What are the key financial statements and why they are important? The key financ

Question

What are the key financial statements and why they are important?

The key financial statements are the income statement, balance sheet, cash flow statement, and statement of shareholders equity. The income statement is what I believe is the most important statement of the group. The firm’s goal is to make a profit. The income statement quickly tells an investor or manager how much revenue was generated and what the expenses are. Often by reviewing the income statement alone, a manager can find the faults of the operation and work to fix them. The balance sheet is important for investors and managers due to it being a snapshot of the firm's overall health. I say this as one can read the balance sheet and tell if a company in trouble. The income statement may say sales are going great, but the balance sheet will say the company is going to be in trouble by the end of the year when the debt comes due. The balance sheet is also important as a planning tool as it tells the manager how much assets/liabilities the company and much is actually available. The statement of cash flows is often overlooked, and yet it tells a great deal of information about a firm’s health. The statement shows the cash flow in and out of the firm which is the most important matter for a company. By being able to break down the flows of cash into operating, investing, and financing activities, a firm can identify the weakest link and fix it. The statement of shareholders’ equity is delivered along with the firm’s balance sheet. The statements tell investors or managers how the company’s equity position has changed and what created the charge. One must know if the increase or decrease in equity was because of net income or something less sustainable such as the issuance of common stock. Again, the statement helps give investors the overall picture of the firm.

What is the purpose of ratio analysis?

The purpose of ratio analysis is to develop an understanding of a firms operations in a manner that can be compared to competitors, previous performance, or current performance. The reason ratio analysis is used compared to raw figures is because no two companies will have the same structure. For example, if an investor wanted to invest in Walmart or Target the investor that goes off raw data may assume that Walmart is a better investment because the company has higher sales. However, target may have lower revenue and still offer a higher return to shareholders due to efficiency. Ratio analysis allows investors to measure performance based on comparable terms. Ratios analysis also allows management to identify weak points in the operation. Ratio analysis generally falls into five main categories, liquidity, solvency, probability, and efficiency.

What is the concept of time value of money?

The concept of time value of money is the core concept in finance which states a dollar today is worth more than a dollar in the future. The concept breaks down as waiting for money in the future entails an opportunity cost of lost interest and therefore any rational person would rather have the money now. TVM concept is used to find the present value, future value, payment, and interest as well as a picture of other financial formulas.

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Explanation / Answer

(a) What are the key financial statements and why they are important?

Answer: The key financial statements are the income statement, balance sheet, cash flow statement, and statement of shareholders equity.

Income statements: Income statement is one of the financial statement of a company that shows the company's revenues and expenses during a accounting period.Income statement show the how the revenue are transformed into the net income.The purpose of the income statement is to show managers and investors whether the company made profit or loss during the particular accounting period. Income statement is prepare for period of time

Balance sheet: Balance sheet is one of the financial statement of a company that shows the company's financial position at a given point of time. Balance sheet is also called snapshot of a company's financial condition at a given point of time. Balance sheet is important for investors and shareholders because it show total asset and liability of company at the end of accounting period.

Statements of cash flow: Statements of cash flow is one of the financial statement of a company that shows how much company generate and spends cash at a particular accounting period. Company generates cash when it issues securities, raises a bank loan, sells a product etc. and spends cash when it redeems securities,pay interest and dividends, purchase materials etc. The activities that generate cash are called sources of cash and the activities that absorb cash are called uses of cash. It is important too for investors and sherholders because it show sources of cash and uses of cash for a particular period of time.

Statement of shareholders equity: Statement of shareholders equity one of the financial statement of a company that shows the changes in value to stockholders or shareholders equity and ownership interest in a company from the beginning of a given accounting period to the end of that period.Statement of shareholders equity includes preferred stock, common stock,treasury stock etc.It is important for investors and shareholder because it show how the company’s equity position has changed and what created the charge.

(2) What is the purpose of ratio analysis?

Answer: Financial ratio analysis is a study of ratios between various items or groups of items in financial statements.Financial ratios have been classified in several ways like liquidity ratio,leverage ratios, turnover ratios, profitability ratio and valuation ratios.

The purpose of financial ratio analysis is:

(a) Assessing Corporate Excellence.

(b) Judging Creditworthiness of the company.

(c) Forcsting Bankruptcy of the company.

(d) Valuing equity shares.

(e) Predicting Bonds Ratings.

(f) Estimating Market Risk.

(c) What is the concept of time value of money?

Answer: The concept of time value of money means that value of dollar is different in different period of time. The value of sum of money received today is more valuable today than received in any point of time in future. The main reason for this difference is reinvestment opportunities for funds which are received early.Time value of money is calculating by componding and discounting.It expressed in terms of rate of return or discount rate.TVM concept is used to find the present value, future value, payment, and interest as well as a picture of other financial formulas.

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