Purpose of Financial Statements Essay
Balance sheet, Profit & Loss accounts and cash flows are the financial statements of the company. Each of these statements has its own importance & at any point in time they give the inter-related. We would look into the details of each of these statements in the following section; Balance Sheet – Balance sheet majorly explains the financing of the company. It is divided into two portions; one side highlights company’s ownership in terms of assets company holds which are further bifurcated into current & fixed assets, while the other side of balance sheet consists of equity and liabilities.
The tenure and nature of particular assets classifies its status of being either fixed or current. The other portion on the other hand projects company’s owing in terms of debt and equity though cost of each of these two kind various depending upon the time, country’s macro environmental factors and the investors sentiments. (Brigaham & Ehrhardt, 2002) • Assets- assets are the company’s ownership in different things. Company assets are both fixed & current.
• Fixed Assets – they are bought with an intention of using in the business and keeping them for relatively longer period. Majorly land & building, Fixtures & Fittings,
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• The other side of the balance sheet as mentioned above illustrates company’s unsettled payments, which consist of liabilities and equity. Liabilities are the borrowings business make in order to run the business and they are divided into current and long-term liabilities. • Current Liabilities are the amounts that have to be paid within a year which were raised largely to meet working capital requirements. Examples of these could be bank overdrafts & trade creditors etc (Wood, & Sangster, 2004)
• Long term Liabilities these are the dues that can be made in a course of more than a year and it consist of debts. • Equity as mentioned in the introductory part is the mode of financing which the business usually raises in the expansionary phase where by the company transfers part of the ownership to general public and is liable to pay the income earned in the form of dividends. All in all balance sheet items explain company’s financing which is very cautiously studied by the interested investors.
Profit & loss statements are formed with purpose of calculating the profit the business has made, what are the different types of costs business in incurring. Proper and updated P n L helps business achieve following purposes; • Future Planning- Profits, sales and costs can help determine company’s capacity for expansion, cost cutting and incorporating different allowance in various heads • It determines the company capacity to borrow loans • It is the seen by prospective investors and the heads tell them the soundness of the company.
• With the profit & loss statement tax is calculated which is an essential payment to the government. (Wood, & Sangster, 2004) At last cash flow statement is maintained to know the sources and uses of cash. Free cash flow is important for debtors and equity holders. For future borrowing company’s cash flow is scrutinized as creditors’ want to be sure of their timely payments. 3. 0 Formats of Financial Statements There are two types of formats in balance sheet and they are; 1.
Horizontal; in this format assets of the company are showed at the right side and is by placing liabilities and equities on the left hand side. 2. Vertical; in this format assets, liabilities and equities are reported on the same side in vertical fashion. While in income statement single format of reporting is used, in cash flow statements there are two formats of reporting; direct method & indirect method. • Direct Method is also known as income statement method where cash receipts and cash disbursed are reported.
• Indirect Method it is also know as reconciliation method where net income is taken into consideration and two changes are made non cash expenses such as depreciation and amortization are added back and net cash credits are deducted (Preparation of cash flow statements) 3. 1 Project Viability a case Viability of any project is determined by it net present value if, the investment is recovered in the operating years it means it is a viable project. In order to assess the investment soundness of Energy Bank Ltd, we need free cash flows of the four years.
Free cash flow is attained by adding the net income of a particular year with the depreciation expense as it is unrealized expense of a company. We got the free cash flows of all the four years now we are in a position to calculate its NPV (Net Present Value). NPV NPV = -800,000 +556,192. 7 + 946,885. 7 + 868,702. 6 + 389,630. 3 NPV= 1,961,411. 231 NPV of the project undertaken by Energy Bank is coming out to be 1. 96 billion pounds. Hence, it is a viable project. 4. 0 Ratio Analysis Ratio Analysis of Navi Ltd is given in the following section and all major ratios pertaining to the information given are calculated