Assessing Risk from Financial Statements: an Essay

INDIAN INSTITUTE OF MANAGEMENT INDORE

Course Title: Emerging Issues in Accounting Research-2
Term Paper on “Assessing risk from financial statements: An Essay”

Submitted to: Prof. V.K Gupta

Submitted by: Pankaj Gupta (FPM 1109)

Abstract
This paper presents insights for assessment of accounting risk from financial statements. Financial statement is only a source of information for external users not the exact presentation of the activities of a firm. The main purpose of this paper is to highlight those accounting variables which are needed to estimate the risk profile of a firm and various accounting issues related.

1) Introduction
Since long we have been preparing, presenting and publishing financial statements but what is the purpose of external financial statements? The answer can be providing information to the stockholders. Instead of stock holders we may find it useful for stakeholders. Like, it can be useful for debt holders to estimate the probability of default or suppliers of goods and services, who may be interested in the return and risk of the dealing with the firm. So, why external statements is necessary only for stockholders? Financial statements help stock holders to decide the market price of the firm’s stock. Since the stock holders are the owners of the firm and by determining stock prices they can take the decision regarding the resource allocation for the firm. Other stake holders may access the information from other sources but these are the shareholders whose basic source of information is the annual reports including balance sheet and income statements (external accounting statements) Earlier, accounting statements designed to measure the level of earnings as a performance measure i.e. return measure. But after Markowitz (1952/March) Roy (1952), risk was introduced as second aspect of performance. So does the financial statements are properly designed to estimate the risk? Even if we accept that financial statements are

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