Financial Analysis

Financial Analysis

Effects of Financial Transactions in Financial Statements

Every transaction process is essential in order to accomplish the main aim of having accurate records and reports. Each transaction should be documented appropriately so as to ensure accuracy in the statements. A transaction includes payment, loans, and sales and in the event that money, goods and services are traded. Monetary reports that are accurately recorded allow a firm to analyse their state of their financial health data to enable the company to make more valid and competent business resolutions. Monetary reports are one of the avenues financiers use in deciding the way forward in terms of making investments or regulating the investments or cutting loose on the existing investments (Edwards, Hermanson and Ivancevich, 2013). The financial statements are contemplative of the distinct durations and transactions, specifically the large statements that can result to incorrect interpretation of authentic figures for a certain duration the annotation is done.

Elements of a Financial Statement and Purpose

A monetary report consists of ten components that include equity, assets, revenues, liabilities expenses, gains, losses, comprehensive income, and investments by owners as well as allocation to owners. Assets refers to items that are possessed or controlled by the firm that can be used to benefit economically. Liabilities refers to responsibilities of services or the necessary settling of payments to another entity for the operations to continue. Incorporation of different types of equities is referred to as equity. The financial statement on the comprehensive income represents the variations in equity by a non-owner source. In the accounting of all-inclusive revenue, the owners’ assets and dividends are not incorporated.

Asset increase as result of trade is referred to as revenue. Inflow of assets are the revenues while the outflow refers to expenses. Decrease in assets refers to the expenses or the costs incurred during manufacture of products. Increase and decrease in equity as a result of marginal transactions is referred to as gains and losses (Williams and Dobelman, 2017). An instance is when a company designing shirts retailed a machine above the book value then it’s considered as a gain while if the same equipment retailed below the book value then it is considered as a loss. Investments by owners is considered as an increase in assets in the accounting of monetary reports (Hermanson Ivancevich and Edward 2010). These investments are transacted in the form of cash transactions in order to own shares in the company. Dividends are the payments made to owners which is referred to as distribution to owners. The decrease in equity occurs when the distribution to owners is paid.

Components and Use of Financial Analysis

Overall monetary stability in an industry is dependent on conducting a financial analysis. The investors’ choice on whether to invest or not is determined by the financial analysis report. The analysis can also be utilized in setting the financial policies and guidelines as well setting long term goals for the business. The components include liquidity, profits and profits. Maintaining the prolonged existence of a company is determined by profits. The profit margins of a company illustrate if a company has a stable financial bases and if it is able to cover the costs of operation in case of losses as well as the ability in re-investing of the company.

Operational efficiency entails regulating the usage of resources and involves determining if the credit offered to clients needs to be adjusted or functioning properly by reviewing the turn over accounts. The business leverage is determined by the debt divided by equity in capital efficiency. Liquidity illustrates the company’s capability in generating money to cover expenses. The capability of a company in paying for short term commitments is determined through division of assets by liabilities.

References

Edwards, J. D., Hermanson, R. H., & Ivancevich, S. D. (2013). Accounting Principles: A Business Perspective. Global Text.

Hermanson, H. R., Ivancevich, D. S., & Edwards, J. D. (2010). Accounting principles: A business perspective. Endeavour International Corporation, Houston, Texas, USA.

Williams, E. E., & Dobelman, J. A. (2017). Financial statement analysis. World Scientific Book Chapters, 109-169.

 

 

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