Premium Essay

Analyzing and Interpreting Financial Statements

In: Business and Management

Submitted By rszierk
Words 4611
Pages 19
Module 4

Analyzing and Interpreting
Financial Statements


Q4-1. Return on investment measures profitability in relation to the amount of investment that has been made in the business. A company can always increase dollar profit by increasing the amount of investment (assuming it is a profitable investment). So, dollar profits are not necessarily a meaningful way to look at financial performance. Using return on investment in our analysis, whether as investors or business managers, requires us to focus not only on the income statement, but also on the balance sheet.

Q4-2.B ROE is the sum of an operating return (RNOA) and a nonoperating return (the effective use of financial leverage – specifically, leverage multiplied by the spread). Increasing leverage increases ROE as long as the spread is positive. Financial leverage is also related to risk: the risk of potential bankruptcy and the risk of increased variability of profits. Companies must, therefore, balance the positive effects of financial leverage against their potential negative consequences. It is for this reason that we do not witness companies entirely financed with debt.

Q4-3. Gross profit margins can decline because 1) the industry has become more competitive, and/or the firm’s products have lost their competitive advantage so that the company has had to reduce prices or is selling fewer units or 2) product costs have increased, or 3) the sales mix has changed from higher margin/slowly turning products to lower margin/higher turning products. Declining gross profit margins are usually viewed negatively. On the other hand, cost increases that reflect broader economic events or certain strategic product mix changes might not be viewed negatively.

Q4-4. Reducing advertising or R&D expenditures can increase current operating profit at the expense of the long-term competitive...

Similar Documents

Premium Essay

My Date

...drastically impacts the position of an accountant. The information required by a company to make decision to make sure it is moving forward is provided by accounting. Both managerial and financial accounting plays a big role by working along to ensure the growth of the organization is in the right path. However, both managerial and financial accounting has its own purpose of improving an organization or a business. “Earlier financial accounting experiments typically sought to determine whether specific accounting policy choices would affect investors’ decisions.” (Pg778-experimental research) (122words) Role of Financial Accounting Every organization or business should be able to know their monetary progress or else they would never be able to evaluate if the business is profitable or the other way around. “The purpose of financial accounting is to provide users of financial statements with information that is useful for efficient decision making.”(accounting for intangible-pg102).It prepares the answers to financial accountants whom are always asked by investors on how the organization or business is growing. Financial accounting reports the financial activities on the balance sheet and income of the company and cash flow statement. It is one of the limbs in accountancy to prepare financial statements for external decision makers who are implicated in the investment of the business...

Words: 1026 - Pages: 5

Premium Essay

Job Description

...historical reference by defining procedures for retention, protection, retrieval, transfer, and disposal of records after its expiration period. • Maintains office efficiency by planning and implementing office systems, layouts, and procurement of equipments. • Designs and implements office policies by establishing standards and procedures; measuring results against standards; making necessary adjustments. • Completes various tasks based on the requirements and follow up on work results. • Keep management informed by reviewing and analyzing special reports; summarizing information; identifying trends. • Maintains professional and technical knowledge by attending educational workshops on the web; reviewing professional publications; establishing networks; participating in professional societies. • Achieves financial objectives by preparing an annual budget; scheduling expenditures; analyzing variances; initiating corrective actions. • Contribute effort to accomplish related results as needed. • Renewal of Tenancy Contracts – Employee Residence, by having accurate information and proper documentation. • Arrange insurance for their accommodation being MPAM’s assets and renew the same on time. • Set up Insurance for the Office Premises, Assets, and Fidelity Guarantees. • Negotiate with the suppliers to get a competitive Pricing for all services required by the company...

Words: 737 - Pages: 3

Premium Essay

Accounting Process

...transactions and events: This is the first step of accounting process. It identifies the transactions of financial character that is required to be recorded In the books of accounts. Transactions is transfer of money or goods or services from one person or account to another person or account. 2. Measuring: This denotes expressing the values of business transactions and events in terms of money 3. Recording: It deals with recording of identifiable and measurable transaction and events in a systematic manner in the books of original entry that are in accordance with principles of accountancy. 4. Classifying: It deals with periodic grouping of transactions of similar nature that appear in the books of original entry into appropriate heads by posting or transfer entries 5. Summarizing: It deals with summarizing or condensing transactions in a manner useful to the users. This function involves the preparation of financial statements such as income statement, balance sheet, statement of changes in financial position and cash flow statement 6. Analyzing: It deals with the establishment of relationship between the various items or group of items taken from income statement or balance sheet or both. Its purpose is to identify the financial strengths and weakness of the enterprise. The above six present day scenario are generally performed using software packages 7. Interpreting: It deals with explaining the significance of those date in a manner that the end...

Words: 544 - Pages: 3

Premium Essay

Candela Corporation

...Analyzing a Summary Analysis for Candela Corporation Analyzing a Summary Analysis To analyze a statement of cash flow means to investigate the cash flow of a company's operations, and study the cash inflows and outflows. Candela had severe growth in 2002 that severely affects the net cash of operating activities. Analyzing the cash flow may have given Candela the opportunity to change its cash from operations. An analysis of a cash flow will give the reader an indication of what changes would improve the company's growth. A cash flow statement divides three functions of a business into operating, investing, and financing. Interpreting the information is essential for a creditor, banker, investor, or even management. The cash flow provides details of cash changes between the periods of other statements. One of the most important factors is how the cash outflow reduces the inflows, and the effect each may have on operations. The details from the cash are taken from the balance and income statements (Fraser & Ormiston, 2007).. The Candela Corporation provides laser systems for the medical field. Performance of laser treatments are cosmetic, or necessary removal of a variety of undesirable physical appearances. Candela provides laser systems worldwide. An increasing desire of improving physical appearance among Baby Boomers contributes to Candela's growth in the 1990s (Fraser & Ormiston, 2007). In 2002, Candela's consolidated cash flow statement shows a net cash from......

Words: 872 - Pages: 4

Premium Essay

Fin 571 Week 3

...Interpreting Financial Results FIN/571 – Foundations of Corporate finance February 4, 2016 Abstract This summary examines Marathon Oil Corporation’s financial statements from the past three years. Financial ratios such as liquidity ratios, leverage ratios, and solvency ratios are discussed and interpreted against the company’s historical data and compared to industry benchmarks. The financial ratios will be used to determine the company’s current financial position how they rank compared to other industry companies. Interpreting Financial Results A financial ratio is an effective instrument that is used in conducting company analysis. These ratios are also useful in important business decision making (Hoskin, Fizzell & Cherry, 2014). There are a number of financial ratios that can be used to conduct analysis. The aspect of the financial comparisons that are under question, determines which financial ratios are best to use. Marathon Oil Corporation is an independent international company and was originally called Ohio Oil Corporation. The organization was originally established in 1887 (Marathon Oil, 2015). As of today, Marathon Oil continues to pull in profits despite the tremendous drop in oil prices. Marathon Oil functions as an energy company and operates in three segments. The company supplies products and services to both large and small organizations. Marathon Oil’s financial data, for years 2014, 2013, and 2012 shown below, provides a......

Words: 990 - Pages: 4

Premium Essay


...N/A | 2 | 1 | ALESSANDRA | DIPLOMA HIGH SCHOOL | N/A | 2 | 1 | LUDOVICO | BUSINESS MANAGEMENT BACHELOR’S DEGREE | N/A | 2 | N/A | 4. JOB DESCRIPTION Description: We need at this stage a Accountant person in our team, who can assist the wedges process and all the account system Job Purpose: Provides financial information to management by researching and analyzing accounting data; preparing reports. Job Duties: * Prepares asset, liability, and capital account entries by compiling and analyzing account information. * Documents financial transactions by entering account information. * Recommends financial actions by analyzing accounting options. * Summarizes current financial status by collecting information; preparing balance sheet, profit and loss statement, and other reports. * Substantiates financial transactions by auditing documents. * Maintains accounting controls by preparing and recommending policies and procedures. * Guides accounting clerical staff by coordinating activities and answering questions. * Reconciles financial discrepancies by collecting and analyzing account information. * Secures financial information by completing data base backups. *...

Words: 716 - Pages: 3

Premium Essay

Financial Statements Paper

...Financial Statements Paper Fantasia Friend ACC/280 April 27, 2011 University Of Phoenix Accounting is the technique through which a person creates a report of business dealings and makes records regarding the fiscal infrastructure of the organization. Three key activities of accounting, determining, documenting, and communicating economic activities, assist bestow the health of this company to external and internal people. The main goal is to determine and document activities which have a fiscal effect on the organization and to assist control, compute danger, and take decisions. All activities are categorized in fiscal words, as per the financial assumption, and placed to a particular account in the journals, and then the ledger. Such is the procedure of bookkeeping. The data created from bookkeeping may then be utilized to produce correct and timely financial statements. The two key divisions of accounting incorporate managerial accounting as well as financial accounting. Managerial accounting assists people deal with finances. It gives inner records to assist people take decisions and predict wants regarding their organization. Financial accounting helps the outer people since it gives economic and financial details for them about whether or not the organization complies with rules, laws, and regulations. To know a company, a person has to understand the figures. The four fiscal reports let a close look at the figures an organization produces. The 4......

Words: 755 - Pages: 4

Premium Essay

Financial Statement Paper

...Financial Statements Paper Twanda Anderson ACC / 280 Principles of Accounting Michael Ford August 15, 2011   Financial Statements Paper Many people assumed that accounting is just adding and subtracting numbers but financial accounting has several important parts for a business to be profitable. In the accounting process there are significant parts and these parts provide excellent information about the company’s finances that identify, record, and communicate its finances. The financial statement has four parts and how these parts interrelate to each other they are the Income statement, Retained earnings statement, Balance sheet, and Statement of cash flows to help the company provide relevant financial data for internal and external users. According to Weygandt (2008), Accounting consist of three basis activities and it is an information system that identifies, records, and communicates the economic events of an organization to interested users. Accounting has two primary qualities that make its information useful for decision making and they are relevance and reliability. The primary purpose of accounting is to provide a financial report showing its performance during a specific time period usually for a year. These reports are made available for its user’s which are creditors, stockholders, and tax authorities. Accounting is also the financial information that gives an organization/company its understanding of what is happening financially to......

Words: 940 - Pages: 4

Premium Essay

“Accounting Information Is Very Significant for Internal and External User”.

...summarizing the business transactions, reporting accounting information, analyzing and interpreting accounting reports to help those interested parties such as managers, investors, bankers and creditors to make important business decisions. The final product of accounting is a set of financial statements comprising at least Balance Sheet and Profit & Loss Statement. These statements are useful to different users for different reasons. Accounting may be divided into financial accounting and management accounting. Financial accounting is the field of accounting that provides financial information for potential investors, creditors and other external users. Management accounting provides financial information for managers and other internal users. There are different kinds of users of financial statements. The users of financial statements may be from inside or outside of the business. They use financial statements for a large variety of business purposes and their ability to understand and analyse financial statements helps them to succeed in the business world. The various users of financial statements are classified and detailed as internal users and external users. Those who lack direct access to the financial information generated by the internal operations of a business are considered as external users. They rely on the financial accounting reports that management has prepared according to financial accounting regulations. These external users include......

Words: 989 - Pages: 4

Premium Essay

Statement of Cash Flows

...esACTG3110 Chapter 5: Statement of Cash Flows Introduction Objectives of the SCF •Companies are required to include statement of cash flows (SCF) as part of their F/S. •Historical CF are often used as indicator of amount, timing, and uncertainty of future CF. •The objective of the SCF is to disclose the historical cash flows of the enterprise during the reporting period for both feedback and predictive purposes. Classification and Organization The SCF is classified on the basis of the type of cash flow: •Operating activities are the principal revenue-producing activities of the enterprise and the related expenditures. * Cash inflow from operations is measured as cash received from customers or clients. * Cash outflows are those disbursements for operating activities, such as cash paid for inventories, wages and salaries, income taxes, and rent and other overhead costs. * Operating activities relate to net earnings (rev. + exp.), not comprehensive income. * If the company has recognized specific amounts that are part of other comprehensive income, these transactions or events are not included in operating activities. * Therefore, net earnings is the reference point for operating activities on the SCF. •Investing activities are those activities that relate to long-term assets and investments. * The acquisition and disposal of property, plant, and equipment; intangible assets; other assets; and investments are all included in this......

Words: 1644 - Pages: 7

Premium Essay

Acounting Careers

...the well-known financial accounting is managerial accounting. In the following paper I will discuss what managerial accounting is and how it’s used, the difference between managerial and financial accounting, the users of this accounting, ethics in accounting, and careers in managerial accounting. Managerial accounting is “the process of identifying, measuring, analyzing, interpreting, and communicating information for the pursuit of an organization's goals” (Managerial Accounting Definition, 2003). Managerial accounting is also known as cost accounting (2003). Managerial accounting provides an organization with the financial data to perform descriptive analytics. The numbers don’t tell anything about the future, but they can be used to make decisions about the future. Without the numbers that managerial accounting provides no appropriate and good decision making would be being made. Managerial accounting is not like other accounting and major differences exist between managerial accounting and financial accounting. Although they work side by side, managerial accounting concentrates on helping people inside the organization, such as managers, make decisions while financial accounting focuses on providing information to people outside the organization. Since managerial and financial accounting differs, so do the users. The users in managerial accounting are those inside the organization such as managers and other staff that makes decision. The users of financial......

Words: 603 - Pages: 3

Premium Essay

Ratio Analysis

...Name: Fernandez Augusthus Form: six Subject: Accounting Title: Financial Statements and Analysis Linval’s Hardware Acknowledgements I would first like to acknowledge God, for giving me divine wisdom and understanding and strength to complete this research. I would like to thank the owner of Linval’s Hardware for his time and co operation, and resources which aided me greatly in this project. I would also like to thank my mother who has been by my side throughout this research. Introduction This project is designed to thoroughly assess the financial position of a business. This project involves the relevant information that will give students the general understanding how to analyze the performance of a business. This project will specifically look on module 3of the syllabus which deals with financial reporting and interpretation. This includes these major concepts: *ratio analysis *limitations of ratio analysis Table of Contents Literature Review Report on Linval’s Hardware * Income Statement and Analysis * Balance Sheet and Analysis Limitations of Ratio Analysis Conclusion and Recommendation Appendices References Linval’s Hardware Income Statement Analysis Linval’s Hardware Income Statement For the year ended December 31, 2012 | $ | $ | Total Revenue | | 12,650,000 | Sales returns | | <54,000> | Net turnover | | 12,596,000 | Cost of Sales: | | | Purchases | 4,678,000 | | Purchases......

Words: 1735 - Pages: 7

Premium Essay

Target vs. Walmart

...Interpreting Financial Results: Walmart vs. Target FIN/571 July 27, 2014 John Kushner Abstract Walmart and Target both are discount retail one stop monster shops, but they each cater to different customers. Walmart, which according to CBS News Money Watch in a November 2012 episode says its customers' average household income ranges from $30,000 to $60,000, hammers its low-price message and focuses on stocking basics like tee shirts and underwear along with household goods. But Target, whose customers have a median household income of $64,000 a year, is known for carrying discounted designer clothes and home decor under the same roof as detergent and dishwashing liquid. Of the two discounters, I prefer Target, I personally name this, my one hundred dollar store. No matter the trip, the minimum I spend per visit is $100 dollars. The purpose of this paper is to perform a horizontal analysis and review Walmart’s financial statements from the past three years and then interpret those results against company historical data as well as industry benchmarks as compared to its biggest competitor, Target. This paper will be interpreting financial results: Walmart vs. Target over the last three (3) years looking at Balance Sheet, Cash Flow and Income Statements.   Interpreting Financial Results: Walmart vs. Target For the first part of this assignment and review of Walmart’s finances, I will highlight......

Words: 1545 - Pages: 7

Premium Essay

Effect of Technological Change on Employee Performance in Organizations

...accounting This provides services on a fee basis. An accountant may practice as an individual or as a member of a public accounting firm. Public accountants who meet the required education, experience and pass required examinations may become CPA’s. 2. Specialized accounting fields/ branches There are several specialized fields in accounting. The two most common are financial accounting and managerial accounting ( this is based on user’s point of view). Other fields include:- Cost accounting, Environmental accounting, Tax accounting, Social accounting, etc. 3. Management Accounting – Management accounting is concerned with the provision of appropriate financial information to people within the organization (management and employees) to help them make better decisions. – It involves professional knowledge and skills in the preparation, presentation and interpretation of information required by management at all levels of the organizational structure. ← In other words, Management Accounting is concerned with data gathering (from both internal and external sources), analyzing, processing, interpreting and communicating the resulting information for use within the organization so that management can more effectively plan, make decisions and control operations. – Management information includes both historical and estimated data which is used by management in conducting daily operations, planning future operations, and developing overall business......

Words: 772 - Pages: 4

Premium Essay

Accounting Principles

...following accounting tasks during the year. ___C Analyzing and interpreting information. ___R_ Classifying economic events. ___C_ Explaining uses, meaning, and limitations of data. ___R_ Keeping a systematic chronological diary of events. __ R__Measuring events in dollars and cents. ___C_ Preparing accounting reports. __ C_ Reporting information in a standard format. ___I__Selecting economic activities relevant to the company. __ R__Summarizing economic events. Instructions Classify each item as an asset, liability, or stockholders’ equity. E1-5 Meredith Cleaners has the following balance sheet items. Accounts payable Accounts receivable Cash Notes payable Cleaning equipment Salaries payable Cleaning supplies Common stock ASSETS LIABILITY STOCKHOLERS’ EQUIT Accounts receivable Accounts payable Common Stock Cash Notes payable Cleaning equipment Salaries payable Cleaning Supplies Instructions After analyzing the data, prepare an income statement and a retained earnings statement for the year ending December 31, 2008. E1-12 The following information relates to Linda Stanley Co. for the year 2008. Retained earnings, January 1, 2008 $ 48,000 Advertising expense $ 1,800 Dividends during 2008 6,000 Rent expense 10,400 Service revenue 62,500 Utilities expense 3,100 Salaries expense 30,000 Linda Stanley Co. Income Statement For the Year Ended December 31,......

Words: 944 - Pages: 4