Financial Statements : Company 's Performance, Controlling Finance, Financial, And Financial Planning

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Chapter-3 reflects on distinct financial statements such as income statement, balance sheet, cash flow statement and statement of shareholder’s equity. These statements help managers in analyzing firm’s performance, controlling finance, financial forecasting, and financial planning. To prepare financial statements accountant must consider the revenue recognition principle, the matching principle, and the historical cost principle. • The Income Statement - is necessary to calculate the profit generated by the company during a year or a quarter. It is also called profit and loss statement. Company’s gross profit can be identified by subtracting cost of goods sold from sales. To find net operating income (earnings before interest and taxes)…show more content…
• The Balance Sheet - provide an idea about firm’s financial position. The left-hand side reflects the assets owned by the company and the right side reflect the firm’s liabilities. The firm must mention all its assets using historical data. The use of historical data ensures that firm’s some assets are mentioned in the balance sheet as per their market value, for instance, a machinery purchased five years back should be mentioned in the balance sheet after deducting depreciation value. To take an appropriate financial decision, it is imperative to keep in consideration that book value and market value of the firm’s fixed assets are not same. • Total assets in the balance sheet - all the current and fixed assets are mentioned in total assets column. The assets side is easy to understand if we remember that all the income, cash and profit affecting entries should be detailed in total assets side of the balance sheet. • Total liabilities - all the debts and finances firm borrow to operate the company are entered in balance sheet’s right-hand side column. Current liabilities, long-term liabilities, par value of common stock, paid-in capital, and retained earnings are recorded in the total liability side. • The Cash Flow Statement – reflects the change in firms cash balance. Titman, Keown, & Martin (2014) explains, “the cash flow statement is the change in the firm’s cash balance for the period of time covered by the statement” (p.55). In cash
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