period. We can measure profit or the increase in wealth by summarising the revenue for that period and deducting the expenses incurred in earning that revenue. This is especially relevant when owners/managers want to know the amount of profit made by a business or project and comparing the profit with how much wealth is needed to produce it, and deciding whether to invest into a business. Additionally, they can determine the success of its operations, the policies and strategies of management, and insight into its future performance.

Other factors that need to be taken into account are the risk involved in the investor’s decision making process and their judgement of future investments. Preferably the return from the statement of financial performance should be adequate accordingly with our decision making. If for example the company had statements issued yearly rather than monthly it would be insignificant if you find out the problem at the end of the year when you could have rectified it at the end of a month.

In conclusion it is clear the statement of financial performance is effective to the investor’s decision making process

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