Chapter 29 Flashcards
What do financial statements provide?
Financial statements provide valuable information for both the owners of the business and any potential owners ∕ investors, and for other stakeholders of the company.
What do financials data serve?
Financial statement data serve as an input to the economic decisions of the different stakeholders of the company. The financial statements provide information on the financial position, the changes in the financial position and the performance of the company.
When is financial data appropriate?
These financial data are more appropriate for certain economic decisions than for others. So financial as well as non-financial data from other sources will be added to financial statement data in order to make decisions.
What can user identify of financial statement data?
It is possible to identify three general areas of interest in which users’ needs and objectives may lie.
Although not all the information needs of users can be met solely by financial statement data, there are needs that are common to all interested parties.
What are the three areas of interest?
The first two items below might interest a wide group of users. The third need relates to owners and potential owners:
1. 1 Financial status. Can the business pay its way in the short term as well as in the long term, so is it in fact liquid and solvent?
2. 2 Performance. How successful is the business? Is it making a reasonable profit? Is it utilizing its assets to the fullest? Is it in fact profitable and efficient?
3. 3 Investment. Is the business a suitable investment for shareholders, or would returns be greater if they invested elsewhere? Is it a good investment?
What is said about the experiences/benchmarks you each year have?
The experiences/benchmarks you each have are different and you are making a subjective judgement on how the current disco compares with those you attended previously. Thus, in setting benchmarks against which we can compare a company, we must be aware of the limitations of this comparison.
What is the first step in identifying a benchmark?
First, we need to identify benchmarks/indicators we can use; then we need to consider their limitations.
What are the four possible benchmarks?
- past period achievements
- budgeted achievements
- other businesses’ achievements
- averages of businesses’ achievements in the same area.
Where for are the four benchmarks used?
Each of the four benchmarks identified are commonly used in assessing business status, performance and potential, but interpretation of accounts is highly subjective and requires skilled judgement, bearing in mind the limitations of these benchmarks.
What can financial statements indetify?
Financial statements identify for us a multitude of figures. However, these figures do not mean very much unless we can compare them to something else.
What is the ROCE?
The first ratio to be considered in this respect is ‘return on capital employed’ (ROCE). This ratio identifies how much profit the business has made from the capital invested in it and answers the question. In fact, this ratio measures the return on investment.
What is ROA?
the ratio ‘return on assets’ (ROA) is not influenced by the financial structure of the company, whereas the ROCE ratio is influenced to a certain extent, namely by the trade-off between short-term and long-term financing.
What is the change in net profit?
The change in profitability can be examined using two ratios as follows: Net profit margin and volume trade.
What is ROE?
the ROE ratio takes the shareholder’s perspective and tries to answer the question of whether the investment in the company’s share capital is beneficial for the owners of those shares.
What is said about ROCE and ROA?
It is detrimental to the shareholders if ROA is lower than the interest rate paid by the firm on its debt. We need to compare ROCE with the interest paid on long-term debt.
