An organization’s finances are closely linked to local and global markets. There

Question

An organization’s finances are closely linked to local and global markets. Therefore, regular monitoring of economic factors, such as employment, inflation, supply and demand, and interest rates is sure to provide beneficial information. Therefore, it is important to understand the impact of economic factors upon an organization’s current and future operations and finances.

Using the module readings, Argosy University online library resources, and the Internet, research two to three articles on the importance of analyzing economic factors for organizations.

Then respond to the following:

Why should companies pay attention to economic factors when managing the organization’s current and future financial information?

Consider an organization you are familiar with. Identify the economic factor that has had the most impact on the organization’s earnings in the past 5 years.

How has this factor impacted the organization and how has the organization dealt with the impact in a positive or negative manner?

Please put the following income statement and balance sheet terms in the proper order:

Taxes, interest, gross profit, selling, general and administrative expenses, sales, depreciation, net income, cost of goods sold, and EBITDA.

For the balance sheet, please categorize the following as short-term assets, long-term assets, short-term liabilities, long-term liabilities, or owner’s equity:

Cash, accounts payable, accruals, property, plant and equipment, inventory, accounts receivables, paid in capital, retained earnings, notes payable, mortgage, and accounts payable.

Please explain in which order the four major financial statements need to be prepared, and why.

Please also explain the three major categories of the statement of cash flows and under which category the following items belong. Also explain whether or not each item would be considered a source or use of cash for the period in question:

Inventory-increased for period
Net income-increased for period
Accounts receivables increase for period
Accounts payable decrease for period
Accruals decrease for period
Depreciation-increases for period
Stock issued
Property purchased
Bonds paid off
Inventories increase for period
Cash decreases
Notes payable increase for period
Bonds redeemed for period

Explanation / Answer

1. While managing the current and future financial information for any Company, attention is always to be paid to economic factors like pricing, demand, supply,employment, inflation, and existing laws. This is because of the fact that while the turnover and financial position of a Company are determined by its products and turnover volumes, the above mentioned factors are the external deciding factors for a business to sustain and expand/develop in the market. The pricing concept is based on the market rates for the products being sold by the Company. Based on the rates, exchange rate fluctuations, and foreign currency transactions which the Company may be engaged in, it can accordingly decide to increase or decrease the rates of its products, thereby leading to higher or lower turnover, as the case may be. Demand and supply for a particular product are again dependent on the prevailing market and socio-economic conditions prevailing within the country in which the product is being sold, and the world at large (in case of export sales). Hence, these factors also help to base the turnover of the Company, as well as forecast its future levels expected. Employment can decide the level of labour employed in the Company and consequently the labour cost, since it also forms a part of the product cost, which is being sold. Inflation is dependent on the world and nation's economy, and a higher rate of inflation would lead to a reduction in the price of the products being marketed, and vice-versa. 2. In an organisation which I am familiar with, the demand and supply as well as the market conditions are two main factors which have contributed to the turnover thereof. Those are the two main economic factors, which have decided the level of turnover and consequently, the earnings of the Company for the previous five years. 3. The Company which I dealt with specialises in pre-primary education provided for children, through schools (labelled as "Centres".) It can thus be seen that demand and supply, or the number of kids required for the school to function IN THE GREEN v/s the number of children available determines the profitability of a particular centre. Similarly, market conditions, which are dependent on similar schools being opened in the region, also attribute to the level of turnover and consequently the Company's earnings. Higher the number of kids, greater is the amount of revenue booked, and consequently higher should be the collections from the parents of the wards. 4. Order of Profit and Loss Account Classification for Balance Sheet Sales Cash Short Term Assets Less Cost of Goods Sold Accounts Payable Short Term Liabilities Accruals Short Term Liabilities Gross Profit Property Long Term Assets Less Selling, General and Administrative Expenses Plant & Equipment Long Term Assets Inventory Short Term Assets EBITDA Accounts Receivables Short Term Assets Less Depreciation Paid in Capital Owner's Equity Less Interest Retained Earnings Owner's Equity Less Taxes Mortgage Long Term Liabilities Notes Payable Long Term Liabilities Net Income 5. The order of preparing the four financial statements is : Trading Account - Since this provides the earnings on a gross level, considering only the turnover and costs associated with the same Profit and Loss Account - Since this provides the earnings on a net level, considering expenses not pertaining to the turnover, but forming a part of the business like administration, general, depreciation, interest and taxation. Balance Sheet - Since the statement provides an insight into the financial position of any organisation, as regards the sources and application of funds. In simple terms, the Balance Sheet deals with the assets and liabilities of the organisation. Cash Flow Statement - Simply put, the cash flow statement provides an understanding of the liquid position of the Company. Funds present in terms of hard cash and bank balances are received from certain sources and paid to others. The statement provides a line to line analysis of the sources and application of cash and cash equivalents, and is reconciled with the closing balance per the Balance Sheet date. 6. The three main categories as shown in the Statement of Cash Flows are : Cash from operating activities - This is the funds sourced from/applied to normal business activities. It includes collections from customers, and payments to vendors. Funding from/to operating activities is primarily concerned with the short term assets and liabilities and changes therein, from one balance sheet date to the other. Cash from investing activities - This is the funds sourced from/applied to the purchase of fixed assets and sale of fixed assets. It also includes the purchase/sale of investments done on behalf of the Company. Cash from financing activities - Simply put, this is the funding received from/made for purchase or sale of equity, or infusion of additional debt/repayment thereof. Including interest payments on debt, it gives a better picture of the financial position of the Company as a whole. Inventory-increased for period Use of cash Net income-increased for period Source of cash Accounts receivables increase for period Use of cash Accounts payable decrease for period Use of cash Accruals decrease for period Use of cash Depreciation-increases for period Source of cash Stock issued Source of cash Property purchased Use of cash Bonds paid off Use of cash Inventories increase for period Use of cash Cash decreases Use of cash Notes payable increase for period Source of cash Bonds redeemed for period Use of cash

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