Using Financial Information

FINANCIAL INFORMATION 1

Financial Information

Ja’Niya Ladson

Department of Business and Entrepreneurship

BA130OL- Introduction to Business

Dr. Wilton Stewart

April 25, 2021

Grade Breakdown

>Communication: 20.00 points out of 20 points

>Analysis: 20.00 points out of 20 points

>Application: 18.50 points out of 20 points

>Effective Use: 17.50 points out of 20 possible points (error in APA format)

>Style: 16.75 points out of 20 possible points.

Remarks:

• Errors noted with Source entries in reference list. See professor’s comments.

• Improper heading levels throughout document. See professor’s comments.

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Introduction

Understanding the financial information of an organization is essential before making a

decision of the company to purchase. Financial information can be extracted from the financial

statement of the company. The paper addresses questions about financial statements.

How a balance sheet differs from an income statement?

The first difference is based on reporting. A balance sheet reports Assets, Liabilities, and

Equity while an income statement represents revenue and expenses (Griffin & Mahajan, 2019).

The second difference is based on timing. The balance sheet indicates what an entity owns and

owes at a particular time unlike the income statement which indicates the total expense and

revenue for a time period. Besides, a balance sheet is utilized by entities to identify whether the

company has adequate assets to satisfy financial obligations while an income statement is

utilized to analyze the performance and to determine whether there exist any financial issues that

require adjustment.

The term owners’ equity

It is the owners' rights to the assets of a company. It is the portion of the value of an

entity’s asset that can be claimed by the owners (Fabozzi et al., 2021). It is merely what remains

for the owners after deducting all liabilities from the company's assets. It is calculated as TA –

TL. Some of the components of owners' equity are retained earnings, treasury stock, and

outstanding shares.

Difference between FA and TA

FA are long-term and tangible assets used in a business that are grouped as PPE. These

are the assets that the company does not expect to sell or consume within an accounting period.

Some of the fixed assets are buildings, furniture, and equipment that depreciates over time,

Commented [WS1]: This should be a level II heading ➔ see article 2.27 on pages 47 – 49 of APA Manual.

Commented [WS2]: See prior comment – This is not in Level II heading format

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Commented [WS4]: Acronyms are to be defined on first use in an academic document in accordance with APA standards.

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except land. In contrast, total assets are the total sum of assets owned by an entity. It is the

summation of fixed assets and current assets.

Difference between long-term liabilities and CL

CL are the obligations and debts that need to be repaid within one year (Fabozzi et al.,

2021). They are given close attention by the management to ensure that the entity has adequate

liquidity from CA to guarantee that the obligations or debts are met. Some of the CL include

account payables, income tax payables, and interest payables. In contrast, non-current liabilities

or long-term liabilities are obligations and debt due in a long time or over one year. These are an

essential part of an entity's long-term financing and are important in identifying long-term

solvency. Examples of long-term liabilities include mortgage payable, the bond payable, and

long-term notes payable.

The difference between cash flow and an income statement

The first difference between these two is based on the meaning. An income statement is a

financial statement that represents the gains, revenue, losses, and expenses for a specific

accounting period while a cash flow represents the outflows and inflows of cash for a specific

accounting period.

The second difference is based on the basis; income statement is founded on an accrual

basis while cash flow is based on the actual payment and receipt of cash (Griffin & Mahajan,

2019). That is to means that the income statement is based on the accrual system of accounting,

which considers income and expenses in an accounting period, while cash flow is based on the

cash system of accounting which incorporates actual outflow and inflow in a specific accounting

period.

Commented [WS5]: See prior comment

Commented [WS6]: See prior comment

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The other difference is that cash flow entails three activities; operating, investing, and

financing activities while the income statement considers two activities; operating and non-

operating activities. Besides, based on objectivity, the income statement is useful in determining

the profitability of an entity while cash flow is essential in determining the solvency and liquidity

of an entity.

How to identify a business’ financial strengths and weaknesses

A business's financial strengths and weaknesses can be identified by using various

techniques or tools. One of the ways to identify business financial strengths and weaknesses is

through the financial SWOT analysis technique (Purba & Septian, 2019). It is a strategic or

financial analysis technique that determines an entity's financial strengths, weaknesses, threats,

and opportunities.

The business's financial strengths and weaknesses can also be identified by calculating or

using the financial ratios of the entity. By calculating the solvency, efficiency, liquidity, and

profitability ratios the business's financial capabilities and weaknesses can be identified. The

other way is through comparison. By comparing the company to its peers or the industry, one can

determine its weaknesses and strengths relative to competitors in the industry. This can be based

on comparing the business ratios with the industrial averages and competitor's ratios.

Why should we be concerned with all these financial processes when we can get an

accounting firm to handle this stuff while we focus on daily business operations?

One of the reasons we should be concerned with the financial processes instead of hiring

an accounting firm is that it enhances and builds our knowledge and understanding about the

firms we wish to purchase. It helps us extensively understand the operations of the firm, the

financials, strengths, and weaknesses. Secondly, hiring an accounting firm requires a good sum

Commented [WS7]: See prior comment

Commented [WS8]: First use of an acronym must be defined.

Commented [WS9]: See prior comment

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of money that can be saved or invested in a productive project when the process is conducted

internally. Thirdly, hiring an accountant firm involves exposure of confidential information to a

third party which some firms may be unwilling to share.

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References

Fabozzi, F. J., Fabozzi, F. A., de Prado, M. L., & Stoyanov, S. V. (2021). Fundamentals of

Financial Statements. World Scientific Book Chapters, 29-75.

Griffin, P. A., & Mahajan, S. (2019). Financial Statement Analysis. Finding Alphas: A

Quantitative Approach to Building Trading Strategies, 141-148.

https://doi.org/10.1002/9781119571278.ch19.

Purba, J. H. V., & Septian, M. R. (2019). Analysis of Short Term Financial Performance: A Case

Study of an Energy Service Provider. Journal of Accounting Research, Organization, and

Economics, 2(2), 113-122. https://doi.org/10.24815/jaroe.v2i2.14632.

Commented [WS10]: Incorrect entry. See article 10.2 on page 321 of APA Manual for proper format for Book works. Further, improper capitalization noted in book title.

Commented [WS11]: Incorrect format for citing chapter in an edited book with a DOI. See example 38 on page 326 of APA Manual.

Commented [WS12]: Improper capitalization of words in article title. See articl e 10.1 on pages 316 – 321 of APA Manual on proper format for title of article that are published in a journal.