I need a feedback for this discussion post below. thank you 1.What are the key f

Question

I need a feedback for this discussion post below. thank you

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

There are four basic financial statements, the balance sheet, income statement, statement of stockholder's equity and statement of cash flows. The balance sheet is a snapshot of a business's financial position at the close of an accounting period, generally the last day of each year. The balance sheet is comprised of assets, liabilities and stockholders equity. The balance sheet will help the company get a handle on the financial strength and capabilities of the business. The balance sheet can change daily "as inventories are bought and sold, as fixed assets are added or retired, or as loan balances are increased or paid down" (Brigham, Ehrhardt, 2017, p. 59). the income statement "is a financial statement that reports a company's financial performance over a specific accounting period" ("Income Statement." n.d.). The income statement is generally prepared monthly, quarterly, and annually. The income statement has two parts operating and non-operating. The operating part tells information about revenue and expense that is a direct result of regular business operations. The non-operating part tells revenue and expense information regarding the activities not directly tied to a company's regular operations. Statement of stockholder's equity shows the changes of equity from the beginning of an accounting period to the end. The statements show all the equity accounts that will affect the ending equity balance such as common stock, net income, paid in capital, and dividends. Statement of cash flows is a financial statement that summarizes the amount of cash and cash equivalents that enters and leaves a company. The CFS will measure how well a company manages its cash position. It compliments the balance sheet and the income statement. The CFS helps investors determine whether a company has a solid financial footing, but creditors use it to determine how much cash is available for the company to fund it operating expenses and pay it debts.

2. What is the purpose of ratio analysis?

Ratio analysis is a quantitative analysis of information contained in a companies financial statements. "Ratio analysis is used to evaluate various aspects of a company's operating and financial performance such as its efficiency, liquidity, profitability, and solvency" ("Ratio Analysis," n.d.). Ratio Analysis can be categorized into six main groups: liquidity ratios, which measures a company's ability to pay off its short term debt as they come due using company's current assets. These can include current ratio. quick ratio, and working capital ratio. Solvency ratios compare a compay's debt level with their assets and earnings to decide if the company can remain afloat in the long term paying off its long term debt and its interest. These can include debt-equity ratio, debt-asset ratio. Profitability ratios will tell how well a company can generate profits from its operations. This includes profit margin, ROA, ROE, and gross margin ratio. Efficiency ratio will evaluate how well a company uses its assets and liabilities to generate sales and maximize profits. This included asset turnover ratio, and inventory turnover. Coverage ratio measures the company's ability to make interest payment and other debts or those associated with debt. Market Prospect Ratios are dividend yield, P/E ratio, earnings per share and dividend payout ratio. These are generally used by investors to determine what they may receive in earnings from investment and to predict what stock is worth in the future.

3. What is the concept of time value of money?

Time Value of Money "is the concept that money available at the present time is worth more than the identical sum in the future due to its potential earning capacity" ("What is," n.d.). Money loses value over time, which makes it more desirable to have it now rather than later. Present value is when a future payment or series of payments are discounted at the given rate of interest up to present date to reflect the TVM, the resulting value is PV. Future value is the amount that is obtained by enhancing the value of a present payment or a series of payments at the given rate of interest reflect TVM. Formula for TVM = FV=PV x [1+(1/n)] (n x t)

Brigham, E., Ehrhardt, M. (2017). Corporate Finance: A Focused Approach.

Boston, MA: Cengage Learning "Income Statement." (n.d.). Investopedia. Retrieved from https://www.investopedia.com/terms/i/incomestatement.asp "Ratio Analysis." (n.d.). Investopedia. Retrieved from https://www.investopedia.com/terms/r/ratioanalysis.asp "What is the Time Value of Money." (n.d.). Investopedia. Retrieved from https://www.investopedia.com/terms/t/timevalueofmoney.asp

Explanation / Answer

All the three questions above are very well explained to the brief and apt to gain a birds eye view on the topic. If needed for better presentation during examination or for any reader of the information for that matter it is advisable to use a classification table or diagram rather than lengthy paragraphs to catch the important points mentioned.

2)Also in the second question regarding Ratio analysis it is advisable to mention the formula of important ratios and explain in brief regarding the ratio for better understanding. For example lets consider DEBT EQUITY RATIO.

DEBT EQUITY RATIO = Companies total liabilities / Stockholders euity.

The debt-to-equity ratio is a measure of the relationship between the capital contributed by creditors and the capital contributed by shareholders. In general, a high debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations. However, a low debt-to-equity ratio may also indicate that a company is not taking advantage of the increased profits that financial leverage may bring. From a pure risk perspective, lower ratios (0.4 or lower) are considered better debt ratios.

Similarly other important ratios depending upon the analysis can be mentioned.

3) The 3rd question can be explained better by giving the abbrevations of the formula and an example relating to the formula.

FV = the future value of money
PV = the present value
i = the interest rate or other return that can be earned on the money
t = the number of years to take into consideration
n = the number of compounding periods of interest per year

Using the formula above, let’s look at an example where you have $5,000 and can expect to earn 5% interest on that sum each year for the next two years. Assuming the interest is only compounded annually, the future value of your $5,000 today can be calculated as follows:

FV = $5,000 x (1 + (5% / 1) ^ (1 x 2) = $5,512.50

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