what do you thinkThe following financial reporting could be beneficial for my or
ID: 415469 • Letter: W
Question
what do you thinkThe following financial reporting could be beneficial for my organization which are:
1. Balance Sheet: it can tell you where a company stands financially. It is separated into three main sectors which are assets, liabilities, and equity. A company’s assets must be equal to or balanced out with its liabilities plus equity.
2. Income statement: this is where you can find details about a company’s income. You start with the company’s net sales or revenue, various costs are subtracted to arrive at four different income metrics which are gross income, operating income, pre tax income and net income.
3. Cash flow: it is a statement that tells you about the overall flow of money into and out of a company. It is a statement that is divided into three sections which are operations, investing and financing.
In my opinion all statements are equally inportant. But most important will be Balance Sheet because of these two
1) Liquid Balance- So that company is able to pay.
2) Debts when compare to Equity
Explanation / Answer
Each of the three financial statement – balance sheet, income statement and cash flow statement – are equally important, with the level of importance varying with the users of the financial statements.
For majority of the users of financial statements it is the income statement that is the most important. This is because it is a company’s income statement that helps in determining and evaluating the company’s ability to generate profit. It helps the users to compute ratios like interest coverage ratio, fixed charges coverage ratio, debt service coverage ratio and profitability ratios like gross profit margin ratio, net profit margin ratio, etc. Thus income statement is most important for current shareholders.
Balance sheets, when paired with income statement, helps in determining the amount of investment that will be needed to support the sales as well as profits in the future. It helps in determining important ratios like liquidity ratios (current ratio, acid test ratio, cash ratio), leverage ratios (debt equity ratio, debt asset ratio), turnover ratios (inventory turnover, debtor turnover, fixed assets turnover). Thus balance sheets are most important for prospective investors.
Cash flow statements help in determining cash flow from operating activities, from financing activities and from investing activities. Free cash flow can be determined from a company’s cash flow statement. Thus cash flow statement will be most important for lenders, creditors, banks etc.
As can be concluded from the above discussion different financial statements hold different level of importance for different users of financial statements. Also no financial statement is completely useful in isolation, it has to be used with other statements to draw meaningful conclusion. For example shareholders will be interested in computing return on equity. This ratio = net income/average net worth. For this the shareholders will require both income statement as well as balance sheet.
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