Please answer the list of questions below: 1. Discuss the importance of financia
ID: 2614626 • Letter: P
Question
Please answer the list of questions below:
1. Discuss the importance of financial statements and how they are used by businesses.
2. What is the basic format of the income statement and what is the relevance of the basic categories?
3. Cash flows for an organization come from operating activities and investment activities. Discuss the importance of each to the organization.
4. The Happy Auto Shop has the following annual information:
Gross Sales
$700,000
Net sales
$696,000
Gross profit
$448,000
a. What are the shop’s returns and allowances and cost of goods sold?
5. Construct a statement of financial position (balance sheet) for the Humperdink family using the following information:
cash
$50
Checking account
$2,500
student loan balance
$6,000
stocks and bonds
$2,600
savings account
$5,850
residence
$110,000
automobile
$12,000
savings account
$5,800
automobile loan balance
$12,000
401K retirement account
$15,000
furniture, clothing, jewelry
$8,000
credit card balance
$4,000
mortgage loan balance
$99,000
6. What is the purpose of financial statement analysis? How do the three types of financial statement analysis differ from each other and when is each used?
7. Samantha Knight is applying for a small-business loan. She provides the bank with the following information:
cash in checking accounts
$5,000
cash in savings
$10,350
home market value
$145,500
first mortgage on house
$25,000
home equity loan limit
$70,000
home equity loan
$10,000
automobile market value
$19,000
automobile loan outstanding
$15,000
credit card debt
$1,500
a. Calculate the debt-to-asset ratio.
b. Calculate the debt-to-equity ratio.
c. What percentage of Samantha's assets is owned by others?
8. Given the profit loss (income statement) and balance sheet for Sam's Sandwich Delivery (Table 4-8, page 121 of your textbook), answer the following:
a. Calculate the following ratios: current, quick, accounts receivable turnover, fixed asset turnover.
b. Using the inventory figure on the balance sheet as average inventory, calculate the inventory turnover ratio.
c. Calculate the debt-to-equity ratio, debt-to-total asset ratio, and operating profit margin ratio.
d. Perform a vertical analysis of the income statement.
e. Perform a vertical analysis of the balance sheet.
f. Based on your analysis, would you consider investing in Sam's Sandwich Delivery?
Gross Sales
$700,000
Net sales
$696,000
Gross profit
$448,000
Explanation / Answer
Ans 1) Financial statements are most important documents for measuring the performance of any business. There are mainly three types of financial statement which are looking by different business statekholders or other investors to guage the current financial position of business and these are balance sheet, cashflwo statement and income statement.
Balance sheet will provide business current standing at a given time.
Income statement will provide firm's revenue and expenses over a year.
Cashflow statement will tell where business is generating cash or not by its operating activities. It is mainly divided into three parts cashflow from operating activities, cashflwo from financing activities and cashflow from investing.
Ans 2) Income statement is mainly broken down in three sections. It generally provide the details of revenue and expenses. Basic income statement look like as follows:
Gross Revenue
(+/-) Allowance and Return
Net Revenue
- Cost of Good Sold
Gross Profit
- Operating Expenses
+ Operating Revenue
Operating Income (Earning Before Interest and Tax)
- Interest Expenses
Pretax Income ( Earning Before Tax)
- Provision for Tax
Net Income ( Earning After tax)
Ans 3) Cashflow is mainly comes from operataion, investing and financing. If it is coming from the financing then it signifies two thing either the organisation is not generating enough cash from its operating and investing activities or company is planning to expand its business and need extra finance for the same. If it is second case then it is justifiable other wise it is bad sign for organisation.
Mainly raganisation should have positive cashflow from its financing and operating activites because organisation is doing this as its core activities if cashflow from operating and investmetn is negative then it signifies that company is not performing well ad need to improve its efficiency to generate positive cashflow.
Ans 4) Shop's return and allowances = (Gross Sales - Net Sales)
= $4000
Shop's Cost of good sold = Net sales - Gross Profit
= (696000 - 448000)
= $248000