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Chapter 4 analysis of financial statements
Chapter 4 analysis of financial statements
Corporate finance ratios
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Introduction There are several methods used to measure the financial health of a company with the use of various statements all providing important financial data used by varying parties. Knowing and understanding the financial results of the company’s operations over a specific time period will aid in better decision making and future planning. Income Statements Managers and business owners use income statements as a tool to visualize their profits and losses over a specific time period. Income statements can greatly differ between companies based on the industry. These reports are typically comprised of several major types of expenses to include; gross profit, operating income, income before taxes, and net income (Melicher …show more content…
This statement provides management, owners, and executives with a snapshot of a company’s financial position within a specific time period. This is not to be confused with an income statement which focuses on the company’s operations. The major types of assets indicated on a balance sheet include; cash, accounts receivable, inventories, current, other, total, net, and other long-term assets (Melicher & Norton, 2014). Claims against a company’s assets can be made by creditors, owners, or …show more content…
The statement of cash flows is beneficial to use with accrual accounting, because cash flows is a compilation of cash receipts, expenses paid in cash, and any changes in cash held by a company not including operating expenses (Epstein, 2011). A statement of cash flows is segmented into three standard sections or activities to include; operating, investing, and financing. Operating activities consists of the amount cash expended or the cash consumed by a company to conduct operating activities. Investing activities consists of any long term assets purchased or sold, such as equipment or facilities, or short term investments, such as stocks and bonds, sold during a specific time period (Epstein, 2011). Thirdly, financial activities consist of any payments made towards debts, or any debts incurred during a specific time
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
One way to measure the success of a company is to examine, in depth, their financial history. Naturally, this includes all financial documentation past, present, and future. Setting goals and open communication in my opinion, can contribute to the financial success of a company. Without a strong team foundation, knowledgeable staff, and thorough accounting practices, I believe a company has no future. The choice of focus between managerial accounting and financial accounting can make or break a company.
This statement summarizes the assets, liabilities, and net worth (stockholders’ equity) that Home Depot held at a specific point in time (Schroeder, Clark & Cathey, 2010, p. 212). The purpose of the balance sheet is to give users a clear ideal of Home Depot’s financial strength and capabilities of the company’s business. It is important that the balance sheet is used to determine if Home Depot has sufficient cash for immediate needs; the balance sheet is also used to evaluate the relationship between debt and owner’s equity (Kimmel, Weygandt & Kieso, 2013,
A consolidated financial statement can be defined as the financial statements of a parent and its subsidiaries combined to form a single economic entity (AASB 10, 2011). The entity, which acquires the other entity, is known as the parent and the entity, which has been acquired, is known as the subsidiary. Consolidation financial reports arise when one entity purchases another entity, to then form a group.
The progress of any business depends on the fine evaluation and distribution of monetary assets. Incomes and expenditures of a company are vital in understanding profit or loss of a company. Hence, income statements are formulated in order to track the cash flow and create decisive plans for the progress of a business. It is also known as profit and loss account, revenue statements, earning statements and operating statements. Keep in mind that an income statement is only part of a company’s financial statement. Hence, with income statement template you can easily avail it as per your requirements.
There are different aspects when working with financial statements. There are different financial statements within accounting. The balance sheet provides the overall picture for an organization, the income statement provides the list of revenue and expenses, the retained earnings statement appears on the balance sheet and income statement and the cash flow provides an indication on how much cash enters and leave an organization. The following paper will go further into the depths of accounting to explore the revenue recognition principle and expense recognition principal, along with the different types of revenues and expenses.
Income statement gives us a summary of incomes and expenses for a given accounting period. It gives the financial performance on how the business incur it revenues and how it spent it through operating and non-operating cost activities. With income statement one can see expenses of income and adjust accordingly.
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.
Preparing general-purpose financial statements; including the balance sheet, income statement, statement of retained earnings, and statement of cash flows; is the most important step in the accounting cycle because it represents the purpose of financial accounting.
The statement of cash flows reports a firm’s major cash inflows and outflows for a period. This statement provides useful information about a company’s ability to generate cash from operations, maintain and expand its operating capacity, meeting its financial obligations, and pay dividends. There are three types of activities to look at in this statement, which are cash flows from operating activities, investing activities, and financial activities (3, 2005).
The statement of the financial position is also known as balance sheet has shown the accounting equation, Assests = Liabilities + Equity. The statement of the financial position shows the current assets, liabilities and equity owned by a business during an accounting period.
Balance sheet-: Balance sheet is a statement at the book value of all of the assets and liabilities of a business or other organization present a particular date such as the end of the financial year. It is known as a balance sheet because it reflection accounting identity the components of the balance sheets. The balance sheet must follow the following formula:
Cash flow statements provide essential information to company owners, shareholders and investors and provide an overview of the status of cash flow at a given point in time. Cash flow management is an ongoing process that ties the forecasting of cash flow to strategic goals and objectives of an organization. The measurement of cash flow can be used for calculating other parameters that give information on a company 's value, liquidity or solvency, and situation. Without positive cash flow, a company cannot meet its financial obligations.
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.
In classified balance sheet categories of assets are: current assets, investments, fixed assets, intangible assets, etc.