6 Responses Nov 13

Ram Work:

The balance sheet mainly helps to reveal the financial status of a business as of a specific point in time. The statement shows what an entity owns such as assets and how much it owes (liabilities), and the amount invested in the business (equity). This information is more important when the balance sheets for several consecutive periods are grouped so that trends in the different line items can be viewed. We have many sets of information that can be used to understand the short-term financial status of the organization. When the amount of the current assets is compared with the current liabilities subtotal, we can say whether the company has access to sufficient funds in the short-term to pay off its short-time obligations.

We can compare the total amount of debt to the total amount of equity listed on the balance sheet, to see if the resulting debt/equity ratio indicates a dangerously high level of borrowing. This information is especially useful for lenders and creditors, who want to know if the extension of additional credit might result in a bad debt (Bragg, 2019). Anyone who wants to take over the business will look at the balance sheet carefully to check if there are any potential assets that could harm the underlying businesses. If we take an example, the acquirer can compare the inventory balance sheet with the sales to figure out an inventory turnover level. This can indicate the presence of excess inventory. The fixed asset total can be compared to sales to derive a fixed asset turnover measure, which is then compared to best-in-class companies in the same industry to see if the fixed asset investment is too high (Bragg, 2019).

Cash flows are another financial statement that includes all the cash outflows and inflows in an organization during a specific period. The cash flow statement complements the balance sheet and income statement and is a mandatory part of a company's financial reports since 1987 (). These cash flows are generally divided into three categories based on their activities. They are Operational cash flows, Financial cash flows, and Investment cash flows. These statements provide the amount of cash present and how it is being operated for different purposes of an organization. It only deals with the cash and nothing else. It is easier and simpler to understand to the readers. Cash flow in financing activities is used to determine how much the company owes loans, debts, etc. For the organizations, it is used to determine the organization's liquidity and solvency and any cash reserves for future investments. For investors, the cash flow statement reflects a company's financial health since, typically, the more cash that's available for business operations, the better; however, this is not a hard and fast rule. Sometimes, a negative cash flow results from a company's growth strategy to expand its operations (Murphy, 2020). By studying the cash flow statement, an investor can get a full picture of how much cash a company generates and gain a solid knowledge of its financial well-being.

 

References

Bragg. S. (2019). The purpose of the balance sheet. Retrieved on November 12, 2020, from: https://www.accountingtools.com/articles/the-purpose-of-the-balance-sheet.html

Murphy. B. C (2020). Understanding the Cash Flow Statement. Retrieved on November 12, 2020, from: https://www.investopedia.com/investing/what-is-a-cash-flow-statement/

Naren Work:

Purpose of the Balance Sheet

The balance sheet provides useful information regarding the financial position of a company over a given period. The information provided by the balance sheet is essential to the stakeholders (customers, investors, shareholders, government) of the company as they are able to find out if the company is growing or not. The management team of a company utilizes information in a balance sheet to make major managerial decisions that positively impact the company (Couchman, 2014). Potential investors also use balance sheets to access potential investment opportunities by looking at the companies' financial performance.

Financial institutions such as banks also use balance sheets to find out critical information regarding whether or not to lend money. A bank will be able to access a company's creditworthiness by looking at the balance sheet of the company. Customers also use balance sheets to determine whether a company is stable financially. A customer who needs to buy a car will want to buy from an economically stable car dealer such that the dealership will be able to offer spare parts in the future (Couchman, 2014). It is easy to detect anomalies in a company's financial position by analyzing the balance sheet information. Statement of Cash Flow’s Presented Information

A cash flow statement shows how the balance sheet changes and income affect the cash transactions related to running operations, investment, and other business financial activities. A cash flow statement contains information on the company's liquidity and solvency. This information can be used to establish whether a company can withstand the current business environment and how good it will be performing.

The statement of cash flows also contains information that can show the company's viability in the short term, such as the ability to pay bills to allow its continued operation. Stakeholders need the statement of cash flows to make crucial decisions regarding the company. The management and the shareholders will use the cash flows to determine the company's general performance and predict possible future performance (Broome, 2004).

References

Broome, O. W. (2004). Statement of cash flows: time for change. Financial Analysts Journal, 60(2), 16-22.

Couchman, C. B. (2014). The Balance-Sheet: Its Preparation, Content, and Interpretation. Journal of accountancy, Incorporated.