Every accounting transaction is vital in achieving the aim of obtaining accurate business records and reports. Executing accurate financial statements require the proper recording of every transaction. Accounting transactions include payments, loans, and sales, among other dealings in which money, goods, and services are involved. Correctly structured financial statements allow for a business to oversee their general economic status and evaluate the record to make more effective business choices. According to Berger (2018), investors utilize financial statements to guide their decisions on whether to proceed with, halt or regulate their investment. Berger (2018) also states that these statements are, on the other hand, reflective of separate timelines and transactions, particularly big ones, which when marked within the wrong schedule can provide an incorrect description of the real values for a certain period.
The Elements and Purpose of each Financial Statement.
There are 10 essential components of a financial statement. They include, expenses, liabilities, assets, revenues, comprehensive income, investments by owners, gains, loses, distribution to owners and equity (Berger, 2018). However, there are five major elements of financial assets refer to items that are controlled or owned by a business and are economically valuable. Liabilities are requirements of payment or services to other units that are obligatory to continue with companies. On the other hand, equity refers to the outstanding interest in the assets of the group after removing all its liabilities (Berger, 2018). They include retaining earning or retain loss, dividends payment, share capital, and revaluation gain. While revenues are the rise in the economic advantages through the accounting time frame in the form of influxes or developments of properties or decline in liabilities that lead to increases in equity, except for those involved in contributions from equity contributors. And finally, the expense is the effective budget of an entity.
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The Components and Use of Financial Analysis.
It is essential to carry out a financial analysis of any firm so as to understand its general economic status. Investors can apply financial analysis to determine the probable outcomes of investing in a firm. It can as well be used in establishing a financial strategy and building sustainable policies for business interest through assessing various financial statements like their cash flow statement, balance sheet, and income statement. Berger (2018) states that the 5 components of financial analysis comprise profits, revenues, capital efficiency and solvency, liquidity and operational efficiency.
Production of quality profits with consistency can result in long-lasting business operation. They are categorized into three different sections consisting of gross profit margin, net profit margin, and operating profit margin (Berger, 2018). Revenues are the probable source of income for a business. The quality, quantity, and control of revenues can establish a lasting business success and solutions. Capital efficiency and solvency are of interest to investors and customers as they tend to evaluate how well investors manage the credit they extend to lenders. Investment productivity and stability are of interest to investors and customers as they tend to determine how well investors manage the credit they extend to lenders. Operational efficiency determines how efficiently the company’s resources are utilized. Poor operational productivity results in reduced revenues and weaker business development (Berger, 2018). Whereas liquidity evaluation reports the ability of a business to produce enough income to contain gross expenses. There is no amount of revenue increase, or profits can pay for reduced liquidity.
References
Berger, T. M. M. (2018). IPSAS clarified: A brief of global public division accounting standards . John Wiley & Sons.
