Question

What is meant by a firm having a strong balance sheet and income statement? What analytical tools are used to make this judgment?

Answer 1

A balance sheet (B/S) is simply a financial statement that summarizes an organization's assets, liabilities, and shareholders' equity. It actually tells that " what's owned and what's owed ",

Rule : Assets = Liabilities + Shareholders' Equity

A strong B/S sheet have:

⦁ Smart working capital

⦁ Positive income

⦁ Optimal capital structure

⦁ Income creating resources

Where as in Income Statement:

It measures excess revenues over total expenses. This way investors, creditors, and management can see how efficient the company was a producing profit.

Rules:  Net Income = Total Revenues - Total Expenses

1. It's shows the edge high on gross, working income  and net revenues.
2. It will show the increase on sales  so that  the working salary and net revenues gets high.
3. On the off chance that deals demonstrates more the income it shows consistency over the time on operational salary.
4. Total compensation and income are similar when fittingly both are thought about one another.

Analytical Tools applied:

So as to make the judgment on Balance sheet and Income statement we need to do the Financial Analysis. For that we need to see the fiscal summary. Budget summaries are set up to have total data with respect to resources, liabilities, value, holds, costs and benefit and loss of a venture. To break down and decipher the budget summaries, regularly utilized instruments are similar proclamations, basic size articulations and so on.

Comparative statement:

It is otherwise called 'Horizontal Analysis', are budget summaries demonstrating monetary position and benefit at various time frames. These announcements give a thought of the enterprise financial position of at least two periods. Correlation of budget summaries is conceivable just when same bookkeeping standards are utilized in setting up these announcements.

Common size statement:

The position of the company can be seen by watching the different assets and liabilities of the firm on various dates to make the examination of parities starting with one date then onto the next date. To comprehend the similar monetary record, it must have two sections for the information of unique accounting reports. A third segment is utilized to show expands/decline in figures. The fourth section gives rates of increments or diminishes.

By looking at the B/S, we can observe:

• Current money related position & Liquidity position
• Long haul money related position
• Productivity of the worry

By looking at the Income Statement, we can observe:

• The increase/decrease in net benefit.
• The analysis of operational profits.
• The increase or decrease in net benefit
• Analysis of the general productivity of the business.

Trend Analysis:

Considering the operational outcomes and money related situation over a progression of years is trend analysis. Counts of proportions of various things for different periods is done and then thought about under this investigation. Regardless of whether the undertaking is inclining upward or in reverse, the examination of the proportions over a time of years is finished. By watching this investigation, the indication of good or poor administration is distinguished.

Ratio Analysis:

Quantitative examination of data contained in an organization's budget reports is proportion investigation. It depicts the noteworthy relationship which exists between different things of an asset report and an announcement of benefit and loss of a firm.To evaluate the gainfulness, dissolvability, and effectiveness of a business, the executives can experience the system of proportion examination. It is an endeavor at building up a significant connection between singular things (or gathering of things) in the balance sheet or benefit and misfortune account.

Cash Flow Analysis:

The genuine development of money into and out of a business is income investigation. The progression of money into the business is known as the money inflow. Likewise, the progression of money out of the firm is called money surge. The contrast between the inflow and outpouring of money is the net income.

Income proclamation is set up to extend the way in which the money has been gotten and has been used during an accounting year. It is a significant scientific device. Examination of income clarifies the purpose behind an adjustment in real money. It helps in surveying the liquidity of the venture and in assessing the working, speculation and financing choices.