Identify the two key financial statements discussed in class that corporations a
ID: 2491268 • Letter: I
Question
Identify the two key financial statements discussed in class that corporations are required to prepare, and describe the type of information found on each. What is ratio analysis? Discuss liquidity, leverage, and profitability ratios. What information can one learn from each of these categories of ratios? What stakeholder group(s) would most likely be interested in each category? Explain the major advantages and disadvantages of issuing stock as a source of long-term financing. The risk/return trade-off is inherent in any investment strategy. What arc the five key criteria investors should consider when selecting investment options? Discuss the methods the Fed uses to enact monetary- policy and provide an explanation of the effects these methods have on the supply of money. Identify and discuss the six conditions that must be met for a contract to be legally binding. What type of law is tort law? Explain what a tort is as well as the meaning of negligence.Explanation / Answer
Ans 1 The two key Financial statements are Balance Sheet and Income Statement.
Balance Sheet: It a report which tells about the entity's assets, liabilities and equity at a particualr point of time generally at the end of the year. The balances it consists is generally at a given point of time. This report is used by investore,creditors to know the liquidity,solvency etc of the business. Assets includes current assets like cash, accounts receivable, inventory, marketable securities and long term assets like fixed assets , intangible assets etc. Liabilities include current liabilities such as accounts payable, accured liabilities payable, income tax payable and also includes loong term liabilities like notes payable, bond payable etc. The stockholder equity included common stock, preferred stock, additional paid up capital,retained earnings and treasury stock.
Income Statement: It tells about the operations carried out by an entity.It is the report that shows the financial results due to the business operations for a specific period of time. This tells how much income is earned due to the activities carried on during the year. It consisits of Revenue from goods/services, Cost of Goods/Services sold, gross margin, selling administrative and genearl expenses, operating income,other income and expenses like interest expense, dividend revenue etc and finally the net income or loss due to all these activities,
Ans 2Liquidity ratio are the financial ratio which is used to masue the entity ability to meet its curren obligations/commitment as they become due. The obligations which are considered are current liabilities which becomes due within one year.There are various ratios like current ratio which is derived by dividing Current Assets/Current Liabilities. Other ratios are quick ratio, working capital ratio etc. Higher the ratio better it is as the creditors are fully secured that there obligations would be met. It is basically short term solvency ratio.
Leverage ratio is the ratio which tells how much debt is used in the entity. What is the exten of debt financing or what is the finacial leverage used by the entity. It also states how much secured creditors are. There are various ratios like debt to equity, debt to total assets etc this tells how much debt is used against equity/total assets. Lower the ratio better it is for the creditors as there money is safe. Other examples are Times interest earned ratio etc this tells how much times net operating income it has by dividing it by sales.
Profitability ratio this ratio shows the combined effect of the three mentioned above liquidity,debt management,asset management ratios. So profit margins,return on total assets, return on equity etc are calculated under this ratio. it tells how profitable the company is. Higher the ratio better it is as the entity is performing well.
Shareholders are interested in Liquidity ratio: Current ratio and Acid Test Ratio
Leverage Ratio: Debt to Equity Rati0
Profitability Ratio: Gross Profit ratio, Net Profit ratio and Return on Equity.
Dear student there are multiple different questions. Please dont post multiple questions under one question. I have answered the first two.
Ans 2Liquidity ratio are the financial ratio which is used to masue the entity ability to meet its curren obligations/commitment as they become due. The obligations which are considered are current liabilities which becomes due within one year.There are various ratios like current ratio which is derived by dividing Current Assets/Current Liabilities. Other ratios are quick ratio, working capital ratio etc. Higher the ratio better it is as the creditors are fully secured that there obligations would be met. It is basically short term solvency ratio.
Leverage ratio is the ratio which tells how much debt is used in the entity. What is the exten of debt financing or what is the finacial leverage used by the entity. It also states how much secured creditors are. There are various ratios like debt to equity, debt to total assets etc this tells how much debt is used against equity/total assets. Lower the ratio better it is for the creditors as there money is safe. Other examples are Times interest earned ratio etc this tells how much times net operating income it has by dividing it by sales.
Profitability ratio this ratio shows the combined effect of the three mentioned above liquidity,debt management,asset management ratios. So profit margins,return on total assets, return on equity etc are calculated under this ratio. it tells how profitable the company is. Higher the ratio better it is as the entity is performing well.
Shareholders are interested in Liquidity ratio: Current ratio and Acid Test Ratio
Leverage Ratio: Debt to Equity Rati0
Profitability Ratio: Gross Profit ratio, Net Profit ratio and Return on Equity.
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