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Analysis of Financial Statement Essay

Autor:   •  October 17, 2017  •  2,424 Words (10 Pages)  •  734 Views

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An objective of financial analysis is to assess a company’s operating performance and financial condition. The information that an analyst has available includes economic, market, and financial information. Cash flows provide the analyst with a way of transforming net income based on an accrual system to a more comparable medium. Additionally, cash flows are essential ingredients in valuation.

The cash flow statement reports the cash receipts and payments from operating activities, investment, and main activities of a company. Operating activities are the activities related to the profits of an enterprise, the activities of income and expenses, inflows and outflows of cash. Financing activities are the means to deliver and withdraw funds to pay support activities. There are two convenient ways to report the flow of effective direct and indirect methods, although different methods offer similar results. With indirect method adjusts net income for items of income and non-cash accruals to produce cash flows from operations. This is the method most used. Direct method used for comparison, this set each item of income related to accumulations.

Through this work we will know the importance it deserves the statement of cash flow in decision-making in a company, whatever their activity is. Cash generation is one of the main objectives of business. Most of its activities are intended to cause a direct or indirect way, an adequate flow of money that, among other things, financing the transaction, investing to sustain the growth of the company, paying any liabilities before it matures, and in general, to compensate the owners with a satisfactory performance. In short, business is business only when a relatively sufficient amount of money is generated. Companies need to have enough cash to stay solvent, aiming to understand the role extensively and methodology of cash flow within the company. This function is responsible for managing all the money that the company receives from sales and deliver on a payment schedule to the areas of supplier payments and accounts payable.

From another perspective, its functions are to detect as soon as possible, the source of all the money that the company and set everything to be paid, it is not for making buying judgments, but be aware what should pay first and you pay more later, simply put meet the preparation of cash flows for operating, investing and financing within the company.

The Cash Flow Statement is designed with the purpose of explaining the movements of cash from the normal course of business, such as the sale of non-current assets, loans and obtaining input from shareholders and transactions that include cash withdrawals such as purchase of non-current assets and liabilities and payment of dividends. Cash management is of primary importance in any business, because it is the means to obtain goods and services. Careful accounting of operations required cash because this area can be quickly reversed. Cash and marketable securities are the most liquid assets of the company. A company may invest its cash in short-term investments of high liquidity, and monetary issue certificates, treasury bills, among others; these investments are called cash equivalents. This area should control or influence all forms of company money, either in accounts receivable, and investments and accounts payable, should also seek greater insight into the future of receivable and payable, so you can envision the possibility of liquidity problems or trends from loss, by reducing the profit margin. Management is responsible for internal control that is the protection of all company assets.

Many owners and managers have that as your business grows, they are more distant from their operations. However, we know that a growing business that has to be followed closely and carefully managed to ensure its sustainability, especially in these times of economic uncertainty. Is necessary to set up systems for measuring results can be a way to track the progress of your business. It provides vital information about what is happening now and also the starting point for a system of goal setting to help you implement their growth strategies. Some of this measures are traditional performance measures, such as the return on assets, which are not forward-looking, do not capture risk, and do not control for factors outside of the control of the company but gives an idea of how well is doing. If used with the understanding of what the measures can and cannot do, the financial analyst may benefit from including these measures along with the traditional measures.

Credit analysis determines whether a company has enough cash to meet its financial obligations. Credit analysts use various quantitative and qualitative indicators to assess credit risk. Categorizing risk of a company falls along a spectrum of low risk or no risk. The basis of corporate credit analysis is based on the capacity refers to the ability of the company to earn enough money to pay its short and long term. This is the essence of corporate credit analysis. It also refers to the ability of the company to sustain itself enough through touch economic conditions to produce sufficient cash flow. Condition considers how external factors such as the economic environment and the level of competition, have the ability of the company to execute its business strategy and its ability to make money. Character's will directed the company to pay its debt and financial integrity.

The fundamental issue in corporate credit analysis is the ability of the company to pay its debts on time. Credit analysts spend an excessive amount of time going through financial statements to assign the weighting of corporate risk no risk to high risk. A risk rating does not mean the credit analyst has extreme confidence in the ability of the company to pay its debt. A company labeled safe get better financing conditions resulted in a lower borrowing cost. By contrast, a high risk company pays more to borrow, affecting profitability is due to the high costs of debt repayment. And, in an extreme case, a high-risk venture can be cut lending money altogether.

Credit analysts focus on many different financial ratios to determine the creditworthiness of a company. Generic relationships include debt into equity, debt to assets or the times interest earned ratio - Earnings before interest and taxes divided by interest expense. However, they are not specific to the proportions that help analysts evaluate the effectiveness of a company operating industry. But above all, the cash flow of a company is a major determinant of your creditworthiness. Cash flow is how fast or slow the money in and out of the company. A company with strong cash flow is in a better position to meet its financial obligations.

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