Financial Statements

by on February 13th, 2015
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Memorandum

TO: EEC Board of Directors

FROM: Lela Keel, EEC Financial Analyst

DATE: January 03, 2011

SUBJECT: Financial statement usage

Introduction

Financial statements are records that offer an indication of a company’s monetary condition during a specific period. There are four basic types of financial statements that Eddison Electronics Company (EEC) will need to use to determine the financial status of the company. These four financial statements are the balance sheet, income statement, statement of cash flows, and statement of stockholders’ equity. The data obtained in these statements will be used both internally and externally to make future monetary decisions for the company, and therefore having knowledge of these statements will be very significant for the financial success of the company (Best, n.d.). This memo will address the previously mentioned statements in further detail so that you can get a better idea of how each is used for planning and controlling of the company.

Balance Sheet

The balance sheet statement will enable me to get a “snapshot” of the financial condition of the company. This statement will list in detail all of the tangible and intangible goods that the company possesses and what it owes at a particular period which would generally be at the closing of the company’s accounting period. The major components included in the balance sheet statement will be the assets of the company, which will include anything that is actually owned by the company; the liabilities of the company, which will include things that the company has acquired from other corporate entities or individuals, such as money or goods; and the company’s shareholder equity, which will be the money that would be left over if the company decided to sell all assets and pay off liabilities, and this money would go the shareholders and/or owners of the company. (U.S. Securities and Exchange Commission, 2007). For instance, if EEC has $25,000 in assets and $20,000 in liabilities then the equity would be $5,000 leftover for the shareholders and/or owners. The inventory accounts on a balance sheet for EEC would consist of the materials that the company possesses to complete the products we manufacture, the work in progress that the company is completing and goods that are finished by the company (Garrison, Noreen, & Brewer, 2010). However, the data incorporated in this financial statement can also be broken down further to better define the products we manufacture within each specific division of the company. Managers benefit by doing this because they are given better observation on the performance of their specific operational areas of the company.

Income Statement

The income statement will provide me with a report of how much income the company received over a specific time, which will typically be put together yearly. The expenses related to receiving the income will also be shown on this statement. Summing up the revenue and expenses over a given period will communicate the company’s net earnings and/or losses (U.S. Securities and Exchange Commission, 2007). Internal income statements frequently present information on performance that is related to the products we manufacture, the product lines we produce, and the processes of producing these products (CTU Online, 2011). With the formation of cost for the products the company manufactures being vital to the profits taken in having specific cost information is very important for operational activity planning. Also, when costs are reorganized and shifted by their behavior patterns a contribution margin income statement can be generated. This type of income statement will represent the remaining resources left to cover the fixed expenses after accounting for the variable expenses (U.S. Securities and Exchange Commission, 2007). By being presented with profitability information on the different products the company has to offer this will benefit management by allowing them the opportunity to reclassify and reorganize costs associated with future work periods. This in return will facilitate the financial decision-making process in regards to accurately defining product prices, making price adjustment, developing new product lines, and eliminating non-profitable products so that resources of the company are not drained.

Statement of Cash Flows

The statement of cash flows will be a report of the company’s cash inflow and outflow. It will show me alterations over time and not just a total cash amount at a specific time. This is very important for the company since we will want to have sufficient money readily available to pay operating costs and pay for assets associated with running the company. This statement will use and reorder the data on the balance sheet and income statement of the company. Although, as previously mentioned, an income statement can show whether the company profited over a given time period, the statement of cash flow can reveal whether the company generated money for a specific period. All incoming cash receipts and outgoing cash payments for the company will be detailed on the cash flow statement. Any variations in cash inflow and outflow for the company during the period of the report will be apparent in the cash flow statement. The cash inflows and outflows of the company will be categorized into detailed activities of business. These activities of business are operating, investing, and financing. Operating activities will produce returns, expenses associated with these returns, and the gains or losses of the company in which the net income presented on the income statement will be directly influenced. The current assets and liabilities of the company will also be influenced directly by the operating activities and this will impact the company’s balance sheet. The continuing assets of the company will increase and decrease through the company’s activities of investment, and the sales and purchases related to the continuing assets will be reported on the cash flow statement as activities of investment for the company, this will also include all loans and collection of loans relevant to the company. The categorization of activates related to financing for the company will be any money that is obtained for funding or launching the processes related to functioning the business. Stock issuance, borrowed money from banks, selling or purchasing stock treasure, and paying shares to shareholders would be reported on the statement of cash flow since all of these are considered financing activities. It would generally be a good indication for the continuing success of the company if when analyzing the statement of cash flows the majority of cash flowing related to functioning the business came from operating activities. Having knowledge of how to accurately organize and evaluate cash inflows and outflows related to the operations of the business will aid managers in noticing areas of problems and controlling the cost associated with business operations will maximize the company’s capabilities to function (U.S. Securities and Exchange Commission, 2007).

Statement of Stockholders’ Equity

The statement of shareholders’ equity is cash or other types of assets provided to the business by the possessor or possessors of the company to purchase assets to begin the business. Any remaining income that is not remunerated out in the structure of shares to the possessor or possessors are also added to the shareholders’ equity and any shortfalls through the undertaking of the business is deducted from the shareholders’ equity. All alterations taking place within a particular reporting phase are revealed on the statement of shareholders’ equity. Equity will increase for the company from investment and income and shortfalls or extractions will decrease the equity for the company, but all of this will be communicated on this financial statement (U.S. Securities and Exchange Commission, 2007).

Financial Statement Use

The financial statements talked about are together and separately applied in various ways to aid in the planning and controlling of future operations as the particular information that results from the analysis will provide the company with the specific numbers required to make alterations to the operational processes of the business. This will enable the company to improve the overall efficiency of the operational procedures related to the business. Analysis of financial statements as they apply to practices of managerial accounting will center on horizontal, vertical, and ratio analysis (CTU Online, 2011).

Horizontal Analysis

Horizontal analysis, which is also called trend analysis, is the analysis of the information from a particular item within a financial statement as detailed over a specific time which will show quarterly or yearly alterations for the company in relation to cash or percent alterations. Percentage of trend will be computed for the company when evaluating many periods and comparing them against a specific year (Garrison, Noreen, & Brewer, 2010). Both the cash alterations and percentage alterations which are associated with specific areas of the financial statement analysis should be considered thoroughly so that one result is not given greater significance than the other. Horizontal analysis will produce accurate planning and budgeting so that it will be ensured that the resources necessary are readily available when the demands of the company’s performance is increased (Accounting for Management, 2009).

Vertical Analysis

Vertical financial statement analysis will focus on every entry for each of the categories of accounts in the balance sheet of the company so that each account is represented as a proportion of the account total. This information will be frequently used to compare the company’s performance to the averages of the industry so that anticipated goals can be recognized. The income statement vertical analysis could reveal the percentage of total sales related the individual divisions or products of the company. The sales of the company will be frequently be compared to a standard percentage which will be taken from industry data specifically, which will in turn help to assess the company’s performance so that it can be compared with real progress of the divisions and/or products of the company (Clausen, 2010).

Ratio Analysis

A ratio analysis will be most frequently used by financiers or other outside decision makers with an impending risk in the operations and performance of the company. However, since management will need to identify how the performance of the company is doing and how it is observed on the outside they can do this by performing a ratio analysis. This type of analysis will compare the significant numbers within the financial statements of the company. Having knowledge of the performance of the company and how the company is viewed by others will present management with information on what the desired levels of performance in every area might be. Understanding the performance in every area of the company will allow management to recognize problem areas and they will be given the opportunity to correct these areas so that a more desirable investment opportunity may arise (CTU Online, 2011). Numerous rations are applied to the numbers on the financial statement to establish productivity for the company, efficiency related to operations of the company, monetary control of the company, and use of assets of the company (Atkinson, Kaplan, Matsumura, & Young, 2007).

Conclusion

Financial statements are reports that will summarize the financial condition of the company at specific times. The role of financial statements is to provide financial information to executives so that they can complete their many responsibilities while continuing financial success of the company. All of the financial statements previously mentioned are inter-related and will play a vital role in the financial decision making process for executives of the company.

References

Accounting for management. Horizontal analysis or trend analysis: Definition and explanation of horizontal or trend analysis. Retrieved from http://www.accountingformanagement.com/horizontal_analysis_or_trend_analysis.htm

Atkinson, A., Kaplan, R., Matsumura, E., & Young, S. (2007). Management accounting. (5th ed.). Upper Saddle River, NJ: Pearson-Prentice Hall.

Best, B. (n.d.). The use of financial statements. Retrieved from http://www.benbest.com/business/finance.html

Clausen, J. (2010). Accounting 101 basics – vertical analysis. Retrieved from http://www.suite101.com/content/accounting101-basics—vertical-analysis-a204428

CTU Online. (2011). Applied managerial accounting: Phase 1 Course Material [text]. Colorado Springs, CO: CTU Online. Retrieved January 04, 2011, from https://campus.ctuonline.edu/MainFrame.aspx?ContentFrame=/Default.aspx

Garrison, R., Noreen, E., & Brewer, P. (2010). Managerial accounting, (13th ed.). New York, NY: McGraw-Hill Irwin.

U.S. Securities and Exchange Commission. (2007). Beginners guide to financial statements. Retrieved from http://www.sec.gov/investor/pubs/begfinstmtguide.htm


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