Chapter 2, Problem 5P

Summary Introduction

Financial Statements:

Financial statements are the accounting reports of any organization that are prepared with a purpose to disclose its past performance and also the assets and liabilities of the company along with the finances. These statements are prepared either on an annual basis or on a quarterly basis.

Balance Sheet − The balance sheet represents the financial position of a company for a particular time period. It is a very important part of the financial statement that shows what the company presently owns and how much liability do they have. The balance sheet basically has three broad headings of its contents namely, liability, asset and the shareholder’s equity. The formula of the balance sheet is written as under:

Profit and Loss Account − The profit and loss account represents the financial performance of an organization for a particular time period. It provides a summary of all the revenues of the firm along with the expenses and cost for a particular fiscal time period.

Cash Flow Statement − The cash flow statement represents the amount of cash that flows in and out of a business for a particular time period. It is mostly prepared on the accrual basis of accounting. The cash flow statement considers the fact that the net profit which a company earns in a year is not necessarily in the form of cash. It can be in the form of other assets as well like the receivables, inventory and so on. Therefore, the cash flow statement represents the total amount of cash that moves into a business organization.

Changes In The Shareholder’s Equity − The changes in the shareholder’s equity represents the changes in the amount of the retained earnings of a company. Retained earnings are those earnings that are left after paying the dividend. From the net income that a company earns, it might or might not pay out the dividends to the shareholders. If the company pays the dividend, the amount that is left is the retained earnings for the company which it uses for further company development and growth. If the company doesn’t pay out the dividend, the entire amount is considered to be the retained earnings for the company.

To Identify:

The change in the book value of equity of company G from the year 2015 to 2016 according to the given table and whether that implies an increase in the market price of the shares or not.