Financial Education

Outside investors and analysts do not typically have access to a company’s general ledger or journal entries. As a result, they must use the financial statements that result from the accounting process to infer the transactions that took place.

Since preparing financial statements requires considerable judgment and can even be subject to misrepresentation, analysts must also assess whether the judgment involved seems reasonable. Often this can be done by comparing the various accounts that might be affected by a given transaction.

For example, if a company were to record fictitious revenue there would be no cash inflow as a result. Instead, the revenue would likely be offset by an account receivable entry. By comparing the trends in sales and accounts receivable the analyst can potentially identify questionable results.