Explaining The Purpose Of The Main Financial Statements Finance Essay

Explaining The Purpose Of The Main pecuniary avouchments finance EssayA pecuniary logical argument (or mo crystalizeary report) is a black-tie record of the fiscal activities of a patronage, person, or another(prenominal) entity. In British English-including United Kingdom association law-a financial line of reasoning is often referred to as an account, although the term financial statement is also used, spellicularly by accountants.For a demarcation enterprise, all the relevant financial schooling, presented in a coordinate manner and in a form easy to understand, argon called the financial statements. They typically include four basic financial statements dimension canvass also referred to as statement of financial position or condition, reports on a confederacys as rectifys, liabilities, and Ownership justness at a given saddle in time.Income statement also referred to as advantage and overtaking statement (or a PL), reports on a conjunctions income, expenses , and profits over a cessation of time. Profit Loss account provide information on the exercise of the enterprise. These include sale and the various expenses incurred during the processing state.Statement of bear gelt explains the changes in a comp alls retained earnings over the reporting period.Statement of exchange turn tails reports on a companys cash flow activities, vocalisationicularly its operating, place and financing activities.For large corporations, these statements argon often complex and may include an extensive set of notes to the financial statements and management discussion and depth psychology. The notes typically line of deferred remuneratement for each one item on the equipoise sheet, income statement and cash flow statement in further detail. Notes to financial statements are considered an integral part of the financial statements.The chemical equilibrium SheetThe balance sheets purpose is to show the assets of the company. sense of balance s heets are based on a fix point called a reporting perioda day, a month, a quarter, a year. A quick discern at a balance sheet will show you what the company owns and how much it owes. proportion sheets include assets (property, cash, anything owned of value), liabilities (debt owed) and shareholders legality.Income StatementsIncome statements show the revenue get during a reporting period.Included in this report are the expenses and salute of creating the revenue. at one time the expenses and costs are removed from the total revenue, the bottom line of the report bring ons whether or not the company lost money or made money. This report is sometimes referred to as the profit and loss statement. another(prenominal) feature of the income statement is the EPS, or earnings per share. This reveals what a shareholder would bump if you were being paid dividends per each share owned. notes Flow StatementsCash on hand is important because it supports the daily activities of a busine ss concern. There moldiness be enough cash on hand to pay expenses and debase assets as needed. Cash flow statements track the inflow and outflow of cash. They reveal whether or not cash was generated by the business. The data for a cash flow statement comes from an income statement and the balance sheet. The cash flow statement reveals elucidate decreases or increases of cash for the reporting period.Retained EarningsOnce liabilities and assets are known and a balance sheet is created, it is known whether or not the shareholders bugger off a positive or negative equity. From the equity is taken retained earnings. Retained earnings are broken smoothen and explained in the statement of retained earnings. This statement reveals what the company pull throughs and does not impart to the owners and how that amount changes over the reporting period. Losses are called put in losses, retained losses or accumulated deficit. monetary StatementsOnce a set of financial statements are pr epared they can be used for lend applications, blood-raising or to place a value on a business. notwithstanding they are typically used for making business decisions that will partake operations. The numbers and calculations in the financial statements are also used to prognosticate ratios and make further analysis. Common figures derived are operating margins, debt-to-equity ratio, P/E, functional capital and inventory turnoverPurpose of financial statements by business entitiesThe objective of financial statements is to provide information about the financial position, cognitive process and changes in financial position of an enterprise that is useful to a wide-cut range of users in making economic decisions. Financial statements should be understandable, relevant, steady-going and comparable. describe assets, liabilities and equity are directly related to an organizations financial position. Reported income and expenses are directly related to an organizations financial performance.Financial statements are intend to be understandable by readers who switch a reasonable acquaintance of business and economic activities and accounting and who are willing to study the information diligently. Financial statements may be used by users for disparate purposesOwners and managers acquire financial statements to make important business decisions that affect its continued operations. Financial analysis is then per organise on these statements to provide management with a more detailed understanding of the figures. These statements are also used as part of managements annual report to the stockholders.Employees also need these reports in making collective bargaining agreements (CBA) with the management, in the case of labor unions or for individuals in discussing their compensation, forwarding and rankings.Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by invest ors and are prepared by professionals (financial analysts), thus providing them with the basis for making investment decisions.Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh working capital or extend debt securities (such as a long-term bank loan or debentures) to finance expansion and other significant expenditures.Government entities (tax authorities) need financial statements to ascertain the propriety and trueness of taxes and other duties declared and paid by a company.Vendors who extend credit to a business require financial statements to assess the creditworthiness of the business.Media and the general ordinary are also interested in financial statements for a intermixture of reasons.Financial ratio analysis groups the ratios into categories which tell us about varied facets of a companys finances and operations. An overview of some of the categories of ratios is given below.* Leverage balances which sho w the point that debt is used in a companys capital structure.* Liquidity Ratios which give a picture of a companys short term financial situation or solvency.* Operational Ratios which use turnover measures to show how efficient a company is in its operations and use of assets.* Profitability Ratios which use margin analysis and show the eliminate on sales and capital employed.* Solvency Ratios which give a picture of a companys ability to generate cash flow and pay it financial obligations.Differences between the formats of financial statements for 3 different type of business- repair proprietorship, partnership and Limited companyGovernment financial statementsThe rules for the recording, measurement and exhibit of government financial statements may be different from those unavoidable for business and even for non-profit organizations. They may use either of two accounting methods collection accounting, or cash accounting, or a combination of the two (OCBOA). A complete set of chart of accounts is also used that is substantially different from the chart of a profit-oriented businessFinancial statements of non-profit organizationsThe financial statements of non-profit organizations that publish financial statements, such as charitable organizations and large voluntary associations, tend to be simpler than those of for-profit corporations. Often they consist of just a balance sheet and a statement of activities (listing income and expenses) similar to the Profit and Loss statement of a for-profit. personalised financial statementsPersonal financial statements may be required from persons applying for a personal loan or financial aid. Typically, a personal financial statement consists of a single form for reporting personally held assets and liabilities (debts), or personal sources of income and expenses, or both. The form to be filled out is laid by the organization supplying the loan or aid.Differences between resole Proprietorship, Partnership C orporationI want to do this Whats This?There are a number of different types of business organizations an individual or a group can form. However, three of the most common types of business organizations are sole proprietorships, partnerships and corporations. These three types of businesses are similar in some ways, entirely a number of differences are important to note.FormationA sole proprietorship or a partnership may be formed without filing any formal paperwork. The creators of a corporation, however, must file a document known as the articles of incorporation.LiabilityThe owner(s) of a sole proprietorship or a partnership may be held nonimmune for any business activity and/or obligation. Corporate shareholders, however, unremarkably are liable only for the amount they invested.Record KeepingCorporations are required to keep strict records of meetings and other similar administrative activities, while a sole proprietorship or a partnership typically is not required to do so .SizeA sole proprietorship can have only a single owner, but a partnership or a corporation may have any number of owners.TaxesThe owner of a sole proprietorship is required only to report the business earnings on her tax return, while a corporation or a partnership must file a separate return for the business.BASIC FINANCIAL STATEMENT FORMAT PARTNERSHIPWhen preparing financial statements by hand the Income Statement would usually be prepared first because the net income or loss becomes part of the Statement of Partners large(p). The Statement of Partners Capital is usually prepared second because the ending partners capital balances become part of the Balance Sheet. Corporations are subject to income taxes but sole proprietorships and partnerships are not. Otherwise the income statements of each are identical.Income Statement (single-step format)HANSON RETAIL FOOD reposition Income Statement socio-economic class Ended December 31, 2006 pelf Sales $262,000 Rent revenue 6,900 e ngagement revenue 1,400 tot up Revenue 270,300 Expenses Cost of Goods Sold $159,000 Salaries and wages 45,000 publicize 12,400 Freight out 4,000 Depreciation 5,000 Taxes and licenses 3,000 Rent 6,300 Interest expense 350 Loss on sale of assets 250 Property taxes 2,000 Total expense 237,300 Net Income (loss) $ 33,000 ========Owners equity statements of corporations are called Statement of Retained Earnings, those of sole proprietorships are called Statement of Capital and those of partnerships are called Statement of Partners Capital.Statement of Partners CapitalHANSEN RETAIL FOOD STORE Statement of Partners Capital Year Ended December 31, 2005 John Soobloody shame DoeTotalsBeginning balance $ 24,000 $ 33,000 $ 57,000 Net income (loss) 16,50016,50033,00040,500 49,500 90,000 Withdrawals 5001,5002,000Ending balance $ 40,000 $ 48,000 $ 88,000=========== =========== ======Balance Sheets of corporations have a Shareholders justness section whereas sole proprietorships have an Owners Capital section and partnerships have a Partners Capital section. Otherwise the Balance Sheets would be identical.Balance SheetHANSEN RETAIL FOOD STORE Balance Sheet December 31, 2006 ASSETS Current Assets Cash $ 3,000 Short-term investments/marketable securities 6,000 Accounts receivable, net 5,000 Inventory 10,000 Prepaid rent 2,000 Office supplies on hand 1,000Total current assets 27,000 Long-Lived Assets Long-term investments $ 10,000 Land 35,000 Building 86,000 Machinery equipment 50,000 Less accumulated depreciation ( 23,000) Patents 4,000Total long-lived assets 162,000Total Assets $189,000 ======== LIABILITIES Current Liabilities Accounts account payable $ 4,200 Notes payable 15,000 Interest payable 1,000 Wages payable 800Total current liabilities 21,000 long-term Liabilities Mortgage payable $ 30,000 Bonds payable 50,000Total long-term liabilities 80,000Total Liabilities 101,000 PARTNERS slap-up John Soo, Capital 40,000 Mary Doe, Captial 48,000Total Partners Capital 88,0 00Total Liabilities and Owners Equity $189,000TASK 2Last YearCurrent Ratio = C.A / C.L= 21 / 15= 1.4Acid Test = C.A / C.L= 15 / 15= 0Net Profit gross profit margin = N.P / Sales=37/499=0.07Gross Profit Margin = G.P / Sales=99/499=0.20Return on Capital Employed = N.P / Equit + Debt= 17 / 75= 0.23Return on Ordinary Share holder breed = N.P after tax / Ordinary share holder equity= 17 / 14= 1.2Average Stock Turnover period = Avg Stock / cgs * 365= 6 /400 X 365=5.5=6daysCurrent YearCurrent Ratio = C.A / C.L= 11 / 11= 0Acid Test = C.A / C.L= 7 / 11= 0.64Net Profit Margin = N.P / Sales= 32 / 502= 0. 06Gross Profit Margin = G.P / Sales= 132 / 502= 0.26Return on Capital Employed = N.P / Equit + Debt= 5 / 79= 0.06Return on Ordinary Share holder fund = N.P after tax / Ordinary share holder equity= 5 / 14= 0.36Average Stock Turnover period = Avg Stock / cgs system * 365= 4 / 370365=3.95= 4 days