In the presence of globalization, financial statements have become the standard measurement in judging a company’s performance. Financial statements are an overall impression of the company which shows profitability, efficient utilization of assets, settlement of outstanding debts, management of equity, and liquidity position to make economic and business decisions by both internal and external users. The analysis of financial statements is the application of financial activities and additional facts of the business, the examination of historical, present, and possible results and monetary situation to make investing, financing, and commercial decisions. External decision makers of an organization are defined as potential shareholders, clients, creditors (banks), and tax authorities who need a financial record to give decisions about investment, approval of loan application, acquisition of products, and compliance with applicable tax laws and regulations.… Read the rest
Financial Accounting
Earnings Management – Meaning and Mechanism
The relationship between managers and shareholders in the business world cannot be disputable. This relationship is interpreted under Agency Theory. They are very dependent each other, even somehow there exist conflict of interest among these two parties. In example the shareholders put on trust to agency by contributing huge amount of money in terms of paid up capital, so that agency can generate business and obtain profit and increase the firm’s value as principles return. Meanwhile agency (managers) is dependent to the principles for remunerations and bonuses as compensation. Because of the great pressure from principles (shareholders) towards the high performance of firms values, so agency commonly practice earnings management in order to be sustained in market place.… Read the rest
Cash Flow Statement – Meaning, Components and Preparation Methods
The cash flow statement was previously known as the flow of funds statement. The cash flow statement reflects a firm’s liquidity.
The balance sheet is a snapshot of a firm’s financial resources and obligations at a single point in time, and the income statement summarizes a firm’s financial transactions over an interval of time. These two financial statements reflect the accrual basis accounting used by firms to match revenues with the expenses associated with generating those revenues. The cash flow statement includes only inflows and outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and payments.… Read the rest
Financial Analysis with the DuPont Model
The dynamic environment of the world today suggests that one should be apt enough to apply his skills immanent to a system and also external with respect to credit management function. These functions include financial planning, plausibility of a defined business strategy or whether a particular merger or acquisition is feasible or not. This has to be done in a rapid yet meaningful way so as to be of immediate need to a particular firm or investor.
There are basically four major reasons for an effective financial statement analysis. These have been mentioned as follows:
- It is useful for long-run business viability so as to determine whether a firm would be able to provide adequate business return when compared to the amount of risks taken.
Approaches to Accounting Theories
Accounting theory is a set of basic assumptions, definitions, principles, and concepts surrounding the accounting rule. It includes the reporting of accounting and financial information to relevant or interested parties. There are several approaches that are used in the development of accounting theory. The two main ones are normative theory approach and the positive theory approach.
Normative theory approach is a theory that is not based on observation. It is based on how things in the accounting process should be done. This approach comprises of different approaches to have a single but effective accounting approach. This kind of approach uses a formula to come up with an income based on value, not costs.… Read the rest
Accounting Basics : The Accounting Cycle Explained
The accounting cycle is a sequence of steps starting with recording transactions and takes it to the preparation of financial statements. The main purpose of recording transactions and keeping track of expenses and revenues. The accounting cycle is a set of steps that are repeated in the same order every period. The highest of these steps is the preparation of financial statements. Some companies prepare financial statements every three months while some complete twelve months.
10 Steps of Accounting Cycle Explained- The first step is to analyze and record transactions in the journal. This step is where information must be carefully read to determine if a transaction is an asset, liability, common stock, retained earnings, revenue, dividend, or expense.