1. Discuss the importance of financial statements and how they are used by busin
ID: 2717369 • Letter: 1
Question
1. Discuss the importance of financial statements and how they are used by businesses.
2. What is the basic format of the income statement and what is the relevance of the basic categories?
3. Cash flows for an organization come from operating activities and investment activities. Discuss the importance of each to the organization.
The Happy Auto Shop has the following annual information:
Gross Sales
$700,000
Net sales
$696,000
Gross profit
$448,000
What are the shop’s returns and allowances and cost of goods sold?
Construct a statement of financial position (balance sheet) for the Humperdink family using the following information:
cash
$50
Checking account
$2,500
student loan balance
$6,000
stocks and bonds
$2,600
savings account
$5,850
residence
$110,000
automobile
$12,000
savings account
$5,800
automobile loan balance
$12,000
401K retirement account
$15,000
furniture, clothing, jewelry
$8,000
credit card balance
$4,000
mortgage loan balance
$99,000
What is the purpose of financial statement analysis? How do the three types of financial statement analysis differ from each other and when is each used?
Samantha Knight is applying for a small-business loan. She provides the bank with the following information:
cash in checking accounts
$5,000
cash in savings
$10,350
home market value
$145,500
first mortgage on house
$25,000
home equity loan limit
$70,000
home equity loan
$10,000
automobile market value
$19,000
automobile loan outstanding
$15,000
credit card debt
$1,500
Calculate the debt-to-asset ratio.
Calculate the debt-to-equity ratio.
What percentage of Samantha's assets is owned by others?
Given the profit loss (income statement) and balance sheet for Sam's Sandwich Delivery (Table 4-8, page 121 of your textbook), answer the following:
Calculate the following ratios: current, quick, accounts receivable turnover, fixed asset turnover.
Using the inventory figure on the balance sheet as average inventory, calculate the inventory turnover ratio.
Calculate the debt-to-equity ratio, debt-to-total asset ratio, and operating profit margin ratio.
Perform a vertical analysis of the income statement.
Perform a vertical analysis of the balance sheet.
Based on your analysis, would you consider investing in Sam's Sandwich Delivery?
Gross Sales
$700,000
Net sales
$696,000
Gross profit
$448,000
Explanation / Answer
1.
A company’s financial statements provide various financial information that investors and creditors use to evaluate a company’s financial performance. Financial statements are also important to a company’s managers because by publishing financial statements, management can communicate with interested outside parties about its accomplishment running the company. Different financial statements focus on different areas of financial performances.
Financial Statements are used by businesses in the following manner:
a. Financial Conditions: Investors and creditors need to know where their money went and where it is now. The financial statement of balance sheet addresses such issues by providing detailed information about a company’s asset investments. The balance sheet also lists a company’s outstanding debt and equity components, and so debt and equity investors can better understand their relative positions in a company’s capital mix.
b. Operating Results: The financial statement of income statement reports operating results such as sales, expenses and profits or losses. Using the income statement, investors can both evaluate a company’s past income performance and assess the uncertainty of future cash flows.
c. Cash flows: The importance of the cash flow statement is that it shows the exchange of cash between a company and the outside world during a period, and so investors can know if the company has enough cash to pay for expenses and asset purchases.
d. Shareholder's Equity: A steady growth in a company’s shareholders’ equity by way of increasing retained earnings, as opposed to expanding shareholder base, means the accumulation of investment returns for current equity shareholders.
2.
Notes Current Year Previous Year
3. Importance of cash flow from operating activities:
Cash flows from operating activities refers to money generated by a company's core business activities. This number highlights the firm's ability (or inability) to make a profit. While it provides good insight into whether or not the firm is making money, the other components of the cash flow statement also need to be taken into consideration in order to develop a more complete picture of the company's health.
Importance of cash flow from investment activities:
When analyzing a company's cash flow statement, it is important to consider each of the various sections which contribute to the overall change in cash position. In many cases, a firm may have negative overall cash flow for a given quarter, but if the company can generatepositive cash flow from its business operations, the negative overall cash flow may be a result of heavy investment expenditures, which is not necessarily a bad thing.
Revenue 14 201.9 182.1 Cost of sales 15 (158.4) (151.6) Gross profit 43.5 30.5 Selling and distribution expenses 16 (9.8) (8.9) General and administrative expenses 17 (14.0) (11.0) Other operating income and gains 18 1.8 2.6 Other operating expenses and losses 19 (3.4) (1.3) Operating profit/earnings before interest and taxes (EBIT) 18.1 11.9 Interest income 20 1.3 0.6 Interest expense 20 (3.6) (2.8) Net interest expense 20 (4.9) (3.4) Profit from investments under equity method 22 6.9 5.5 Earnings before taxes 20.1 14.0 Income taxes 23 (6.0) (4.2) Income from continuing operations 14.1 9.8 Income from discontinued operations 24 2.1 3.1 Net income 17 16.2 12.9 Distribution of net income: Equity-holders of parents 14.6 11.6 Non-controlling interest-holders 1.6 1.3 Earnings per share: 19 Basic, attributable parent 0.15 0.12 Diluted, attributable to parent 0.15 0.11 Basic, from continued operations, attributable to parent 0.14 0.10 Diluted, from continued operations, attributable to parent 0.14 0.09Related Questions
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