The Purpose of Financial Statements The financial statements of a business are used to provide information about the status of the business, set performance targets and impose restrictions on the managers of the firm as well as provide an easier method for financial planning. The financial statements consist of the Profit and Loss Account, Balance Sheet and the Cash Flow Statement. There are four areas of information, which we can collect from a company's financial statements. They are: Ÿ Profitability - This information comes from the Profit and Loss account. Were we can compare this year's profit with the previous years. Ÿ Liquidity - This information comes from the Balance Sheet and the Cash Flow Statement. Ÿ Efficiency - This information can be found in the Balance Sheet but also some information from the Cash Flow Statement. They both show the use of company assets and the management of working capital. Ÿ Capital structure/investment - This information is taking from the Balance sheet, but also from the Profit and Loss Account. This is examining the sources of finance the company has used and also looking at it as a potential investment opportunity. There are certain features, which must be present if financial information is to meet the needs of the user. The two most important features are that: Ÿ The information should be relevant to those who are using it. Ÿ The information should also be reliable so the user can make informed decisions. Other features are: Ÿ The information should be free of any bias. The information should be understandable. It should be pres... ... middle of paper ... ...o monitor the health of the company and also to make the right choices. They are the most important users of financial information as without this group using the information properly the company could cease to survive. Bibliography Biz/ed 2004, Accounting [Online], available http://www.bized.ac.uk Duncan Williams 2004, User of Financial Statements, [online], available http://www.duncanwill.co.uk Finance Demon 2004, User of Financial Information, [online], available http://www.financedemon.co.uk Financial Reporting Council 2004, About the FRC [online], available http://www.asb.org.uk Hacker Young Chartered Accountants 2004, Accounts Explained [online], available http://www.account-explained.co.uk Joe Corbett 2004, Class Notes, Borders College, Galashiels
Balance sheet lists assets, liabilities and owner’s equity. The assets listed on the balance sheet are acquired either by debt (liabilities) or equity. “Companies that use more debt than equity to finance assets have a high leverage ratio and an aggressive capital structure. A company that pays for assets with more equity than debt has a low leverage ratio and a conservative capital structure. That said, a high leverage ratio and/or an aggressive capital structure can also lead
The objective of financial reporting/statements is to provide information about the reporting entity’s financial performance and financial position that is useful to a wide range of users for assessing the stewardship of the entity’s management and for making economic decisions.
Assessing the capital structure of any firm is important for investors attempting to determine if...
In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20bn dollars in equity and $80bn in debt is said to be 20% equity financed and 80% debt financed. The firm's ratio of debt to total financing, 80% in this example, is referred to as the firm's leverage.
Financial decision of a business organization becomes one of the important decisions that normally will represent by capital structure. Musiega, et al. (2013) claimed that choosing an appropriate capital structure will benefit the firm as it help a firm to adapt with various challenging and competitive business world thereby become more profitability. According to Zeitun and Tian (2007), managers who are able to identify the optimal capital structure will help the companies to increase the firm revenue or profitability and reduce the firm’s cost of finance. Nutshell, capital structure of a firm can influence a firm profitability; a firm health determined by a firm capital structure.
There are three standard sections and they are investing activities, operating activities and financing activities (Melicher, Norton, 2013). Investing activities will report change in a company’s cash position resulting from losses or gains from investments in operating subsidiaries and financial markets as well as changes in amount of money that is spent on the capital assets like equipment and plants. Operating activities are calculated by adding depreciation and EBIT then subtracting taxes. Operating activities is the money a company earns from regular business activities like selling goods, manufacturing goods or providing a service. Financing activities that track a company’s external activities that help a company raise capital and repay investors, an example of this is cash dividends, issuing more stock or changing loans. It will show investors how strong a company is
A balance sheet can be given at any point in time but only shows a particular date. There are two other names for a balance sheet, statement of condition or statement of financial position. The main characteristic of for the balance sheet is that it assesses liquidity. Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset 's price (Investopedia.com). In order to fully understand a balance sheet you must first understand the relationship of every account and the financial statements simultaneously. The balance sheet informs us that asset equals liabilities plus stockholders’ equity. Assets are items possessing service or use potential to owner (Fraser & Ormiston, 2012). Liabilities are lawful dues or obligations that organizations have while doing business. Stockholder’s equity is represents the capital obtained from investors in order to receive stock. There are two main sources that stockholders’ equity comes from and that is money and retained earnings that was accumulated over time
It outlines the interconnection of a company’s financial and non-financial elements and aims to combine them and show value creation and maintenance. It identifies resources and their effective and responsible usage. It intends to create a dialogue between the shareholders and other stakeholders and provides them with detailed information.
Finding the perfect capital structure in terms of risk and reward can ensure a company meets shareholder expectations and protects a firm in times of recession. Capital structure refers to how a business puts its money to “work”. The two forms of capital structure are equity capital and debt capital. Both have their benefits and limitations. Striking that perfect balance between the two can mean the difference between thriving versus trying to survive.
The directors need to be able to view the financial performance of the group in order to make relevant and informed decisions. In order to obtain this information the correct procedures, as mentioned, must be followed to ensure that assets are not overstated and liabilities
According to the conceptual framework, the potential users of financial statements are investors, creditors, suppliers, employees, customers, governments and agencies, and the general public (Financial Accounting Standards Board, 2006). The primary users are investors, creditors, and those who advise them. It goes on to define the criteria that make up each potential user, as well as, the limitations of financial reporting. The FASB explicitly states that financial reporting is “but one source of information needed by those who make investment, credit, and similar resource allocation decisions. Users also need to consider pertinent information from other sources, and be aware of the characteristics and limitations of the information in them” (Financial Accounting Standards Board, 2006). With this in mind, it is still particularly difficult to determine whom the financials should be catered towards and what level of prudence is necessary for quality judgment.
What is capital structure? Capital structure describes the specific mixture of long-term debt and equity the firm uses to finance its operation and growth. The risk and value of the firm will be affected by this mixture. Hence, it is often a challenging task for the finance managers to determine the optimal capital structure. An error free decision is critical to avoid an incorrect financing decision (Eriotis, Vasilou & Neokosmidi, 2007) and different levels of debt and equity used in capital structure suggest that managers may employ firm-specific strategies for improved performance (Gleason, Mathur, & Mathur, 2000).
In addition, the objective of the financial statement user is to find and interpret this data in order to have answers for questions regarding the organisation such as: Would an investment generate returns, or what is the degree of risk inherent in the investment (M. Fraser, Ormiston 1998). Additionally, an organisation’s financial conditions are the main concern to investors and creditors. Investors are simply the capital providers and they rely on an organisation’s financial conditions for both the safety and profitability of their investments. Moreover, investors must to know where their money was spent and where it is now. The financial statement of balance sheet reports that kind of issues by providing detailed information about an organisation’s asset investments. Furthermore, the balance sheet shows a business’s outstanding debt and equity components, and so debt and equity investors are able to better understand their relative positions in a company’s capital mix (Way
The purpose of this document is to describe the nature, purpose and scope of accounting and it deliberately explains the details of each category in accounting. Accounting involves in preparing financial documents of an entity by analyzing, verifying, and reporting this records. It emphasizes its major characteristic role in field of banking and finance, with a mixture of supportive sub topics.
The capital structure of a firm is the way in which it decides to finance its operations from various funds, comprising debt, such as bonds and outstanding loans, and equity, including stock and retained earnings. In the long term, firms seek to find the optimal debt-equity ratio. This essay will explore the advantages and disadvantages of different capital structure mixes, and consider whether this has any relevance to firm value in theory and in reality.