Question

Assignment 03 - Financial Statements, Cash Flow, and Taxes Accountants focus on creating financial statements, whereas finance professionals use these statements to evaluate a firm and answer questions about its performance. Indicate which financial statement you would refer to when answering the questions in the following table: Income Statement Statement of Retained Earnings How profitable has the firm been? How much of the firm's earnings are left as balance after the firm pays out dividends to its shareholders? If compensation for senior management is based on short-term performance of the firm, in the short run the firm is likely to: Overstate its earnings Understate its earnings Flash Rover HAC 120.0314 Q334102004- 2016 Apta All rights reserved. o 2013 Cangage Learning coopt a noted All rights reserved Orade It Now Save & Continue Continue without saving

Answer 1

Ans >	i) Income Statement Shows how profitable has the firm.
	An Income statement shows the totals of a company's revenues and expenses.
	It matches all revenues from selling good and services against all expenses - including
	interest, depreciation and taxes - required to operate the company over a specific
	time period. Theses statements can be prepared monthly, quarterly or annually.
	An Income statement has several layers of profitability.
	-- Gross Profits
	-- Operating profits, or EBITDA (earnings before interest, tax, depreciation and amortization)
	-- Net Income
	II) Statement of Retained Earnings shows how much of the firms earnings are left as
	balance after the firm pays out dividends to its shareholders.
	Retained Earnings (RE) are the portion of a business's profits. While it is arrived at through the income statement, the net profit is also used in both the balance sheet and the cash flow statement. that are not distributed as dividends to shareholders but instead are reserved for reinvestment back into the business.
	III) If compensation for senior management is based on short term performance
	of the firm, in the short run the firm is likely to Overstate its earnings
	The firm will likely overstate how they've performed in the short-term as a way of making sure that the compensation and bonuses are attained. This might affect the company long-term, however, when the performance levels out or decreases under prior levels, and the firm then finds itself wondering what led to the decrease (the overstatement of the short-term).