Introduction: Managers in sustaining organization’s today know that in order for decision’s to be successful they need to be made with the total financial picture in mind. Organization’s who hope to still be doing business in the following years look at all of the implications of investments and taking on additional debt by first reviewing its effects on their bottom line. They do this through the three most important applicable financial statements, the Income Statement, Cash Flow Statement and also the Balance sheet. We will discuss these statements in depth below. • What is the purpose of the income statement? Identify the major types of expenses that are shown on the typical income statement. The statement of income (sometimes called …show more content…
It can also show areas that the firm can reduce its expenses and also increase its revenues. The starting point of the income statement reflects the revenues or sales generated from the operations of the business. A few of the important items that one might see on the income statement include: revenue, COGS cost of goods sold, gross profit, selling general and administrative expenses, depreciation, operating income, interest expenses, other expenses (income), income before taxes, income taxes, net income , eps earnings per share (as reported) (Melicher 358), weighted average shares …show more content…
The claims of creditors include: liabilities such as accounts payable, short term debt, current liabilities, total liabilities, and long term debt. Also additional claims of creditors include the shareholders ' equity portion of the balance sheet. Consisting of: Preferred equity, common equity and retained earnings held within the company as well as stockholders equity. (Melicher 358) This one-time period depreciation is accumulated over time, and the accumulated depreciation appears in the balance sheet the balance sheet indicates the firm’s assets and how they were financed by various liabilities and equity as of a point in time. (Melicher 375) • What are the three different accounts that comprise the owners’ equity section on a typical corporate balance sheet? In the case of a corporation, the owners’ equity is usually broken down into three different accounts: Preferred equity, Common Equity and Retained earnings and Shareholders equity. The retained earnings account, shows the accumulated undistributed earnings within the corporation over time. These retained earnings do not represent cash. They have been invested in the firm’s current and/or fixed assets. Together these three accounts comprise the corporation’s common stockholders’ or owners’ equity.
A strong balance sheet gives an investor an idea of how financially stable the company really is. Many professionals consider the top line, or cash, the most important item on a company’s balance sheet. The big three categories on any balance sheet are “assets, liabilities, and shareholder equity.” Evaluating Barnes & Noble’s assets for the time 2014 at $3,537,449, 2013 at $3,732,536 and 2012 at $3,774,699, the company’s performance summarizes that it is remaining stable. These numbers reflect a steady rate over the three year period. Like assets, liabilities are current or noncurrent. Current liabilities are obligations due within a year. Key investors look for companies with fewer liabilities than assets. Analyzing this type of important information, informs a potential investor that if the company owes more money than they are bringing in that this company is in financial trouble. Assessing the liabilities of the balance sheet, for the same time period, it is also consistent with the assets. The cash flow demonstrates a stable performance in the company’s assets and would be determined that the liabilities of this company are also stable. Equity is equal to assets minus liabilities, and it represents how much the company’s shareholders actually have a claim to. Investors customarily observe closely
The purpose of an income statement is to report the revenue generated and the expenses incurred by a corporation for the past year. (Melicher, 2014) The gross revenue is the first item on the financial statement followed by several expenses and then the net revenue. One of the expenses a corporation incurs is the cost of goods sold, which is the amount of money it costs a corporation to produce or manufacture the items sold to generate a profit. The second expense on a financial statement is the cost of record keeping, preparing financial statements, advertising, and salaries grouped under the heading “Selling, general, marketing expenses”. The other expenses on an income statement are depreciation, interest expense, and the unavoidable income tax. (Melicher, 2014) Once all of these expenses haven been deducted from the gross revenue a company has an accurate depiction of their net
Account receivables are used as a replacement of cash as the liquid asset of a business. Cash flow report: Cash flow is money actually received and gone. The amount is coming by selling product, service, and asset or from other sources is known as cash inflows. Cash spend by purchase or other way is recorded as cash outflow. Cash inflows always remain higher than cash outflows though there might be high amount of account payable .spent might be higher than income.
Among other things, when the FASB created the statement of cash flows a vital part, it permitted either the direct or indirect approach/method. However, if the direct approaches are picked, the FASB demands that it be helped by a schedule of the adjustments that make up earnings to cash on the condition that it’s used by operating activities. This particular schedule can be shown as either in the footnotes on the financial statement or on the cover of the statement. In addition, commonly allowed accounting principle ask for that under either approach or method cash figures paid out for things like taxes and interest must be made known
There are many companies that use financial accounting statements to maintain a financially sound organization. Bookkeepers are able to give a report of the company’s financial health through these statements. These statements are reports that contain information pertaining to the organization’s financial position and results of their activities. (Finkler, et, al., 2013). The purpose of Management's discussion and analysis (MD&A), is to provides an overview of previous operations to develop a framework to meet the goals for the next year (Finkler, et, al., 2013). These outcomes can highlight areas of positive and negative managerial styles and decision making. It offers a breakdown of the overall financial position and results of operations to assist users in assessing whether that financial position has improved or deteriorated as a result of the year’s activities. (Finkler, et, al., 2013).
Thesis: Businesses deem financing necessary when they are just beginning, expanding, or recovering; Debt financing and equity financing have many advantages and disadvantages but also change the entire accounting method that is to be considered while running the business. Debt financing has both advantages and disadvantages. Debt financing is a business’ way to start up, expand, or recover by borrowing money from a person or company. The money borrowed has to be paid back along with the interest that was accrued during the length of time the loan was carried out. This option is great for company’s that do not want investors.
The Purpose of Financial Statements The financial statements of a business are used to provide information about the status of the business, set performance targets and impose restrictions on the managers of the firm as well as provide an easier method for financial planning. The financial statements consist of the Profit and Loss Account, Balance Sheet and the Cash Flow Statement. There are four areas of information, which we can collect from a company's financial statements. They are: Ÿ Profitability - This information comes from the Profit and Loss account. Were we can compare this year's profit with the previous years.
Maintaining a company’s financial assets is a daunting task. Cash management techniques and short-term financing provide accounting executives with the tools needed to survive the constant changes within the economy. The combination of these tools and the knowledge of the world economy will assist companies in maintaining current assets and facilitates growth.
The cash flows from investing activities are cash flows from transactions that affect the investments in non-current assets. Some of these include investments in bottling companies; purchases of property, plant and equipment; and purchases of investments and assets. For the most part, these figures have remained fairly stable. From 2001 to 2003 it went from $1.1 million to $9.3 million, showing a slight decline (2).
Each type of financial statement has their own objectives and purposes. Below has shown the purposes of each financial statement:
Income statement-: Income statement is the financial statement that measures a company 's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities.
Managing an organization’s financial operation requires a good understanding of the economy and ways to maximize revenue. For an organization to operate on a daily basis, adequate cash flow is required. Poor cash management within an organization might make it hard for the organization to function because there may be shortage of cash in case of inconsistences in the market. In most companies, management is interested in the company 's cash inflows and outflows because these determines the availability of cash necessary to pay its financial obligations. Management also uses this information to determine problems with company’s liquidity, a project’s rate of return or value and the timeliness of cash flows into and out of projects (used as inputs
In the past, the company performance was measured by asking ‘how much money the company makes?’ To a certain extent, they are right because gross revenue, profitability, return on capital, etc. are the results that companies must bring to survive. Unfortunately, in today business if the management focuses only on the financial health of the company, numerous unwanted consequences may arise.
If there is sufficient working capital than we can assume that it has sound financial position and if the business is under trading than there will be increment in liquid assets which shows that the funds are not been utilized and kept ideal.
"The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions."[Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities and equity are directly related to an organization's financial position. Reported income and expenses are directly related to an organization's financial performance.