Analyzing and Interpreting Financial Statements
An important factor to the success of a small business is understanding financial statements. Financial statements are very important and critical to a business’ journey to economic success. According to Edmonds, Olds & Tsay, (2008), when used properly, financial statements can act as a basis of information for business valuation. Another important and useful indicator when determining a business’ performance and financial situation are financial ratios.
Financial statements helps manage a company and to see whether the company is being well managed. According to Edmonds, Olds & Tsay, (2008), companies’ use four financial statements to periodically report on business activities. The Balance Sheet consists of a company’s assets and their financial stance at a particular point in time. The accounting equation: Assets = Liabilities + Equity (Easton, Halsey, Hartgraves, McAnally, & Morse, 2010). The Income Statement shows how the company is performing over a certain period and provides the amounts for the company’s revenues and expenses. The income statement equation: Revenues – Cost of goods sold = Gross Profit – Expenses = Net Income (Easton, Halsey, Hartgraves, McAnally, & Morse, 2010). The Statement of Stockholders’ Equity reports on changes in the company’s accounts that make up equity. The statement of Stockholders’ Equity equation: Ending retained earnings = Beginning retained earnings + Net Income – Dividends (Easton, Halsey, Hartgraves, McAnally, & Morse, 2010). The Statement of Cash Flows gives a report of change in a company’s cash balance (operating, investing and financing activities) over a period of time (Easton, Halsey, Hartgraves, McAnally, & Morse, 2010). Additional information added at the end of financial statements is footnotes. The notes (footnotes) to the financial statements are important to external users because they help the users understand and interpret the...
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