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Which of the following is not a main financial statement that every company creates and monitors?
Which of the following is not a main financial statement that every company creates and monitors?
What is the purpose of the balance sheet?
What is the purpose of the balance sheet?
The balance sheet shows the financial worth of a company in terms of its book value.
What does "book value" refer to?
What does "book value" refer to?
A company's book value is the shareholder's equity, which is considered to be its financial worth.
What is the purpose of the income statement?
What is the purpose of the income statement?
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Net profit is calculated after deducting interest and taxes from operating profit.
Net profit is calculated after deducting interest and taxes from operating profit.
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Briefly describe the purpose of the cash flow statement.
Briefly describe the purpose of the cash flow statement.
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Which of the following is not a type of financial statement analysis?
Which of the following is not a type of financial statement analysis?
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What does a horizontal analysis compare?
What does a horizontal analysis compare?
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What does a vertical analysis compare?
What does a vertical analysis compare?
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Which of the following is not a technique of financial statement analysis?
Which of the following is not a technique of financial statement analysis?
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Trend analysis can be upward or downward and examines the percentage relationship of each line item in the financial statement.
Trend analysis can be upward or downward and examines the percentage relationship of each line item in the financial statement.
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What is common size analysis?
What is common size analysis?
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What is comparative statement analysis?
What is comparative statement analysis?
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What is the main purpose of ratio analysis?
What is the main purpose of ratio analysis?
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Which is the most common use of liquidity ratios?
Which is the most common use of liquidity ratios?
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Profitability ratios examine a company's success in generating returns on investments.
Profitability ratios examine a company's success in generating returns on investments.
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What are the main differences between a funds flow statement and a cash flow statement?
What are the main differences between a funds flow statement and a cash flow statement?
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The main objective of the cash flow statement is to show the causes of changes in cash between two balance sheet dates.
The main objective of the cash flow statement is to show the causes of changes in cash between two balance sheet dates.
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Cash flow statements only show cash receipts and payments.
Cash flow statements only show cash receipts and payments.
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What is the purpose of a funds flow statement?
What is the purpose of a funds flow statement?
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Study Notes
Tools of Financial Analysis and Planning
- Financial statements are official documents that explore a firm's entire financial information.
- The main purpose of financial statements is to provide information and understanding of the firm's financial aspects.
- Preparing financial statements is as important as making financial decisions.
Definition
- Financial statements summarize the accounting of a business enterprise.
- The balance sheet reflects assets, liabilities, and capital at a specific date.
- The income statement shows the results of operations during a certain period.
- John N. Nyer defines financial statements as a summary of accounting for a business enterprise.
Types of Financial Statements
- Financial statements generally consist of two important statements: the income statement and the balance sheet.
- These statements are further broken down into separate statements. This includes the income statement, position statement, statement of changes in owners' equity and statement of changes in financial statments.
Income Statement
- Also known as a profit and loss account, it reflects the operational position of a firm during a particular period, usually an accounting year.
- It determines the overall operational performance of a company, specifically the total revenue and expenses associated with earning that revenue.
- Helps determine the company's gross profit and net profit.
- Gross profit is determined through trading or manufacturing accounts, while net profit is determined through profit and loss accounts.
Position Statement
- Also known as a balance sheet, it reflects the financial position of a firm at the end of a financial year.
- Helps ascertain and understand the total assets, liabilities, and capital of a firm.
- Helps to understand a company's strengths and weaknesses.
Statement of Changes in Owners' Equity
- Also known as the statement of retained earnings. It shows changes or position of owners' equity in a company.
- This statement details how retained earnings are employed in the business.
Financial Statements
- Companies create and monitor three main financial statements: the balance sheet, income statement, and cash flow statement.
- These statements help companies manage their operations and provide transparency to stakeholders.
- All three statements are interconnected and provide different views of a company's activities and performance.
Balance Sheet
- A report of a company's financial worth (book value).
- Divided into assets, liabilities, and shareholder's equity.
- Short-term assets (e.g., cash, accounts receivable) indicate operational efficiency.
- Liabilities include expense arrangements and debt capital repayment.
- Shareholder's equity includes details on investments and net income.
- Assets minus liabilities equals shareholder's equity.
- Book value represents the company's shareholder's equity.
Income Statements Example
- Companies use income statements to compare revenue against expenses, showing net profit or loss.
- Income statements are categorized into three parts for analyzing business efficiency: revenue, direct costs for revenue (to get gross profit), operating profit after subtracting indirect costs and lastly net profit.
Cash Flow Statement
- Provides an overview of a company's cash flows from operating, investing, and financing activities.
- Net income is carried over to the cash flow statement, appearing as the top line for operating activities.
- Investing activities include firm-wide investments.
- Financing activities include debt and equity financing.
- The bottom line shows the company's available cash.
Financial Statement Analysis
- Analyzing a company's financial statements to support decision making.
- External stakeholders use it to understand company health and evaluate financial performance and business value.
- Internal constituents use it as a monitoring tool for managing finances.
Types of Financial Statement Analysis
- Based on materials used: Internal analysis, external analysis.
- Based on methods used: Horizontal analysis, vertical analysis.
External Analysis
- Outsiders (investors, creditors, governing bodies) use this analysis.
- It helps to understand the financial and operational position of a business.
Internal Analysis
- Companies use this analysis to understand the operational performance of different departments and units within the business in order to take decisions to improve the achievement of the company's goals.
Horizontal Analysis
- Comparing financial statements across several years based on the base year (100% comparison).
- Shows changes in financial information over time.
- Also referred to as dynamic analysis.
Vertical Analysis
- Measuring the relationship of different items in financial statements during a specific period.
- It is referred to as static analysis.
- Expresses items as percentages of a base figure (e.g. sales).
Techniques of Financial Statement Analysis
- Ratio analysis, trend analysis, comparative analysis, cash flow analysis, funds flow analysis, common-size analysis.
Comparative Statement Analysis
- Analyzing financial statements at different points in time.
- Helps understand the comparative position, financial and operational performance of the company across periods.
- Includes comparative balance sheet analysis and comparative profit and loss account analysis.
Common Size Analysis
- Expressing financial statement figures as percentages of a common base (e.g., total assets).
- Used to understand the relationship between different items within the statement.
Funds Flow Statement
- Shows the changes to a company's financial position (e.g., sources and uses of funds).
- The difference between the beginning and ending dates of the financial statements.
Cash Flow Statement
- Summarizes operating, investment, and financing cash flows.
- Shows how companies use and generate cash during a period.
Ratio Analysis
- A mathematical relationship between two figures that have a meaningful connection.
- Used to evaluate the company’s financial performance and identify areas for improvement.
- Common ratio types: Liquidity (short-term), Operational efficiency (efficiency of current assets), Leverage (long-term obligations), Profitability.
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Description
This quiz covers the essential tools of financial analysis and planning, focusing on the role and importance of financial statements. Learn about the components and functions of the income statement and balance sheet, and understand how they summarize a firm's financial status. Test your knowledge of these key financial concepts.
