Discussion: Firm and Individual Financial Reporting

Question 1 

Firms issue financial statements for various reasons. A key reason is related to decision-making by the management. The financial statements allow the management to understand the entity’s performance and compare it to that of competitors (Ittelson, 2009) . The accurate information provided by the statements enables the management to devise proper policies and strategies for the entity. Fundamentally, the statements ensure the management takes correct decisions in facilitating the entity's financial and operational success. 

Question 2 

Financial statements can provide a picture of an entity’s capacity to serve as a reliable manager of invested funds. Shareholders invest their money into an entity to realize gains in the form of dividends (Ittelson, 2009) . The entity’s financial statement can indicate whether the entity is using the shareholders’ money wisely. Financial statement items such as the net profit and shareholders’ equity can be used in realizing this goal. The return on equity metric uses both items in its computation. The standard derived from dividing the net profit by the shareholders’ equity shows the effectiveness of the management at using the invested funds to grow the entity. 

Question 3 

A financial institution might utilize the borrower’s debt-to-income metric to assess the suitability of the borrower for a personal loan. The ratio is computed by dividing the applicant’s current debt obligations with their aggregate income (DeSimone, 2020) . Notably, the metric compares how much cash is outgoing versus how much is coming in over a specific period. 

Question 4 

The financial statements of an entity serve a similar purpose to the documentation needed by a mortgage loan applicant, for instance, bank statements and tax returns. Both types of documents reveal financial information regarding a party's income and assets. The corporate income statement shows the entity's income over a period, while the bank statement also shows the applicant's earned income. 

References 

DeSimone, A. (2019). Housing finance 2020 . New York, NY: Housing 2020 Publishing, LLC. 

Ittelson, T. R. (2009). Financial statements: A step-by-step guide to understanding and creating financial reports . Franklin Lakes, NJ: Career Press.