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As SAC's business financial analyst, I have been tasked with the duties of providing the Board of Directors and the executive management team with the pertinent financial statements that are necessary for helping in the management of the company. Things that I will cover are the statement consists of, how the information will be used by the management team, how it will help them manage the company, its limitations, synopsis of the company as a whole just from looking at the data in these statements. The first area I will cover is the different type of financial statements and their purposes. Financial statements are a crucial part of a company's well being. In blatant speech, a financial statement is all about showing the money. They actually give a view of where a company's money is coming from and where it is going, and the current state of it. In saying this, at the minimal, there are at least four statements that are crucial in answering the question of the company's state of being on a financial basis. They are: balance sheets, income statements, cash flow statements, and statement of the shareholders' equity. Balance sheets consist of things such as what SAC owns and what it owes. To elaborate a little further, it gives more precise information on the company's assets or what it has from a value standpoint. This ranges from physical items to equipment or its inventory. This can even be intangible things such as the company's trademarks or patents. Liabilities are described as what the company owes to others (i.e. banks, rent, suppliers, employers, taxes, and the government. To get a better understanding of how to construct a balance sheet you would use the formula: 1. Assets=Liabilities+Shareholders Equity The assets have to equal or at least balance that of when the liabilities and the shareholders equity are added up. This will be done basically at the end of a reporting period. Then there is the income statement in which it is a report that gives a picture of how much the company has earned over a period of time (i.e. quarters, semi-annual, or annually). It is made up of the costs or expenses accrued over that given period. To sum it up, it shows the company's losses or net profits. This statement is where the earnings per share is reported and this will give an idea of how much each shareholder would get if the company decided to or had to pay them out. In order to determine this, you simply take the total net income of the company and divide it by the number of outstanding shares. Once all of these things have been calculated and looked at, the income tax is the final thing that is deducted and this leads to whether SAC has a net profit or net loss during the period. The third statement is the cash flow statement which deals with SAC's money that is flowing in and the money flowing out of the company. Its importance is that the cashflow statement shows it or not if a company actually generated any cash. Cash flow statements look at three different activities which are: its operating activities, investing activities, and its financing activities. The fourth statement is the financial statement ratios. It consists of numerous ratios (i.e. debt to equity, inventory turnover, operating margin, price to equity ratio, and price to equity ratio). The calculations that you use to determine how these ratios will be calculated are listed below: 1. Debt-to-Equity Ratio: Debt-to-Equity = Total Liabilities / Shareholders' Equity The debt to equity ratio compares a company's total debt to shareholders' equity. These numbers actually are found on a company's balance sheet and is calculated by dividing a company's total liabilities by its shareholder equity. 2. Inventory Turnover: Inventory Turnover Ratio = Cost of Sales / Average Inventory for the period This calculation compares a company's cost of sales on its income statement with its average inventory balance for the period. To calculate the average inventory balance for the period, look at the inventory numbers listed on the balance sheet. Take the balance listed for the period of the report and add it to the balance listed for the previous comparable period, and then divide by two. In calculating the inventory turnover ratio, you divide a company's cost of sales by the average inventory for a particular period. 3. Operating Margin: Operating Margin = Income from Operations / Net Revenues The operating margin compares a company's operating income to net revenues. These numbers are found on a company's income statement and is calculated by dividing a company's income from operations (before interest and income tax expenses) by its net revenues. 4. Price to Equity Ratio: P/E Ratio = Price per Share / Earnings per Share The P/E ratio compares a company's common stock price with its earnings per share. This is calculated by dividing a company's stock price by its earnings per share. 5. Working Capital: Working Capital = Current Assets - Current Liabilities The working capital is the money that is leftover if a company decide to pay its current liabilities or debts due within one-year of the date of the balance sheet) from its current assets. To bring all of the statements together, they are all pretty much related in a sense. Changes that can be seen in assets and liabilities are what you will see on the balance sheet anyway and those then will be reflected in the revenues and expenses that will be seen on the income statement. This in essence will result in the company's gains or losses. Then as for cash flows, they provide more information about cash assets that are listed on a balance sheet also. Cash flow statements are, as I said very much listed on the balance sheet but are not as much so related or equivalent to the net income that is shown on a income statement. So, although all of these statements are very crucial in determining the whole conglomerate of a company, just one statement by itself does not complete the process. It takes all of them to tell the whole story and when they are combined, they provide very powerful information for the company. How will the information that you provide on a financial statement be used by the management team? Information that is calculated on financial statements have numerous purposes and can be used by different people ranging from owners and managers, to that of the employees. This in essence from the view of the managers, they need this information to make business decisions as it relates to the company and its business operations. An analysis is done to give them more detailed information about the figures that were calculated. This information is definitely used as a major part of the annual report that the management team will give to the stockholders. They use information from income statements for the purposes of hiring new employees. Other things that managers are concerned with when it comes to financial statements are that it will tell them if they can afford new equipment or other operating expenses and even where they need to cut expenses if the profit for the company is relatively low. How will it help them manage the enterprise? When it comes to financial statements, they are very crucial in many ways. In fact, creating regular financial statements will help to keep an accurate count on the progress of the company. As I listed earlier, the income statements and cash flow sheets are detrimental I the process. By maintaining accurate records, it helps the company to know the trends in their sales and expenditures so that if problems were to arise, they can handle the issues before they get to difficult to manage from a financial standpoint. What are the limitations of the information regarding financial statements that you provide to the management team? Financial statements have numerous limitations when it comes the data that will be given to management. It is evident that these statements are basically based on factors that are historical I nature. The first thing that limits financial statements is that sometimes the financial position of a company that is disclosed is not correct or accurate simply because they end up leaving some of the economic or financial factors off of the statement. In fact, it may be that some of the social, economic, or financial factors that are truly what are affecting the company. The second thing is that the profits that get revealed on the profit and loss statement really doesn't click in a sense with the balance sheet. (Independent, LLC., 2011). There is limitation as well because there is a personal judgement issue on the behalf of the financial analyst. These things that are of issue are things such as: bad debt provisions, stock valuation, or a provision of depreciation. As I said, all of these things are basically left on his shoulders to make the necessary call. Another thing that is a limiting factor is that on the income statement, it may not disclose the true income of the business because of the fact that some probable losses were considered while the probably incomes were ignored. Then there is the fact that fixed assets get shown at cost less depreciation on the basis of just what the financial analyst thought was the right thing to do. (Independent, LLC., 2011). With that being said, we all understand that we are human and are very prone to making mistakes at any given time. How can the management team ensure that they obtain a complete picture of the enterprise? In my opinion, I think that a company's management team can get a well rounded view of how well the company is doing first by making sure that all of their financial statements are correct and accurate so that there are no discrepancies or conflicts that would cause them to lose credibility in the eyes of their employees, stockholders and the like. Then another thing that will help to ensure this is that they should definitely listen to the concerns of the people (i.e. customers) whether they are internal or external. Because if the company has a good culture and the employees, shareholders, and owners are happy, then this ensures that everything is fine and okay within the company. References: Independent Stock Investing, LLC., (2011). What are the Limitations of Financial Statements. Retrieved on August 19, 2011 from http://www.independent-stock-investing.com/Limitations-Of-Financial-Statements.html Loth, Richard, (2011). Things that You Should know About Financial Statements. Retrieved on August 19, 2011 from http://www.investopedia.com/basics/financialreport Planview, Inc., (2011). Management. Retrieved on August 20, 2011 from http://www.planview.com/products/enterprise/ideation-management/ SEC, (2009). Financial Statements. Retrieved on August 19, 2011 from http://www.sec.gov/pubs |
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