Mba 503 Week 1

Introduction

When speaking of finance and accounting, it is hard to sum up everything into these two words. There are several different financial reports. Depending on the audience, these can be viewed in different aspects. I will cover the different financial statements and managerial reports and how ethical business decisions making is used when reporting.

Financial Statements

The audience of financial reporting can be the following: accountants, shareholders, stock brokers, financial managers, customers, and CEO’s, just to name a few. Each of them use financial statements to relate how well a company is doing financially. I will share with you the most used reports and explain the purpose for each report and how it can relate to your position in the company.

First is the income statement. The income statement is “the major device for measuring the profitability of a company over time” (Block & Hint, 2005, Ch 2). The income statement covers a defined period of time, whether it is one month, three months or a year. It is easy to read the profit or loss as it is itemized. There are some limitations to the income statement. They reflect not only internal but external changes also when considering value. Therefore, if a competitor closes, it may appear that profits are greater than they actually are.

Next is the balance sheet. It “indicates what the firm owns and how these assets are financed in the form of liabilities or ownership interest” (Block & Hint, 2005, Ch 2). Unlike the income statement, the balance sheet measures a specific period of time. Net worth is also measured on the balance sheet. This is an important number for shareholders. It shows what the company would sell for at any given moment. Like income statements, balance sheets also have limitations. Most figures are based on the original costs of the business. This can cause problems as the value increases. One major concern is replacement value. For example, if a part originally costs a few dollars, because of inflation, the replacement may cost three times as much. The company may not be prepared or financially stable to cover any repairs or replacements that are necessary.

Then there is the statement of cash flow. The purpose of this is “to emphasize the critical nature of cash flow to the operations of the firm” (Block & Hint, 2005, Ch 2). Both the income statement and the balance sheet is more for measuring revenue and not actual cash transactions. The statement of cash flow puts these two together and determines how much the company can get in cash in 90 days.

Financial Management

“It is the responsibility of financial management to allocate funds to current and fixed assets, to obtain the best mix of financing alternatives, and to develop an appropriate dividend policy within the context of the firm’s objective” (Block & Hunt, 2005, Ch 1). This is extremely hard to do as the financial manager has to keep all shareholders in mind. What is good for the company may not be in the best interest