There are numerous tools that are essential for understanding the financial cond

Question

There are numerous tools that are essential for understanding the financial condition of an organization.

Select a tool that is essential to the analysis of an organization’s financial status and explain it in detail.

Using this tool as a template, create an application of it in an imaginary organization. Examples include, but are not limited to, balance sheets, operating statements, statements of changes in net assets, statements of cash flows, total assets, liabilities, and owners’ equities.

Explain the example tool in detail. One option is to use generally accepted accounting principles (GAAP) to highlight various sections of the tool. Another option might be to provide a detailed explanation of fund accounting, highlighting various sections of the example. Be sure that the tool matches the explanatory methods used.

Explanation / Answer

Financial statements are a collection of reports about an organization's financial results, financial condition, and cash flows.

The standard contents of a set of financial statements are:

At the most minimal level, a business is expected to issue an income statement and balance sheet to document its monthly results and ending financial condition. The full set of financial statements is expected when a business is reporting the results for a full fiscal year, or when a publicly-held business is reporting the results of its fiscal quarters.

Current Assets and Liabilities

Assets and liabilities are broken into current and non-current items. Current assets or liabilities are those with an expected life of less than 12 months. For example, suppose that the inventories that The Outlet reported as of December 31, 2017, are expected to be sold within the following year, whereupon the level of inventory will fall and the amount of cash will rise.

The current ratio – which is total current assets divided by total current liabilities – is commonly used by analysts to assess the ability of a company to meet its short-term obligations. An acceptable current ratio varies across industries, but should not be so low that it suggests impending insolvency, or so high that it indicates an unnecessary build-up in cash, receivables or inventory.

By comparing the company's market value to its book value, investors can in part determine whether a stock is under- or over-priced. The market-to-book multiple, while it does have shortcomings, remains a key tool for value investors. (You can read more about the market-to-book multiple in the article Value by the Book.) Extensive academic evidence shows that companies with low market-to-book stocks perform better than those with high multiples.

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