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Financial Performance of a Business - Assignment Example

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The author of this assignment "Financial Performance of a Business" casts light on the main financial statements. It is stated that in order to understand the financial strength and financial status of the business, every enterprise should prepare certain statements known as financial statements…
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Financial Performance of a Business
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Download file to see previous pages Balance sheet, Income statement and Cash flow statement are the basic statements normally prepared by profit-oriented corporations. These statements help in knowing the profitability and financial soundness of the business concern. These are prepared at the end of a given period of time. Financial statements are used as an important tool to communicate the financial information to parties outside the organization (such as investors, creditors, and other external decisions makers). The Balance Sheet; The purpose of preparing a balance sheet is to report the financial position (amount of assets, liabilities, and shareholders’ equity) of a firm during a particular period of time. A balance sheet contains complete information about assets, liabilities, and shareholders’ equity of the company. Assets; Assets are things which have economic value and that which are owned by the company. It includes tangible assets, such as plants, trucks, equipment, and inventory. It also includes intangible asset, such as trademarks and patents. Cash itself is an asset. A tangible asset can be divided into two, Current asset and fixed asset. The current asset represents the company’s liquidity. This is where companies list all of the stuff which can be converted into cash in a short period of time, usually a year or less (Kennon 2012). A fixed asset is an asset held with the intention of being used for the purpose of producing or providing goods or services, and it is not meant for sale in the normal course of business (Accounting for Fixed Assets n.d). Liabilities: Liabilities include all kind of obligation that a company has. The term liabilities mean the amount of money that a company owes to others. Shareholders’ equity; It is also called capital or net worth. The following formula summarizes what a balance sheet shows: ASSETS = LIABILITIES + SHAREHOLDERS EQUITY Income Statements; Income statement is a statement which shows the revenue that earned by the company during a specific period of time (usually for a year or some portion of a year Income statement also shows the expenses and the cost associated with the earning of revenue. The income statement also gives information regarding how much the company earned or lost over a period of time. This statement helps to calculate earnings per share (EPS), and it also tells how much money shareholders would get if the company decides to distribute the whole earnings of the company. The income statement can be also called the statement of operation, or statement of earnings. Statements of Cash Flow; A cash flow statement is a statement that contains a detailed report regarding the company’s inflows and outflows of cash. Cash flow statement is helpful in knowing the net increase or decrease in cash for the period. It is prepared by using the information and reports in the company’s balance sheet and income statement. Cash flow statement is helpful in recognizing the changes in cash balance(increase or decrease) sources of cash uses of cash There are three parts included in the cash flow statement. They are (1) operating activities; (2) investing activities; and (3) financing activities. The financial statements explain from where a company's funds come from, where it goes and where it is at present. “Owners and CEOs use these statements to manage a business, bankers to check its creditworthiness, and investors to gauge its potential for dividends and growth” (Randolph 1999). ...Download file to see next pagesRead More
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