Financial Statements Analysis - Research Proposal Example

The business world generates billions of dollars in profit every year. Most of the large corporations that operate in the marketplace are public enterprises. These companies have to reveal their financial results to the general public due to the fact their shares are sold in the marketplace. The Securities and Exchange Commission obligates these companies to prepare financial statements every accounting period. Having knowledge about how financial statements work can help the average person interpreter the financial data of corporation which can help them become wise investors. The purpose of this paper is to analyze and describe accounting financial statements. The income statement is one of the four major financial statements. The four major financial statements are the income statements, balance sheet, statement of cash flow and the statement of retained earnings. The income statement is a report that shows the profitability of the company. The information contained in the income statement corresponds to a period of time or an accounting cycle (Answers, 2010). The normal period of time for which the income statement is prepared for is one year. The top of the income statement illustrates the total sales or revenues the company. During 2003 Landry’s restaurant generated $1,105,755,000 in sales. The income statement also shows the total expenses that the businesses incurred in during the time period. The total operating cost and expenses of the company were $1,037,338,000. The subtraction of revenues minus expenses equals the net income of a corporation. The net income of Landry’s Restaurant in 2003 was $45,901,000. The net income can be used by manager in order to determine if the profits obtained by the company are adequate. The information contained in the income statement can be used for ratio analysis. A ratio that determines the profitability of a company in terms of percentage is the net margin. The net margin is calculated by dividing net income by total sales or revenues. The net margin of Landry’s Restaurant in 2003 was 4.15%. A manager can utilize this metric to compare with the industry standard in order to determine if the profitability of the company is adequate. A database that shows business ratios industry standards is the Dun & Bradstreet database. The income statement is important because the data contained in the statement can help manager make better operating decisions. For example if the company shows a negative income statement during an accounting period managers have to take measures to either increase revenue or reduce costs in order to achieve a positive net income in the following accounting period. The balance sheet is a statement that shows the position of a company at a particular point in time (Investopedia, 2010). This statement is prepared following the logic of the basic accounting equation. The basic accounting equation states that assets equal liabilities plus stockholders equity. The balance consists of two sections. The top section of the balance sheet shows the assets the company owns. The assets are listed in order of liquidity with cash being the most liquid assets. Assets are divided into current assets and non-current assets. The liability section of the balance sheet is divided into current liabilities and long term liabilities. The balance sheet of Landry’s Restaurant shows that the company has total assets of $1,102,785,506. The total liabilities of the company are $498,234,757. The equity section of Landry’s Restaurant balance sheet shows a total equity balance of $604,550,749. Manager can use the data contained in the balance sheet to calculate business ratios. A ratio that shows the debt utilization of the company is the debt to equity ratio. Landry’s debt to equity ratio is 0.82. The ratio is acceptable due to the fact that it is below the normal ratio of 1.0. Two ratios that are calculated combining information from the income statement and the balance sheet are return on assets and return on equity. The return on assets of the company was 4.16%, while the return on equity of the firm was 7.59%. Managers use the balance sheet as parameter to determine how much a company is worth. The higher the total assets of the company is the more a company is worth in general terms. The balance sheet also warns managers when too much liability is undertaken. A ratio that determines if the company is able to pay off its debt is the debt ratio. The debt ratio is calculated by divided total assets by total liabilities. The debt ratio of Landry’s Restaurant is 2.21. The ratio is good because it is above norm of 1.0. The statement of cash flows illustrates how a corporation spent its cash during a specific period of time or accounting cycle. The statement shows both the inflows and outflows of cash. Cash is the most important assets a company has. If a firm runs out of cash the company it is unable to continue operating because it will not be able to pay off its obligation which includes paying current liabilities and paying its payroll. The cash flow statement separates cash transaction into three types. The three types of cash transactions illustrated in the cash flow statement are operating, financing, and investing activities. The cash flow statement can be utilized by managers to determine how the cash of the company is spent. This can help managers optimize its use of cash. For example if the total cash balance of a company decreased from one period to another the cash flow statement tells management in which type of activity cash disbursements increased. In 2003 Landry’s Restaurant received $121,599,891 from operating activities. The company in 2003 spent $189,930,676 in investing activities and it received $89,733,905 from financing activities. The financial statements provide valuable information that can be used to make business decisions. The income statement provides information related to the sales of a company during an accounting period. Managers based on past results can determine if the sales figure attain by the firm was adequate in comparison with the past. It is preferable for the sales of a company to increase from period to period. Companies that are able to achieve sales growth for many periods of time are probably using an organic growth model. The data in the financial statements can be used by manager to calculate financial ratios. These ratios can be compared with the industry standard in order to determine if the financial results of a company are good or bad. The cash flow statement is very important because it provides information to management about the inflows and outflows of cash by category. Tracking cash can help managers determine which activities are generating cash for the company. Despite the value of financial statement it does not provide all the information managers need to make decisions. For example the financial statements do not provide information about the efficiency of workers. The statement cannot help manager determine if a particular project should be undertaken or rejected. The financial statements of corporation provide information regarding the financial status of a company at a specific point in time and during periods of time. Managers must have good knowledge about financial statements because the information contained in them can be used to make better operating decisions. Even regular people can benefit from learning about financial statement because they can use that knowledge to make educated investment decisions. The financial statements are important tools that must be used by managers to determine the performance of the enterprise. References Answers.com (2010). Income Statement. Retrieved November 7, 2010 from http://www.answers.com/topic/income-statement Investopedia.com (2010). What Does the Balance Sheet Mean? Retrieved November 7, 2010 from http://www.investopedia.com/terms/b/balancesheet.asp Read More