Question

Describe and summarize the key financial statements used in a business organization. Explain three to five key financial ratios used to analyze a company.

Answer 1

Balance Sheet:

To know the firm's position, balance sheet is one place where one would look at. To understand the relationship among Liability, Assets and Equity one would prefer to go through balance sheet only. This is one of the prime financial statement to evaluate the company's position whether to get the information as if it is debt-ridden, insolvent or to know it's cash position. We get to know the Diluted Earning per share as well as Earning per share with the help of Shareholding value and the number of outstanding shares. We can be able to see how much depreciation is being charged over the fixed assets and how much current assets are in hand for smoother operations of the firm.

We use Debt to Equity ratio to evaluate debt with respect to the equity of the firm. We use Fixed Asset turnover ratio to see how much fixed assets are helping to grow in a firm. We use Current Ratio and Acid ratio to understand whether the cash in hand is sufficient or not for the working capital and also to compare the current liabilities with the current assets.

Income Statement:

This financial statement helps us to understand the efficiency, profitability, operational viability of a firm. To know the firm's profit and loss Income statement gives us the full picture of it. We can use Net Profit, Net Profit Margin ratio, Gross Profit , Gross Profit ratio , Operating profit ratio etc to evaluate the profit by net and gross. Sales and revenue, costs and expenditure are also covered in the Income statement which helps us to understand the future forecasts with estimates.

Cash Flow Statement:

This financial statement helps us to understand the free cash flows, dividends disbursed, any debt unpaid or gone bad debt, or any accounts to be received, changes in working capital and also financing, investing and operating activities. This statement let's us know about where the cash is being invested and how much is inflow with respect to the outflow.