An entrepreneur’s dream of starting a business is all about getting an idea to the marketplace with great expectations of striking it rich. Little thought ever goes into the steps and methods on how to get there. It takes a lot of effort and forethought setting up strategic plans in areas of cost effectiveness, best in quality, and on time delivery. All three areas require careful financial planning and reporting. This paper discusses the basics in understanding the basics of four different types of financial statements paint a picture of a business’s cash flow. The latter part of the paper will summarize the importance of a company’s financial statement regarding its success in critical decisions to improve its market share in the global market.
The Four Financial Statements Financial statements are accounts or records that summarizes fiscal or monetary activities of an organization, an individual, or any article or unit. Fraser and Ormiston informed us that financial statements can seem like a map or maze. As a map it clarifies things but as a maze it can be quite complex. Even though financial statements can be either a maze or a map, it should only be a map.
Introduction Managers within the firm, as well as the firm’s owners and lenders, keep track of the firm’s performance by reviewing its financial statements - income statement, balance sheet, and statement of cash flows. I will discuss several items regarding these financial statements. Firstly, I will discuss the purpose of the income statement and identify the major types of expenses that are shown on the income statement. Secondly, I will discuss the purpose of the balance sheet and identify the major types of assets, including the claims of creditors and owners shown on the balance sheet.
Corporate liquidity can be affected by the interim shocks to cash flows, alongside the availability of cash reserves. On the other hand, solvency’s main concerns can be expressed by the financial leverage and average future profitability uncertainty. These relations indicate that there is two ways for a firm to enter financial distress. First, a company can become illiquid after a weak interim cash flow or it can become insolvent if the predicted rate of the cash flow decline
The liquidity position of a company can be evaluated using several ratios which evaluate short-term assets and liabilities and a firm’s ability to settle short-term debts (Gibson, 2011). These ratios can provide insight into a firm’s ability to repay its debts in the short term (Gibson, 2011). In turn they suggest a firm’s capacity for debt-satisfying capabilities into the future (Gibson, 2011). This paper will use financial statement data as cited in Gibson (2011) from 3M Company (3M) to better understand liquidity measures to evaluate a firm’s total liquidity position. The following paper will focus on various liquidity calculations, their meaning, and their interpretation relative to 3M. Finally, an overall view of 3M’s liquidity position will be evaluated. By analyzing a company using ratios, one can evaluate the effectiveness of its management and its strengths and weaknesses (Žager, Sačer, & Dečman, 2012).
On 11th September 2014 US lawmakers have sent a letter in which they have urged the House of Representatives to preserve cash-flow accounting method. The legislators have stated that the shift towards accrual accounting could be detrimental to businesses that have developed their business strategies on cash basis for years. Their argument in defence of cash accounting was that it allows a firm to have more disposable income at a time, increasing growth possibilities for small businesses. Moreover, being less complex, the method requires less funds to be spent on accounting processes. On the other hand, Fayez Choudhury suggested that government public sector’s cash accounting does not represent the true economic health of the government by
A business generates cash from sale of products and services, sale of assets, borrowings from banks and other creditors and from capital contributions by its owners. It uses cash to pay for its operating and capital expenditure, its liabilities and in paying dividends to its owners. Information about sources and uses of cash are presented in the statement of cash flows.
Therefore, the amount of profit obtained is somewhat arbitrary. However, cash flow is an objective measure of cash and it is not subjected to a personal criterion. Net cash flow is the difference between cash inflows and cash outflows; that is, the cash received into the business and cash paid out of the business (Fernández, 2006). Whereas, net profit is the figure obtained after expenses or cost of resources used by the business is deducted from revenues generated from the business operations activities. Nonetheless, the figure for revenue and cash are not entirely cash, some of the items may be sold on credit and some of the expenses are not paid up
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).
WHY DO COMPANIES PREPARE BALANCE SHEET? Balance sheet is a financial statement which is widely used by accountants for businesses. Balance sheet is also known as the statement of financial position because it helps us to present company’s financial position at the end of a specified period. (fresh books, 2016) Balance sheets are very important for parties like suppliers, investors, competitors, customers, etc. to know the company’s position, company’s strength and company’s weaknesses. Balance sheets helps to ascertain the amount of capital employed in the business so that we can further calculate different types of ratios.