Financial statements are very important to a company because they measure a company’s performance. This performance statement can be viewed by the owners, possible investors, and lenders. This statement can make or break a company and is important that it is completed correctly. A Financial statement includes income statement, balance sheet, and statement of cash flows. In this essay I will describes the reason of the firm’s financial statements.
Income Statement Purpose
The income statement is the one of the most important and a large part if the financial statement. The income statement features the expenses, revenue, and either a profit or loss from the company during the fiscal month, year, quarter. One of the main purposes …show more content…
They are liquidity, profitability, and efficiency. Liquidity is ratio of assets to liabilities. This shows a company 's capability of paying their short term bills. The second is profitability and it shows the owners ability to exchange sales into profits. The last is efficiency and it includes inventory turnover and receivables turnover.
In conclusion a financial statement is very important to a firm to measure performance. A Financial statement includes income statement, balance sheet, and statement of cash flows. When reviewing a firm’s financial statement, a company uses three categories of ratios for the analysis of this finance statement and they are liquidity, profitability, and efficiency. In this essay I described the reason of the firm’s financial statements and why it is a very important to a …show more content…
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The first method we will review is the accounting method. Through this accounting approach we will analyze specific ratios and their possible impact on the company's performance. The specific ratios we will review include the return on total assets, return on equity, gross profit margin, earnings per share, price earnings ratio, debt to assets, debt to equity, accounts receivable turnover, total asset turnover, fixed asset turnover, and average collection period. I will explain each ratio in greater detail, and why I have included it in this analysis, when I give the results of each specific ratio calculation.
Financial statement users around the globe use financial statements to evaluate the performance of companies (Fundamentals of Financial Accounting, 2006). In order to locate a company’s reported assets, liabilities, expenses and revenues, statement users rely on four types of financial statements. The four financial statements include: Balance Sheet, Income Statement, Statement of Retained Earnings, and Statement of Cash Flows (Fundamentals of Financial Accounting, 2006, p. 6). Each of these reports provides different information to the financial statement user. The Balance Sheet reports at a point in time: a company’s assets (what it owns), liabilities (what it owes) and stockholder’s equity (what is left over for the owners) (Fundamentals of Financial Accounting, 2006, p.7). The Income Statement shows whether a business made a profit (net income) during a specific period of time (Fundamentals of Financial Accounting, 2006, p. 10). The Statement of Retained Earnings illustrates what portions of the company’s earnings was paid to stockholders and retained by the company for future operations (Fundamentals of Financial Accounting, 2006, p.12). Finally, the Statement of Cash Flows reports summarizes how a business’ “operating, investing, and financial activities caused its cash balance to change over a particular range of time” (Fundamentals of Financial Accounting, 2006, p.13).
The Statement of financial position is a very useful tool full of information showing the position of an entity. However within this sheet of information lies a lot of limitations and problems. This essay will pinpoint some of the limitations and problems within the balance sheet. These limitations include how the balance sheet does not reflect the true financial position of a business, it does not reflect assets that can’t be measured monetarily and it also has a huge amount of estimated values and not actual verified values so this causes some controversy within the entity and its true position on the market. As well as the problems within the balance sheet there also lies a lot of problems with what’s left out of the balance sheet.
The collection of these three financial statements identifies the financial position of the corporation to help identify the way forward financially for the company. Once all of the data has been collected for the annual reporting the corporation can analyze the data through the different financial ratios including the liquidity ratio, the asset management ratio, and the profitability ratio.
Financial statements are formal records that represent the financial activities of any business entity. Financial records are used to calculate the performance, financial strength and liquidity of a company. There are four basic types of financial statements:
Inventory, for example, may be difficult to sell and can highly impact a firm’s ability to pay on its liabilities. The second type of liquidity ratio is the quick ratio, which is similar to the current ratio, but it takes into account the inconvertibility of inventory. It is important to compare these ratios to industry standards for proper analysis to prevent a skewed understanding of a firm’s performance. A retailer, for instance, Target or Walmart that has a high volume of inventory would have a different benchmark than a company that has essentially no inventory, such as a day care
The income statement can also be known as the statement of income, statement of earnings, or statement of operations. It reports the accountant’s primary measure of performance of a business, revenues less expenses during the accounting period. This statement shows the net income of the company; revenues minus expenses. The income statement’s header includes the name of the entity, the title of the report, and the unit of measure used in the statement. The time shown is only for a specified period of time.
They help to establish the performance and state of a firm’s operations that would otherwise not be reflected by individual item in the financial statements (Ittelson, 2009). The ratios help in identifying different aspects of a firm’s performance including profitability, liquidity, and financial leverage of a firm among others. This article determines the profitability, liquidity and the financial leverage of Coca-Cola Company.
It is of utmost importance when operating a company or business that all financial statements are accurate. Accurate financial data is needed to get a good picture of how the company is handling its revenue and show how well the company has done in the past. This information is helpful to managers running the company, to investors that may invest in the company, and to creditors who may extend credit to the company. The financial information is also helpful in the company acquiring revenue in the future.
As we already know, financial statement is the most important aspect that every company should have as a reference for any decision making in term of loan, project, operation and other related matters. Because management of any business requires a flow of information to make informed, intelligent decisions affecting the success or failure of its operations. Investors need statements to analyze investment potential Banks require financial statements to decide whether or not to loan money, and many companies need statements to ascertain the risk involved in doing business with their customers and suppliers. Because of these reasons, it is essential to have comparability and consistency on financial statement for decision making process then lead company to perform well in their business and boost the profitability as well.
Financial statement is concerned with the recording of business transactions in a set of books and the periodic presentations of the financial data recorded in the books of accounts through financial statements like the profit and loss account and balance sheet, to outsiders like creditors, shareholders, employees etc.
The statement of cash flows reports the cash generated during a given period of time. It compares the cash from operating activities to net income. Overall statement of cash flows identifies the cash flowing in and out of the company. If the company is making more cash than it is spending, it is apparent to be good for stockholder value. The three primary sections are: operating activities, investment activities, and financing activities. Operating activities include cash earned and used during normal business operations. These accounts include accounts payable, accounts receivable, and unearned revenues. Investment activities are the investment activities. These accounts would include all investments like sale of property, equipment, and land. Financing activities cover the company’s financing. This section could include bonds and s, stocks and dividend payments. These accounts are: capital equipment, paid-in capital account, stocks and retained
Financial statements provide an overview of a business' financial condition in both short and long term. They help in understanding the past performance of the company and making future predictions about the company. It thus helps us to look beyond the profit figures.