Financial management. Financial statements and comparative analysis - Essay Example

Running Head: WEEK 2 QUESTIONS Week 2 Questions In APA Style By Why are the s on financial statements important How do the primary financial statements (income statement, balance sheet, and cash flow) tie together What managerial assessments can you make about a company that has a profit and a negative cash flow in the same accounting period The dates in the financial statements are important in order to relay complete information to its user. It should be noted that financial statements captures the financial position of a business organization in a certain period (Horngren 2000).

Thus, knowing when the statements are released inform the user when the company experienced growth in sales, announced dividends, etc. This is also important especially when an investor wants to compare the financial statements for a given fiscal year for different industry players. Without the knowledge of when reports are filed, the investor will not be able to get a clear grasp of which among these companies performed the best. Comparing financial investors in the same year will enable the investor to see which company is able to manage the events which directly affected the industry.

There should always be consistency in the information presented and statements are only comparable when they are all taken together. The balance sheet is important in showing the movements in the company's resources which includes the payment of expenses reflected in the income statement. In addition, it also shows how expenses are financed, e.g. through the use of cash or notes payable, etc. On the other hand, the cash flow mirrors how the company handles this liquid resource during the financial year.

Cash is considered as an important asset and its efficient management is important. A company which shows profit in a fiscal year yet fails to display positive cash flow is insolvent meaning almost all its resources are tied up in liquid assets. This can signal risk of not being able to pay when current liabilities become due immediately (Keown 2005). 2. How could you assess which of the top three companies in an industry was the best managed from a financial standpoint How could you use comparative analysis to perform a three-year trend analysis If you combined your company with another one in a different industry segment, how could you use comparative analysis to estimate the financial performance of the combined company I believe that a business organization's main goal should be to maximize shareholder wealth.

It should be noted that the resources of a company is claimed by both creditors and stockholders with the former having the primary claim. Shareholder wealth is what remains after the claims of creditors are covered. Thus, the bottom line in a financial standpoint is the satisfaction of these stakeholders which is mirrored by its return on equity ratio. I believe that the best managed company in an industry is the one which shows the highest return on its stockholders. Using a three year trend analysis, it is also important to look at financial ratios that consistently improve which indicate the continuous commitment for better performance.

On the other hand, even if the ratios of one of the players surpasses the others but is declining over the three year period, it is deemed to be in a more risky situation. When looking at two companies in different industry sectors, it is important to recognize the risk that each of the sectors face. It is quite normal for a company in a riskier industry to show poorer financial performance because of the external factors that it needs to deal with. Thus, comparative analysis should start by looking at the company's beta coefficient which shows the amount of risk that the company faces (Keown 2005).

Only then can an investor decide which performs better under the different circumstances that each faced. Also, the return on equity should always be considered. References Horngren , C. et. al..2000, Accounting.4th ed. New Jersey: Prentice Hall Keown, A.J., Martin, J.D., Petty, J.W., and Scott Jr., D.F, 2005, Financial Management principles and applications, Pearson/Prentice Hall International Edition, 10th Edition