Financial Reporting and Analysis - Essay Example

These spreadsheets should be common-sized and the figures compared to the company. The Balance Sheet helps to plot company's next year's profitability and what company's future business wealth will be by evaluating company's present year's Balance Sheet, and comparing with last year. To improve company's financial performance, the company needs to evaluate the major Balance Sheet components - Assets, Liabilities, and Equity. The company owns assets, such as cash, equipment, and property, to increase the company 's business profitability and future wealth.

Return on Assets (ROA) compares Net Income and Total Assets to show how much income has been generated worth of the company's assets. The company's assets can be improved by evaluating each asset category to identify room for improvement and to manage company's inventory and collect accounts receivable better and faster. The important thing to remember for loan consideration is that if company's business experiences large variances in assets during last two year, ROA is to be calculated using an average of the assets over the period being evaluated When purchased, inventory is an asset recorded on the Balance Sheet. . Managing InventoryCompany's business manages inventory has an impact on both profits and cash flow.

When purchased, inventory is an asset recorded on the Balance Sheet. At any given time, assuming a customer wants it, company can sell inventory to regain cash. One way to evaluate how well inventory is being managed is to look at the Inventory Turnover ratio. This ratio tells how many times the average level of inventory is sold, or turns over, during the year. The ratio should be used to compare company's own trends and to compare to the industry's averages. High turnover is generally good.

High turnover, however, may also indicate that there is not enough merchandise, and sales are being lost. The important thing to remember is that if companion's business experiences large variances in inventory during the year, calculate Inventory Turnover using an average of the inventory over the period being evaluated Collecting Accounts ReceivableAccounts Receivable describes money due from customers for products or services already sold. Liabilities Liabilities have an important supporting role that is vital to the creation of a healthy cash flow.

The more cash a company has and the longer it can hold on to it, the better. One way to secure more cash and other assets is through the proper use of Liabilities. Liabilities are categorized as either short-term or long-term debts, called Current or Long-Term LiabilitiesCurrent LiabilitiesCurrent Liabilities are bills or loan payments due within the next business cycle, usually a year. The primary Current Liabilities are Accounts Payable, Accrued Expenses, and Short-Term Notes Payable. Several ratios, called Liquidity ratios, are used to measure a company's ability to pay its short-term bills, also called