Financial Statements & Ratios

Balance sheet, Income statement, Statement of retained earnings, Statement of cash flows, Earnings per share, current ratio, and debt to total assets.

What is a balance Sheet?

A balance sheet is a financial statement that shows what a company owns and what it owes at a fixed point in time (Weygandt, Kimmel, & Kieso, 2013). A balance sheet shows a snapshot of a company’s assets, liabilities and shareholders’ equity at the end of the reporting period. It does not show the flows into and out of the accounts during the period. The balance sheet is used by a number of users. For instance, managers use balance sheets and cash flow statements in order to create spending budgets and to create marketing strategies. Overall the balance sheet is the most important statement since it represents economic health of the organization at a particular time. The balance sheet can be compared against prior balance sheets which can reveal trends in the company’s debt and assets. The balance sheet is linked to income statements is also linked to the cash flow statement. Changes in net cash in the operating activities area of the cash flow statement also affect the balance sheet.

What is an income statement?

Income statements are financial statements that show how much money a company made and spent over a period of time (Weygandt, Kimmel, & Kieso, 2013). The income statement and balance sheet of a company are linked by the net income for a period. As well the relation shows the increase, or decrease, in equity over a period. The income an organization earns during a period is transferred to the equity portion of the balance sheet.

What is a statement of cash flows?

Cash flow statements are financial statements that show the exchange of money between a company and the outside world across a period of time (Weygandt, Kimmel, & Kieso, 2013). For instance, cash flow is affected by equipment purchases and these purchases if large enough can affect the assets on the balance sheet.

What is a statement of retained earnings?

The retained earnings statement is a financial statement that shows changes in retained earnings or the interests of the company’s shareholders over time (Weygandt, Kimmel, & Kieso, 2013). The shareholders’ equity is also referred to as capital or net worth. Net worth is the money that remains if a company was to sell all of its assets and paid its liabilities. The remaining money belongs to shareholders. Again, the ownership of the company is affected by changes in the balance sheet, income statement, and cash flow statement. Shareholder equity can be altered by any number of factors involving these statements.

Earnings per share, current ratio, and debt to total assets.

Kieso, Kimmel, and Weygandt (2013) stated, “Earnings per share is net income available to common stockholders divided by the average number of common shares outstanding.” (p. 203). The return of assets ratio measures the profitability of assets overall. This refers to the income that is made on each dollar invested in the assets. By directing the net income by the average total assets, a person can find the return on assets ratio. The total assets are made up of the current assets and the long-term assets. A current asset is one a company will use in the next 12 months or be able to turn into money. Long-term assets are those assets on the financial sheets that take longer than 12 months to use up or turn into cash. “The current ratio expresses the relationship of current assets to current liabilities completed by dividing current assets by current liabilities.” (Kieso, 2013, et al.).

Asset turnover calculates how proficiently a business uses its assets to generate sales. Debt to total assets measures the percentage of total assets provided by creditors. A person can find the debt to total assets ratio by diving current and long-term liabilities by total assets. The current cash debt coverage ratio is the ratio of cash provided by operating activities to average current liabilities. It represents liquidity because it uses cash given by operating activities rather than a balance at one point in time.

References

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2013). Financial accounting (7th ed.). Hoboken, NJ: Wiley.

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