Critical issue in accounting

Accounting is the language of finance that deals with business and numerical figures relating to the transactions of a company. The concept of accounting originated in the Middle East and later spread to European and American states. Nowadays, it has more significant advancements in Europe than in any other part of the world. The art of accounting is millennial. Ancient traders used the concept of accounting to solve their money problems (Alvi, 2016). Therefore, investors venturing into new business ideas hire financial experts to conduct a review before they invest their money in a plan that they are not guaranteed of making profits (Damodaran, 2016). The process of investment analysis is not restricted to only new entries into a market. Large established firms also conduct business investment analysis to find out whether their resources are adequate.

The report of the review enables them to know whether they have over-invested or they need to allocate more resources to their business. These purposes served by the performance of an investment analysis make it a critical issue in accounting. This analysis is conducted by looking into the main activities that a company has in its business model. In most cases, these activities include design, creation, production or manufacture, and transportation or distribution of good and services in a business (Defusco, McLeavey, Pinto, Anson, & Runkle, 2015). The most preferred strategy of conducting this step is Porter's Five Forces which is used to determine and assess the economic attributes that are relevant to a business. Identifying a firm’s strategies The financial analysts must also consider the nature of the product or service that the company is offering to its clients.

The critical aspects of this consideration are determining whether a firm is applying the appropriate business strategies that are specific to its product. Analysis of risk factors and profit earning levels In this phase, the analysts add some value into the business processes and financial statements of a firm. Some of the standard tools that financial experts use in this step include Financial Statement Ratios (FSRs). These ratios are comprised of measurements relating to liquidity, debt limitation, and the management of various assets that enhance the profitability of a business. The analysis in this step aims to determine the profits acquired through the use of a particular asset compared to the resources spent by the firm to purchase and maintain that asset (Schaltegger & Burritt, 2017).

When the profits are lower than the costs incurred by the company to buy and operate the asset, then the financial advisors should advise the firm accordingly to reduce their risk factor. The quality of accounting activities in a firm can be measured through the different techniques discussed in the procedure for an investment analysis. Companies need to appreciate the value of hiring experts to conduct investment analysis using their financial statements. Stakeholders and investors also require viewing the data presented in investment analysis reports so that they can be informed on how their money is spent. Summary Investment analysis is an effective strategy to ensure transparency and reduce the fraudulent activities that may occur. The financial experts conducting an investigation should be informed about the objectives of the company.