Question 1
Accounting transactions are crucial as they help to achieve the goals of having reports and records that are accurate. For these statements to be factual, there is the need to have appropriately kept records. These transactions may vary from sales, payments, loan records, or in the cases where goods and services or cash is traded (Hermanson et al., 2013). When financial statements are constructed accurately, they allow organizations to view their general fiscal health while at the same time, analyzing the available data to help in making efficient decisions (Mashkour, 2019). Additionally, investors use these statements in making decisions for future investments and know when to invest or cut off current investments. Financial records often reflect diverse periods and timelines and transactions such as large transactions that may be annotated in the wrong period hence depicting false statements other than the actual numbers in a given financial period.
Question 2
Financial statements are composed of ten elements; these include; Liabilities, comprehensive income, assets, gains, expenses, losses, owners' investments, revenues, and distributions made to owners. The assets are the economically valuable items controlled and owned by the organization (Hermanson et al., 2013). Liabilities denote all the responsibilities of payments or services made with other entities, which are essential for operations to continue. For example, accounts payable.
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Equity is a term encompassing diverse equities types. Shareholders' equity or net assets refer to the outstanding interest remaining after liabilities are subtracted ("Elements of Financial Statements", 2020). In a financial statement, comprehensive income represents the equity changes by non-owner identities. Distributions to owner's and owner's investments are excluded in full income accounting. Revenue refers to the positive change in assets resulting from selling goods and services. The negative growth in assets or associated costs of production is known as expenses. Example of revenue includes payment for goods, and an example of expenses include payment for raw materials.
The increasing or decreasing of equity from marginal or subsidiary dealing of an entity is referred to as gains or losses ("Elements of Financial Statements", 2020) . Owners' investments in financial statements are accounted for as an increase in assets. Such investments may be in cash form for the owner to be compensated by increasing the ownership percentage. Stock buying in a company is an excellent example of owner investments (Hermanson et al., 2013). Distribution to owners usually is a form of payment that is given to owners and commonly referred to as dividends. When distributions to owners are made, equity decreases.
Question 3
Financial analysis is essential in indicating the financial health of an organization. Financial analysis is useful to investors for making decisions if their investment is of the right choice or not. It is also vital in setting monetary policies and in building lasting plans for business activities (Tuovila, 2020) . The financial analysis comprises five components, mainly operational efficiency, profits, revenues, capital efficiency and solvency, and liquidity.
Growth, concentration, and per-employee revenues illustrate how revenues are earned and how much income is generated by each employee. The concentration of revenue is an indicator of how much revenue each client contributes (Periu, 2017). Productivity in an organization is measured through revenue per employee, and increased ratios are the best
In a company, profits are essential in maintaining longevity. Profit margins in an organization, as a financial analysis element, analogous to revenues, indicate if the financial health of a company is progressing positively or not (Periu, 2017). Profit margins are an indicator in organizations are capable of paying their operational costs in cases where large losses or re-investment happens in a company
Measuring how resources are being used in an organization is referred to as operational efficiency. It involves focusing on accounts receivable turnover as a way of determining if credit presented to clients is working efficiently, or there is the need to adjust (Periu, 2017). In capital efficiency, debt divided by equity is essential in determining a businesses' leverage. Liquidity indicates if an organization is capable of generating enough money vital for covering expenses. Assets that are divide by liabilities are useful in revealing if a company can pay short-term obligations or not. To potential investors, a ratio above 2 is regarded as suitable for investment.
References
Hermanson, R. H., Edwards, J. D., & Maher, M. W. (2013). Accounting principles: A business perspective, financial accounting (chapters 1-8). (8th ed.). Textbook Equity, Inc.
Mashkour, Saoud. (2019). Chapter (2) Accounting Transactions Analysis and Recording. From https://www.researchgate.net/publication/331074844_Chapter_2_Accounting_Transactions_Analysis_and_Recording
Elements of Financial Statements . Highered.mheducation.com. (2020). Retrieved 30 September 2020, from http://highered.mheducation.com/sites/0072994029/student_view0/ebook/chapter1/chbody1/elements_of_financial_statements.html .
Periu, M. (2019). 5 Key Elements of Financial Analysis of a Business . Business Trends and Insights. Retrieved 30 September 2020, from https://www.americanexpress.com/en-us/business/trends-and-insights/articles/financial-analysis-small-business-health/.
Tuovila, A. (2020). Financial Analysis Definition. Retrieved 30 September 2020, from https://www.investopedia.com/terms/f/financial-analysis.asp
