Financial Statements Essay -- Economy, Financial Distress

Financial Statements basically show the historical performance or record of the company at some previous point of time. By the time when financial statements are made public, changes are many economical areas such as market conditions, currency exchange rate and inflations can change the values of assets and liabilities. In this case there often exist discrepancies between book value of assets and their market values. In above case there might be companies that are healthy and many go through period of financial distress. In particular is the threat of not being able to meet debt obligations. The first Indication of financial distress is when firm does not have enough liquid assets (short-term assets) to cover (pay for) current liabilities (short-term liabilities) when this happen than firm ability to covering long-term liabilities is reduced resulting in creditors taking on more risk than the investment of loaning money to the firm is worth. When company is facing financial distress, book value of company liabilities can become worth more than the market value of the same liabilities. If this happen, than firm is in danger of not meeting its obligations to creditors. In this case creditors may not be paid and in worst of financial distressed time, the creditors may receive nothing in interest or principal, if the firm files for bankruptcy. The importance of financial-decision making goals is to increase shareholders’ value and to keep them away from financial distress. The Predicting of financial distress is an early warning signal to keep investors from being loss. It has been more than 70 years, since Ramser & Foster, and Fitzpatrich in 1931-1932, and 44 years, since Beaver (1966) but still they have not found the theory... ...earches this paper extends the previous research work done on financial distress. We have used modified Altman Z Score as a proxy for the financial distress. After including the financially distressed and financially healthy firms in our sample, we have seen the effect of financial distress on corporate cash flows. Prior to this work hardly any paper can be seen which studies the impact of financial distress on corporate cash flows, especially in Asian context. Our work adds to the literature in a sense that it not only identifies the financially distressed firms but also measures the effect of financial distress on operating cash flows of the firms listed on Karachi Stock Exchange. Our work also contributes to the literature in establishing a fact that whether the model of financial distress developed by Altman is relevant in Pakistan’s Corporate Environment. Financial Statements Essay -- Economy, Financial Distress Financial Statements basically show the historical performance or record of the company at some previous point of time. By the time when financial statements are made public, changes are many economical areas such as market conditions, currency exchange rate and inflations can change the values of assets and liabilities. In this case there often exist discrepancies between book value of assets and their market values. In above case there might be companies that are healthy and many go through period of financial distress. In particular is the threat of not being able to meet debt obligations. The first Indication of financial distress is when firm does not have enough liquid assets (short-term assets) to cover (pay for) current liabilities (short-term liabilities) when this happen than firm ability to covering long-term liabilities is reduced resulting in creditors taking on more risk than the investment of loaning money to the firm is worth. When company is facing financial distress, book value of company liabilities can become worth more than the market value of the same liabilities. If this happen, than firm is in danger of not meeting its obligations to creditors. In this case creditors may not be paid and in worst of financial distressed time, the creditors may receive nothing in interest or principal, if the firm files for bankruptcy. The importance of financial-decision making goals is to increase shareholders’ value and to keep them away from financial distress. The Predicting of financial distress is an early warning signal to keep investors from being loss. It has been more than 70 years, since Ramser & Foster, and Fitzpatrich in 1931-1932, and 44 years, since Beaver (1966) but still they have not found the theory... ...earches this paper extends the previous research work done on financial distress. We have used modified Altman Z Score as a proxy for the financial distress. After including the financially distressed and financially healthy firms in our sample, we have seen the effect of financial distress on corporate cash flows. Prior to this work hardly any paper can be seen which studies the impact of financial distress on corporate cash flows, especially in Asian context. Our work adds to the literature in a sense that it not only identifies the financially distressed firms but also measures the effect of financial distress on operating cash flows of the firms listed on Karachi Stock Exchange. Our work also contributes to the literature in establishing a fact that whether the model of financial distress developed by Altman is relevant in Pakistan’s Corporate Environment.