What are the significant factors of Financial Statements? Discuss the various tools of financial Analysis
Many factors affect the quality of financial statements. For instance, corporate governance, management decisions, and internal controls have a significant impact on how financial statements are prepared. The main objective of preparing financial statements is to provide useful information to internal and external users. Management decisions have a significant impact on the quality of financial statements.
Management accounting decision about the best methods that should be used to value assets, liabilities and inventories affect the quality of financial statements. When preparing financial statements, managers should follow acceptable accounting standards such as GAAP or International Financial Reporting Standards. However, managers can influence the flexibility and accuracy of preparing financial statements by altering figures, which can have a significant impact on the reputation of the organization.
Financial statement analysis can be done using various methods and techniques. These methods include regression analysis, horizontal analysis, vertical analysis, ratio analysis, trend analysis, and graphics analysis. These tools help financial statement users to obtain useful information about an entity. For instance, ratio analysis is the most common method employed by investors to determine the financial viability of a firm.
Ratio analysis is one of the most powerful tools in financial analysis. It involves computation of ratios in order to establish the relationship between various figures in the financial statement. It also shows the relative importance of different items appearing in financial statements. Ratio analysis helps investors to make rational decisions after considering the underlying risk and return. It helps investors to know the liquidity, profitability and financial risk associated with a particular firm.
Trend analysis analyzes financial statements by establishing series of information. It shows the relationship between each item in the financial statements and how they relate to the base year. Usually, financial statements for some years are converted into percentages using the first year as the base.
What is a Fund Flow Statement? Discuss the uses and preparation of Fund Flow Statements
A funds flow is a financial statement that is prepared to explain why there are changes in the financial statements between two statements of financial positions. Ideally, it is prepared to show changes in the working capital of the company. A statement of funds flow deals with variations in the current assets and current liabilities of a firm by indicating the amount of increase or decrease during a specified accounting period. It discloses the movement of funds between the opening and closing balance sheet date. It helps investors and other users to analyze how a company funds its business operations. A funds flow uses past data to analyze the future flow of money in and out of the firm.
The first step when preparing a funds flow statement is to prepare a statement of changes in working capital. There are many reasons why working capital can change such as the purchase of fixed assets, repayment of long-term liabilities and dividend payment. Secondly, prepare a statement of changes in operating activities. A statement of funds flow is different from a statement of cash flow, which prepares changes in operating activities, investing and financing activities. A statement of funds flow shows only the movement of funds in the operating activities. When preparing this statement, it is imperative to show the sources of capital, and how it has been applied to generate revenues.
A statement of funds flow is different from a cash flow statement because accountant uses it to show changes in working capital during a financial year. This information can be obtained from the statement of cash flow. Investors also use it to gauge how the different assets in a company change over time. It helps managers to understand how fast the company is acquiring assets and liabilities. For instance, if a company reported a positive flow of fund in equities, it can be interpreted to mean the firm is profitable in the short run.
What is financial Forecasting? Explain
A financial statement forecast is simply a budget. A financial statement forecast is prepared to show the expected sales and expenses within a specified period. It is possible for companies to forecast the estimated sales and expenditures because they understand how income and expenditure behave. Although managers cannot be able to forecast with accuracy, they can be able to predict the trend of sales and expenditures.
It is imperative for companies to forecast. First, it helps managers to plan. For instance, they will be able to plan whether money generated by the company will be adequate to finance the future operations of a company. Moreover, firms can establish strategies that will help them to offset expenses. For example, one of the major expenses of airlines is fuel costs. If managers foresee that the cost of fuel will increase significantly in two years’ time, they can be able to develop new strategies that will increase revenues to offset expenses.
A financial forecast also helps managers to plan the financial needs of the business. For instance, if a firm intends to finance its operation by acquiring a loan, financial forecasting will help to establish the best time to acquire the capital when the business is making profits. Therefore, financial forecast helps businesses to plan.
Many business decisions depend heavily on a financial forecast of future events. For instance, the decision to borrow or lend money depends on financial forecast of future cash flows and expected revenues. Managers use the term financial forecast interchangeably with modeling to describe how the organization accomplishes their goals. A financial forecast is important because it helps companies to eliminate risk because it improves the quality of prediction.
Although risk is basic factor in business life, financial forecast helps companies to reduce risk exposure. Therefore, it is critical for businesses to ensure that accountants can be able to forecast in order to reduce risk exposures and maximize return.
Describe the various aspects of Zero Based Budgeting with its merits and demerits
There are various aspects of zero-based budgeting. They include the following:
- Identification of a firm’s objectives.
- Establishing alternative strategies to achieving that objective.
- weighing different funding levels.
- setting priorities.
Advantages of zero based budgeting
Zero-based budgeting has very many advantages. First, it encourages efficiency because it does not consider the incremental budget. Ideally, the incremental budget assumes that the previous year’s figures are the correct amount. However, in most cases incremental budget are incorrect because it does not question how the previous year’s money was used, and whether it was used wisely. By using requesting managers to justify each cost and expected benefits, a company can maximize returns by concentrating on the most profitable and cost-effective solutions.
Zero-based budgeting allows a company to make rooms for new projects. Incremental budgets are prepared based on the financial figures of the previous period. If a firm wants to expand its business to new geographical areas, it must try to “find money” in the budget. However, with zero-based budgeting, managers can be able to prioritize new project because they can be able to justify the costs and their expected returns.
Disadvantages of zero based budgeting
The major disadvantage of zero-based budgeting is that it consumes a lot of time. Since the model requires managers to start from zero every year, they waste a lot of time planning and developing strategies that will help them to achieve organizational goals. Moreover, it requires high workforce to develop budgets from scratch. In fact, developing an entire budget from zero may require companies to involve many workers. However, in many organizations, some departments may even lack adequate workforce to help prepare an entire budget. This process ends up wasting a lot of time and resources. In summary, although zero-based costing can improve efficiency in business decision making, it is expensive and consumes a lot of time.