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Financial Statements Paper Part I

Essay by   •  September 23, 2012  •  Essay  •  1,178 Words (5 Pages)  •  1,343 Views

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What does the income statement tell you about the company? Why is this statement important? What business decisions could be made using the income statement? These questions and more are important when evaluating the financial statement of any company.

An income statement would show the financial results of the company for the financial year. The financial statements would include the profit or loss for the company, the operational efficiency of the company, how much revenue for the company, and how much expenses the company had for their operation for the year.

An income statement is important because it show the operational efficiency, or inefficiency, of the company. By evaluating the information on the income statement, shareholders will then decide if they want to buy shares. If the income statement shows a positive figure, rather than a negative, shareholders are more likely to not to decide to sell their holdings and the market price of the share of the company will increase. However if the company were to show a loss then the shareholders might possibly decide to sell their shares and that could cause the market price of the company to decline. Therefore making the income statement important for shareholders information on either to buy, sell or trade their shares. If the income statement shows high profit, then the company can decide to expand its business by the issue of new shares or it may decide to plough back the income by issue of stock dividend. Also the company internally uses the income statement to decide if they need to drop the any segment which is incurring loss or it can decide to put more efforts on the segment which is yielding high income as income statement shows the income from different segments.

When evaluating a company and their financial records the balance sheet is also important financial tool. Questions that might arise are: What does the balance sheet tell you about the company? Why is the balance sheet important? What business decisions could be made using the balance sheet?

A balance sheet shows the financial position of the company on a particular date usually at the end of the particular financial year. A balance sheet informs us the amount of fixed assets, current assets, investments made, amount of shareholders' equity, long term debt and current liabilities of the company. A balance sheet is different from income statement in such a way that it depicts the financial position on a particular date rather than the summary of financial affairs carried during the financial year. Income statement covers a range or period of time such as a month or a year. A balance sheet is usually generated to show what an organization owns or owes at the end of the financial period.

Shareholders use the balance sheet to know the amount of net profit earned by the company, the amount of earnings transferred to retained earnings account, and the amount of earnings of the company declared as payment of dividend. If a return is expected, shareholders will be tempted to buy more shares and the market price will increase. The same information is used by banks and financial institutions who might lend more money if the balance sheet of the company shows high amount of reserves and surplus and high level of liquid assets. Also with the balance sheet information, the management may decide to pay off its long term debt and decide to issue more equity. Management may also decide to sell off some plant/equipment if that equipment/plant is almost depreciated.

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