Accounting the Role of Financial Statements in Essay

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The role of financial statements in investing is that they provide a consistent format that can be used by potential investors and other stakeholders to evaluate a company. There are several components that facilitate this happening. For publicly-traded firms, Generally Accepted Accounting Principles (GAAP) play a key role in the creation of financial statements. GAAP is a common set of accounting principles and procedures that companies use to compile their financial statements (Investopedia, 2012). With companies having to produce their statements according to a common set of criteria, the information is easier to compare not only between different years at the same company, but also against other firms in the industry and all other publicly-traded firms.

The IFRS is essentially the international version of GAAP. Financial statements in many countries, especially those in Europe, are produced according to IFRS. There are a many areas where GAAP and IFRS diverge, so analysts need to be aware of these differences. The process of switching from GAAP to IFRS in the United States is underway. This convergence process is one of the major issues in public accounting right now (AICPA, 2011).

The annual report is a document produced by the company for its shareholders and other external stakeholders. The contents of the annual report are divided into two parts. The first part is the content produced by the company, none of which is mandatory, but which discusses the business and results.

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The second part is the 10-K. Some companies forgo the annual report entirely, and only publish the 10-K. The 10-K is mandatory, and is published according to a format approved by the Securities Exchange Commission. The financial statements that are compiled according to GAAP are published in the 10-K, along with information about the business and notes to the financial statements.

Liquidity is an entirely separate issue. Liquidity refers to the degree to which the company can meet its debt obligations. This is one of the many concepts that are analyzed with the financial statements. Liquidity is of key concern to regulators, creditors, shareholders and other stakeholders. In general, liquidity measures are calculated using the balance sheet.

Part II: Revlon is an American firm, headquartered in New York, and produces financial statements according to GAAP. Revlon's 10-K for the fiscal year 2011 is going to be used in this report. Beiersdorf is a German firm based in Hamburg. It produces financial statements according to IFRS. The company's 2011 Annual Report is going to be used as the basis of this report.

There are some minor differences in the layouts of the statements. Beiersdorf has its equity above the liabilities, and long-term assets above current assets, and this order is reversed in the Revlon statements.….....

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