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answerhappygod
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Financial statements are reports issued by companies that contain information about the company. Even though accounting is the tool used to put these numbers onto the financial statements, these numbers can relate very important information that accountants do not publish. There are four financial statements that are reported by corporations: the balance sheet, the income statement, the statement of cash flows, and the statement of stockholder's equity. The information in these statements focus on different perspectives of the company finance, but these financial statements all relate to one another and all four are necessary in order to make accurate predictions in the success of a company's financial future. The balance sheet covers a firm's assets, liabilities, and stockholder equity. These values can help determine a firm's financial position at the time the balance sheet was released. The income statement reports on revenues, expenses, and profits during a reporting period. This statement is especially useful for current or prospective stockholders because it shows earnings and dividends per share. The statement of cash flows is more focused on actual cash entering and leaving the company than the balance sheet or the income statement. It is divided into four different sections that all report on money the company earned and spent. The difference between the sections is that they are organized based on how the cash enters or exits the company. The statement of stockholder's equity is completely focused on the amount of equity being earned during a financial period and why. Companies may issue new stock in order to raise capital and they also pay dividends on these stocks, causing an inflow and outflow of cash that are reported on the statement of stockholders equity. The different information in the financial statements can be combined to give a more in depth view of the company, and answer important questions such as if the company is making or losing money. Just as the financial statements give different outlooks on a company, ratio analysis can give an even more in depth view. There are five main categories of ratios, the first are the liquidity ratios which focus on a company's ability to pay off its short-term debts that are maturing. The asset management ratios give insight into if a firm is using its assets effectively or not. The debt management ratios focus on how these assets have been financed and the effects this has on the company. It also focuses on the long-term debts of a company. The profitability ratios give an idea if a company has been profitable based on how it utilizes its assets. Market value ratios give an idea of what investors think about a firm and its future prospects. Return on common equity (ROE) is one of the most useful and important ratios because it tells investors how well a company is doing with returns on investments. This is important for managers as well because if a company has a better ROE, Investors may prefer these companies and the manager needs to improve their shareholder value. The liquidity ratios are a very important tool to creditors who may be investigating the financial status of a company to determine if they can repay their loans. For example, by using the Acid-Test ratio, the creditor can be sure that the company is not just holding excess inventory and can truly cover their liabilities. This is a very important tool to creditors who may be investigating the financial status of a company to determine if they can repay their loans. Different results from ratios are generally more important to different people based on what they are looking for. A stockholder may want to see a company with high leverage but a creditor will want to loan to companies that do not have outstanding debt. Although they will both use debt ratios to determine the companies leverage, they will have different opinions on the results. Having a strong ability to understand financial statements and apply different ratios to them is critically important to anyone in the business world or to anyone looking to invest. A very large amount of important insights can be received through the combination of financial statements and ratio analysis. Ratio analysis can also become dangerous as there are many potential difficulties that can occur. An example of this would be an investor not knowing that some companies engage in 'window dressing techniques, which distort the true picture of a company's finances. Even when ratio analysis is perfectly applied, if the user is not aware that more than just the financial statements can affect a company, their analysis is not complete
Financial statements are reports issued by companies that contain information about the company. Even though accounting is the tool used to put these numbers onto the financial statements, these numbers can relate very important information that accountants do not publish. There are four financial statements that are reported by corporations: the balance sheet, the income statement, the statement of cash flows, and the statement of stockholder's equity. The information in these statements focus on different perspectives of the company finance, but these financial statements all relate to one another and all four are necessary in order to make accurate predictions in the success of a company's financial future. The balance sheet covers a firm's assets, liabilities, and stockholder equity. These values can help determine a firm's financial position at the time the balance sheet was released. The income statement reports on revenues, expenses, and profits during a reporting period. This statement is especially useful for current or prospective stockholders because it shows earnings and dividends per share. The statement of cash flows is more focused on actual cash entering and leaving the company than the balance sheet or the income statement. It is divided into four different sections that all report on money the company earned and spent. The difference between the sections is that they are organized based on how the cash enters or exits the company. The statement of stockholder's equity is completely focused on the amount of equity being earned during a financial period and why. Companies may issue new stock in order to raise capital and they also pay dividends on these stocks, causing an inflow and outflow of cash that are reported on the statement of stockholders equity. The different information in the financial statements can be combined to give a more in depth view of the company, and answer important questions such as if the company is making or losing money. Just as the financial statements give different outlooks on a company, ratio analysis can give an even more in depth view. There are five main categories of ratios, the first are the liquidity ratios which focus on a company's ability to pay off its short-term debts that are maturing. The asset management ratios give insight into if a firm is using its assets effectively or not. The debt management ratios focus on how these assets have been financed and the effects this has on the company. It also focuses on the long-term debts of a company. The profitability ratios give an idea if a company has been profitable based on how it utilizes its assets. Market value ratios give an idea of what investors think about a firm and its future prospects. Return on common equity (ROE) is one of the most useful and important ratios because it tells investors how well a company is doing with returns on investments. This is important for managers as well because if a company has a better ROE, Investors may prefer these companies and the manager needs to improve their shareholder value. The liquidity ratios are a very important tool to creditors who may be investigating the financial status of a company to determine if they can repay their loans. For example, by using the Acid-Test ratio, the creditor can be sure that the company is not just holding excess inventory and can truly cover their liabilities. This is a very important tool to creditors who may be investigating the financial status of a company to determine if they can repay their loans. Different results from ratios are generally more important to different people based on what they are looking for. A stockholder may want to see a company with high leverage but a creditor will want to loan to companies that do not have outstanding debt. Although they will both use debt ratios to determine the companies leverage, they will have different opinions on the results. Having a strong ability to understand financial statements and apply different ratios to them is critically important to anyone in the business world or to anyone looking to invest. A very large amount of important insights can be received through the combination of financial statements and ratio analysis. Ratio analysis can also become dangerous as there are many potential difficulties that can occur. An example of this would be an investor not knowing that some companies engage in 'window dressing techniques, which distort the true picture of a company's finances. Even when ratio analysis is perfectly applied, if the user is not aware that more than just the financial statements can affect a company, their analysis is not complete