Week 2 Learning Team A Reflection
There are many financial tools available to a future business owner, possible investor, or someone trying to calculate one’s personal worth. Two main financial comparison instruments used are comparative analysis and ratio analysis. Both methods are good to appraise the fiscal strength of a company, and they have different purposes when interpreting financial reports.
Comparative analysis is using both horizontal and vertical analysis to examine several periods (e.g., year, quarter, etc.) of a company’s financial statements, and comparing like line items to find any “emerging trends in the company's operations and results” (Investor Words, 2013). This process requires several documents: the income and retained earnings statements, a balance sheet, and the statement of cash flows. In fact, the purpose of these official papers is “designed to assist users in identifying key relationships and trends” (Williams, Haka, & Bettner, 2005, p. 602).
Always start with the income statement, as it shows a company’s revenues and expenses for an operating period. This document is important because it shows how profitable or unsuccessful operations are over a period of time (Kimmel, Weygandt, & Kieso, 2011, p. 12). The income statement also shows the net income or loss by subtracting the company’s expenses from its revenues (p. 12).
The retained earnings statement includes any profit the business makes, which is included to determine the ending retained earnings (p. 12). This statement is important because it shows what the company does with its profits. The company may decide to pay dividends to its stockholders, or reinvest some or all of the money back into the business to promote growth (p. 13).
Along with the retained earnings, a balance sheet also shows all the assets and liabilities of a company. Creditors learn the probability of the business to pay its bills by scrutinizing...