This week we learned that companies are required to prepare a statement of cash flows because it gives a more accurate snapshot of the actual cash flow of a company. Financial statements give an overall picture of how much revenue a company is reporting, but high revenue does not guarantee that the company has the ability to pay its bills. The statement of cash flows is a tool designed to help external users make sound economic decisions about the company. The statement of cash flows is divided into three sections: 1) operating activities, 2) investing activities, and financing activities. The operating activities section analyzes the company's flow of cash as it relates to a net loss or net income.
It shows all costs and all revenues, divided into several categories. Monitoring the flow of funds is relation of the monitoring of changes in assets and liabilities, with the balance of cash flows for the everyday, conditioned state assets and liabilities of the past days and balance of planned giving and receiving days. Cash flow statement shows cash flows from operating activities, investing activities and financing activities. Company’s ability to generate cash is the most important indicator of its success. The main purpose of the cash flow statement is to allow external users to assess the solvency and profitability of the company, to ensure the safety of their investment decisions.
Pro forma financial information is generally used to illustrate the effects of transactions such as business combination, and change in capitalization. There are countless reasons on why companies use pro forma statement in their business, the most significant is the planning and control received when using pro forma. The process of using pro forma statements are less time consuming, they help businesses evaluate and make a better distinction between business plans (Scarborough, Wilson, & Zimmerer, 2009, p. 196). Pro forma statements are an excellent outlet for resources that will help a business forecast expected earnings should the company chose to merge with another company or even if the company wanted to sell off part of it operations (Scarborough, Wilson, & Zimmerer, 2009, p. 196). The pro forma statements are commonly used when applying for a business loan.
3) The sales budget is to estimate the profitability. As we know, sales budget is used to structure the company in a way to maximize profits. With an accurate projection of future sales, the company is actually can save the expenses and protects the company from failing. If the sales projection is overstated, the president has to decide whether to proceed or to have other alternative planning.
A cash flow forecast is also prepared which gives an estimate of the amount of cash the company expects to flow in and out and also includes all the projected income and expenses. This will help in predicting any upcoming cash surpluses or shortages which can be used to help make the right decisions. It can help in planning new equipment purchases or identifying if the business needs to secure a small business loan. The cash flow forecast is also used to check if the company is meeting expectations. Comparing actual income and expenses with the forecasts can identify where the company is over or under performing.
FP101 Week Two DQ 1 Post a 150- to 300-word response to the following discussion question by clicking on Reply: Refer to p. 87–93 of Personal Finance. Identify two cash management products and provide a short description of each. Do you have any experience with these products? Account Reconciliation and Controlled Disbursement Account Service are both important and beneficial to a company by managing people’s money spending situations. It is used to ensure that the money leaving an account matches the actual money spent, this is done by making sure the balances match at the end of a particular accounting period.
The balance sheet connects to income statements, in turn also connected to cash flow statement. Occurrences or a change to the net cash activities of the cash flow statement affects the balance sheet. The balance sheet is useful when estimating the potential of the organization in order for them to achieve there long-term mission. However, cash flow statement displays the exchange of currency among an organization and external agents. For example, the cash flow can be affected when the company purchases products, and if the costs of the products are an outstanding amount in turn it will affect the assets on the balance sheet.
The financial balance sheet will demonstrate the current and total assets and the current and total liabilities of the business. The financial income statement will demonstrate the projected income, or losses, of the business in a given year. And, the financial statement of cash flows will demonstrate the projected liquidity and the operating cash for the business in a given year. (What is a Pro Forma Financial Statement?, n.d.) A pro forma financial statement is a statement that is usually presented to a potential investor in a company to demonstrate the financial merits of investing. As well, public companies must file a pro forma financial statement with the Securities and Exchange Commission (SEC).
Businesses in need of funds can easily discover which financial institutions or which financial markets may provide funding and what the cost will be for the borrower. This allows the businesses to compare the cost of financing to their expected return on investment, thus making the investment choice that best suits their needs 3) Ways the US financial Market impact the individual: Individual are the participant or investor of the financial Market. Individual need is to get best return on their investment for minimum cost. To borrow money from the financial market individual have to make his mind for the risk issues but efficient financial markets facilitate lower search and transactions cost to the individuals as market provide them a list of financial products with varying risk and pricing structures as well as maturity. Individuals in need of funds can easily discover which financial institutions or which financial markets may provide funding and what the cost will be for the borrower.
D2 – evaluate the financial performance and position of a business using ratio analysis. Ratios analysis allows for a meaningful understanding of published accounts by comparing one figure to another and Ratio analysis also allows for both inter-firm and intra- firm comparisons. Probability is a measure of the profitability of a firm in relation to another It allows a comprehensive assessment of the performance of a firm by comparing one figure to another, it can also see how effective a business is and how good it is at controlling its costs. The ratios to do this are the following; gross profit percentage of sales, net profit percentage of sales and Return on Capital Employed also known as ROCE. If the gross profit falls from one year to the next or is thought to be too low the firm may need to decrease the costs of its purchases or may try to increase the sales without increasing the cost of the goods sold.