Financial statements are the primary documents used in reporting financial information to banks, investors, suppliers and others. Along with financial information, financial ratios can help stakeholders evaluate the business performance. They can deliver a better understanding of a variety of things going on in the company. Financial information and ratios are important tools to help predict the growth of a company and to compare them to other compares. Stakeholder can consist of both internal (employees, managers, board members, etc. And external (investors, customers, suppliers, etc.
). As a stakeholder in a company, it is very important to know how the company is performing. Financial reporting can deliver information to help them know how refutable the company is or not. Investors and creditors have the right know if their investment is being spent sensibly and if they will be getting a return on their investment. Employees want to know if the company they are working for is doing good or bad so they can plan for the future.
Fifth company is not doing well, they might not get a raise or the company could go bankrupt and they could be without a job. Many internal stakeholders have stock options with the company; therefore it is important for them to know if the company they are working for will be making money or not which in turn will make them money. All stakeholders, internal or external, want to know how their investments are being handled therefore, reviewing the company’s financial statements become very important.
Financial statements can help stakeholders know how profitable the company is, how assets stack up to liabilities, where did the business get its capital, how much money was invested, is the investment getting used wisely, did the company reinvest its profit, and does the business have enough capital for future growth. There are a couple of different financial reports that provide stakeholders with important financial information like balance sheet, income tenement, and cash flows statement. The balance sheet can reflect the financial position of a company.
It shows how the company is doing on a particular date. According to Hung & Ghana (2012), the balance sheet is an important part of a financial report which informs investors of the sources and uses of financial resources for the company’s operations as it provides necessary information for evaluating the value of the company. The balance sheet displays the company’s assets, liabilities, and shareholders’ equity. The assets which can include cash, fixed assets and intangibles (trademarks, patents, goodwill, etc. Are listed on the left side or top of the balance sheet.
On the right side of or below the assets on the balance sheet are liabilities and shareholders’ equity. The liabilities that must be paid first are listed at the top. Current liabilities are listed before long term debt. Shareholders’ equity gets listed last because they must wait to see if there is any money left. The difference between assets and liabilities shown on the balance sheet is shareholders’ equity (net worth). The dollar value which has been agreed upon at the time of the transactions is what is recorded on the balance sheet.
Stakeholders can analyze the balance sheet by examining the major categories listed. Unlike a balance sheet, this presents the companies list of assets, an income statement report events that occur during a certain period of time. The balance sheet for stakeholders can be very instrumental as there are many ways that the information can be analyzed by comparing assets to liabilities. The income statement which can also be call a profit and loss statement shows how the company is doing and summarizes the profit generating activities during a certain period of time for instance a month, a quarter or a year.
The income statement reports on the company’s profitability. The income statement always begins with net sales followed by cost of goods sold (COGS). Cost of goods sold includes anything that is required to manufacture the product which includes the labor used to make the product, freight and royalties, etc. However, it excludes the labor it takes to sell the product. Gross profit is calculated by deducting cost of goods sold from the company’s net sales. Gross profit is the amount before removing operating expenses and taxes. The next item on the income statement would be operating expenses.
Operating income is calculated y subtracting operating expenses like rent, utilities, office supplies and other operating expenses from gross profit. Other means of income that are not part of the primary business such as interest income would be considered other income and would be listed separately. The location of items listed on the income statement is usually associated with the content of the information and its ability to predict future earnings. Specifically, the closer the item is to the top, the higher the valuation significance. Bartok & Moran, 2014). Although some income statements may show that a company is profitable they Anton grow if they do not have the necessary cash flow to pay their debt. To help predict and evade cash flow issues, companies should get in the habit of preparing a cash flows statement. The income statement can help stakeholders see the shortfalls in the prior year’s financial so that they can forecast the future. The cash flow statement is another important financial report which can be used as a resource for companies to help predict their future.
The cash flows statement can help companies make financial decisions such as when funding will be needed to pay bills or expand the business. According to Spindled, Seep, & Nelson (2011), “the cash flows statement can provide helpful information in assessing future profitability, liquidity, and long-term solvency. ” Cash activities like when cash is paid out and taken is the only thing reflected on the cash flows statement. This can help companies recognize when additional funding is required and if they should consider borrowing.
The cash flow statement divides a company’s cash flows for an accounting period into three activities: operating, investing and financing. Operating activities are all cash flows related to the day to day operations. They include accounts receivables, accounts payable, and other operating cash flows such as advertising, administrative costs, interest, and tax payments. Investing activities are cash flows used to purchase property and equipment for the company. It is the cash that a company uses to invest in itself to grow the business.
Cash generated from the sale of assets gets included as cash in from investing. Financing activities reflects cash flows either in or out from the company’s investors, both lenders and debt and owners. The cash flows statement shows the relationship among the cash flows from operating, investing and financial activities. It shows whether the firm is generating cash to meet current and future needs. Therefore, it is one of the most important sources of information needed. For stakeholders, the cash flow statement can show how funds are being repaid and the amount of money required in covering operating expenses.
Management must be careful in how they handle company debt. Changes in balance sheet accounts can provide indication of the year-end actions taken and how they could be paid. However, if short-term loans have been paid off during the year, they wouldn’t be able to see them separately. This also gives no indication if there was a profit due to an increase in volume or an increase in price, reduced cost of goods sold, or whether expenses were lower. Using ratio and expense analyses could help figure this out.
Ratio analysis compares financial figures to help evaluate the performance and risk of a company (Spindled, Seep, & Nelson, 2011). They can also help investors, creditors and stakeholder who are interested in the company to see their creditworthiness and stability. Ratios can help companies assess their progress and figure out what areas they need to improve on. The basic ratios used for financial statement analysis are liquidity analysis, profitability analysis, activity analysis, capital structure analysis, capital market analysis and ROAR (profit margin x asset turnover).
According to Eager, Aster, & Demean (2012), “liquidity and solvency ratios determine the financial position of an entity. On the other hand, the economy ratios, the profitability ratios, and the investment ratios reflect business efficiency. ” Liquidity ratios can help a company establish a company’s ability to pay their current debt. The basic liquidity ratios include current ratio, acid-test Asia, debt to equity ratio and times interest earned ratio. Liquidity ratio is the availability of assets that can be easily converted to cash.
This is important to know if you need to quickly pay off some debt if creditors are seeking payment. This can also help to tell if a company will be facing bankruptcy or not. The two main ratios used in financing are debt to equity and time interest earned. Debt to equity ratio compares the relationship between money contributed by the creditors and owner’s equity remaining in the business. Time interest earned ratio gauges whether or not a company can satisfy its fixed debt obligations y comparing interest charges with the income available to pay the charges (Spindled, Seep, & Nelson, 2011).
Time interest earned ratio can assist creditor in seeing if they can safely invest in the company. Profitability ratios can provide stakeholders with the ability to measure return on sales, return on assets and return on investment. Making a profit is what matters to most of us in the business words. Profitability is calculated by dividing net income by sales to get a profit margin. The higher the profit margin, the better the company is doing. Profit ratio can be affected by the change in both price and/or volume. Ratios can easily be change by raising or lowering price.
There are other factors over time that can affect a company’s trend of profitability like political and economic Issues. Activity ratio can tell whether a company has the ability to e accounts within its balance sheet into cash for sales. This ratio is important as it can determine whether a company is doing a good job at generating income from its resources. Activity ratio measures how effective a company is using its assets, leverage or other balance sheet items. The faster a company can turn production into sales he quicker they can generate higher revenue.
Activity ratios are commonly used when performing essential analysis on different companies. To popular forms of activity ratios are asset turnover ratio and inventory turnover ratio. Using information from the balance sheet, stakeholders can divide total assets by liabilities in order to calculate the assets-to-debt ratio. This can help to see how heavily leveraged a company is and whether the company has exceeded their limit. Reviewing the proportion of current assets can help stakeholders assess the company’s liquidity and its ability to deal with unforeseen debt.
To see if a company is using their assets efficiently to generate more sales from per dollar of asset, they need to divide sales by the average of total assets to get the asset turnover ratio. If the ratio is high, the company is using their assets efficiently. Company like that are private require funding in order to cover many of their day to day operating cost. For instance, the company that I work is private and we are looking to go public. In order for us to do that, we need to have a certain level of revenue. In order to get there, we require funding from investors.
Before ND investor will feel comfortable about turning over millions of dollars, that want to know if we are stable and profitable. By providing them with accurate financial statements, they can run ratio analysis to see how the company is performing. Stakeholders usually want to see financial statements to determine the strength of the company to see if their investment is profitable for them. Both internal and external stakeholder in a company should understand if a company is being profitable or not. The difference between failure and success comes from analyzing financial information and foreseeing the future.
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Financial statements stakeholders. (2018, May 04). Retrieved from https://graduateway.com/final-assignment/