In presenting financial statements, what do you feel is the most important statement and why? Give an example of a decision you have made or observed being made involving financial statement analysis.
Your response should fully address all elements of the question and should be a minimum of 200 to 300 words long.
READ STUDENT POST AND COMMENT IN 100 WORD COUNT
In presenting financial statements, I feel the most important statement is that of the income statement. The income statement is often the most current (relevant) financial statement; therefore, it presents a reasonable degree of accuracy regardless of vantage point (i.e. investor, business owner, management, etc.). It captures the ability of a business to generate a profit. Profitability is especially important because it allows current investors, potential investors, and company management for example to view the business’ net income, net loss, and problem areas.
Revenues and gains refer to operating and non-operating revenues and the gain on the sale of long-term assets. These operating expenses show exactly how much it costs to run a business for a specific period of time –to include the dollar amount spent on manufacturing its product(s). Income statements, when viewed in comparison to those from previous reporting periods, will allow one to see inconsistencies or trends. An example of a trend includes the product(s) average sale price. It is this trend, and in some cases inconsistencies, that allows business owners or investors to make informed business decisions.
An example of financial analysis that I have observed being made includes increased new membership pricing at our company social club. Recently, our social club performed a financial analysis and determined that due to a shift in employee turnover its menu prices had increased. This information essentially helped management make an informed decision to help generate revenue. It was ultimately determined that new members should pay an increased membership fee versus lower priced if enrolled outside of the discounted membership window. I am unable to discuss whether it has been determined that this change was effective as it is fairly recent.
In presenting financial statements, I feel the most important statement would be the income statement. The bottom line to every business’s existence is to make money or “generate income.” The financial statement is clear and straight to the point. It analyzes the revenue of a business against its expenses to determine the net income. This statement is of importance because most financial decisions can be determined by looking at the income statement. At one time I worked as an employee in the recreation department for the city that I live in. I was responsible for assisting with recreation plans and activities for the youth throughout the city. Along with recreation responsibilities I oversaw a small snack bar and café. I was responsible for several employees staffed in the café, along with purchasing all food and supplies for the café. This was the first full time job that I ever had. I learned about the operations of a small business. What I also learned was how important the financial statement was to my boss and also to his boss. Based on the financial statement, my boss had to make the decision of how long the café could operate when not generating much cash and be within city guidelines and objectives. He came up with a solution of reducing operating hours. Because the café was a part of a city organization it was able to absorb some of the operating costs and expenses. The income statement was needed to show others not involved in the day to day operations, the basic revenue and expenses, and to provide the financial information needed to make decisions.