Free «Application of Financial Statements» Essay Sample
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Financial information and financial accounting are crucial aspects for every company. All business processes, loses and profits from business activity, increases or reductions of productivity, changes in facilities and resources distribution are clearly illustrated in financial statements of a company. Taking financial information into account helps to develop businesses, indicate problems on the early stage, foresee and prevent negative tendencies. Thus, the aim of this paper is to analyze how efficient and necessary is to understand the balance sheet and income statement. Moreover, the importance of financial information from the prospect of an employee and a business manager is explained in the essay.
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How a business manager may benefit from an understanding of the income statement?
The income statement is one of the main and the most basic financial statements of a company. It contains information about the results of business activity for the current and previous years. The income statement includes the list of revenues and expenses sources. Therefore, the main goal of the income statement is to provide information about the company’s profitability level for a certain period of time (U.S. Securities and Exchange Commission, 2007).
First of all, information provided in the income statements can clearly indicate the profitability level over a period of time. The main indexes of profitability are operating profit margin, gross profit margin, and net profit margin. Comparing the indexes for the last couple of years gives the general picture of a company’s financial situation and the way the financial resources are used. Thus, after evaluating operating profit margin and gross profit margin business manager can understand how well the business is doing, and in which direction the company is moving. In this way, some negative tendencies can be prevented. Net profit margin shows the amount of money, which a company gets for every dollar invested. This index is essential for calculating the amount of extra investment needed to increase profits (Quinn, 2010). On the whole, the income statement demonstrates how positive is a company’s long-term performance and helps business managers to predict a company's success rate (Reh, 2012).
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Assessing the income statement rather than the balance sheet is more valuable for a business manager. It is explained by the fact that the income statement reveals changes in a company’s financial indexes during a certain period. Contrariwise, the balance sheet shows the financial situation only on the instant of time (U.S. Securities and Exchange Commission, 2007). Furthermore, evaluating the income statements for the last three or more years is crucial for understanding the trends of a company’s business activity (Quinn, 2010).
Moreover, income statements demonstrate the situation in the market assessing the competition and the possibility of acquisitions. Comparing the income statements of a company with its direct competitors can help to predict the future of its business development. Once several companies’ income statements are compared, managers are able to develop their business plans and bring changes in order to improve their position in the market (Quinn, 2010).
For investors, the income statement analysis is a precious source of information about the predictability and reliability of their financial investment. The consistent growth of profits for the past and prior years is an indicator of a favorable situation in the company.
How understanding of the balance sheet and income statement may be applied to your everyday life and future position?
Planning to pursue a career of an accountant, it is necessary to understand all the financial statements: the balance sheet, the income statement, cash flow statement, and the statement of shareholders’ equity. The accountants have an exceptional responsibility to utilize information and form the financial statements based on the gained data (U.S. Securities and Exchange Commission, 2007). The accountants assist management by presenting financial information on the regular basis. Moreover, the accountant needs financial statements to detect possible threats or other essential issues for the company in order to report them to the management.
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Reading financial statements allows accountants to estimate if the company has an adequate amount of assets, level of revenues, and if all the financial indexes are within the normal levels. For instance, calculating the liquidity ratio demonstrates to an accountant if the company is able to cover its obligations. The solvency ratio shows the ability to meet long-term obligations, which indicates the possibility of bankruptcy. The activity ratio determines the efficiency and processing time of every-day activities. The profitability ratio shows how profitable is the company, which allows improving its business activity (Reh, 2012).
Therefore, being able to comprehend the financial statements is the key to being a successful accountant and supporting the sustainability of the company.
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Therefore, information received from financial statements has a wide spectrum of use for business managers, accountants, and investors. It is essential to evaluate the income statement and the balance sheet to understand the efficiency of a company’s business activity. The changes in profits and revenues, the resources distribution, and the level of profitability are indicated in the financial statements. Moreover, comparing financial statements of the competitors to the company’s shows their position in the market. For accountants, forming and evaluating financial statements provides the indicators of the company’s financial situation. For business managers, it means knowing the company’s strengths and weaknesses, having a clear picture to make some changes and improvements. For investors, possessing the financial information allows to choose the most reliable and profitable project to invest in.