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Mary Dereshiwsky April 19, 2010
Financial Statements There are some important accounting principles that need to be understood in order to make sense of a financial statement. I will discuss what the various sections of a financial statement say and how they can help in understanding a company’s bottom-line. In addition to this. In this paper. These principles are the foundation for an accounting system that allows for companies to be compared on equal footing. What are the sales projections for the next year? What kind of debt does the company have and how soon does it all come due? What is the cash situation for the business? Do they have enough on hand to meet their immediate obligations? The answer to all these questions can be found in the financial statements. in an . A lack of standardization really could and has lead to companies and organizations reporting the health of their company in a way that enables them to present the most favorable view possible whether it is totally accurate or not. Together with the financial notes at the end of the financial statements. There are 3 main parts to a financial statement that will give you this kind of information. you really need to understand the financial health of the company. They are the Balance sheet. This includes what kind of sales a company had in the current or previous year. the Income Statement and the Statement of Cash Flows.ABSTRACT To understand how well a company is doing. an investor can gain a lot of insight into how well a company is performing as well as what could possibly lie in its future. This would result. and has resulted. I will use the financial statements from a couple of different companies to do a basic analysis of their bottom-line.
auditors.p. every financial transaction has an equal and opposite transaction. or in other words.”1 FASB is also recognized by the SEC as the authoritative body for accounting standards as well as by the American Institute of Certified Public Accountants. I mean that for every asset gained. in a nutshell. including issuers. is a set of rules that are used by corporations worldwide to record and summarize transactions and in preparing financial statements for any given corporation. It would be like comparing apples to oranges. we must understand that just like in physics. Web. it explains 1 "FASB: Financial Accounting Standards Board.fasb. 21 Apr. or FASB creates the GAAP standards. So. N.. <http://www. Additionally. To understand this. FASB is a non-governmental organization whose mission is to “establish and improve standards of financial accounting and reporting for the guidance and education of the public. n.inability of investors to be able to make sound judgments as to the true health of any given company. The Financial Accounting Standards Board. GAAP. The next concept is Double Entry Accounting. GAAP allows companies to be analyzed on an equal footing. something had to go out to acquire that asset. the first concept used to standardize accounting is the Generally Accepted Accounting Principles (GAAP). it could lead to an inability to compare the overall health of the restaurants on equal terms.org/jsp/FASB/Page/SectionPage&cid=1176154526495>. and users of financial information. 2010." FASB: Financial Accounting Standards Board. If two different hamburger joints. for example. it would prevent investors from making comparisons between two like companies. . apples to apples and oranges to oranges. reported their sales and earning in completely different ways. Double Entry Accounting accounts for those reactions. By that.d. It explains how transactions occurred and where “things” came from.
I was not able to calculate a comparable inventory turnover ratio for RTL. All of these accounting tools help investors. represent the present value of that item. Lastly. I calculated the debt to equity ration. those assets or liabilities that will not. All calculations were done for reporting period 2008. Historical Cost is the cost of an item at the time it was originally purchased or acquired. given that it is an entertainment company and does not have inventory in the same sense as that of Samsung or Lockheed. the working capital and the inventory turn-over for each of the companies. Accrual Basis Accounting and Cash Basis Accounting are accounting methods that essentially show what has actually happened versus what will happen at a future date. were cash basis does not. . however. Accrual accounting uses notations such as accounts receivable and accounts payable. creditors or auditors get credible. however. the operating margin. Cash Basis Accounting only records the transaction once the exchange of goods or services has happened.what I have and how I got it. Analysis of Financial Statements In my comparison of these three multi-national companies. Next. transparent. Non-Current items details those assets or liabilities that will become liquid or be paid out in that current reporting period vs. and comparable financial information for the companies they are analyzing. I needed to calculate a few ratios and calculations to help determine performance. Current Assets and Liabilities vs. Accrual Basis Accounting records all transactions at the time the transaction was entered into regardless of whether items had yet changed hands. It does not.
spacecraft and ocean vessels. Samsung has a rapid inventory turnover indicating that they are able to build and move their goods more quickly then Lockheed.74%.73 and Lockheed was 10.Results Looking at the Debt-to-Equity ratio. which shows every dollar of debt to every dollar of shareholder investment. . where as Samsung turns over its inventory far more frequently. For 2008. as compared to Samsung and Lockheed. Lockheed appears to operate at a fairly high margin compared to Samsung and RTL (4. I find that RTL has the lowest at . which mostly builds and sells large items such as aircraft. Lockheed should be larger given the cost of the items that they manufacture. This makes sense to me since. Lockheed. of the three. the more money they may need to borrow to purchase those materials. requires many months to years to manufacture 1 item. All three of these companies look to be healthy and in a position to be profitable in the future. Samsung had a debt-to-equity ratio of . barring uncontrollable events like economic downturns and such. Lockheed had a working capital of 21.9% and 8.95.67. And depending on what it is they are making.42.2 Billion dollars and an operating margin of 14. The more expensive the raw materials are. they have the least amount of need for inventory storage and manufacture. but that does not always equate to greatest profitability.1% respectively). it may take longer to recoup those costs and repay that debt due to the time it takes to manufacture that item and deliver it to the customer.02 were Samsung turned over inventory at a ratio of . Lockheed has the largest margins. Their turnover was 20. Two metrics where Lockheed seems to be sitting pretty is in working capital and in operating margin. This means that they essentially have the lowest debt compared to shareholder investment.
The various standards that are established through FASB via GAAP enable the public to make intelligent decisions when it comes to deciding on whether or not to invest in. It truly pays to learn these tools and practice them. lend money to or become involved with any given company(s).especially since they turnover inventory so much slower then Samsung. creditors and auditors alike to use as they analyze publicly traded companies. The exercise for this module won’t make anyone an expert by any means. . Conclusion There are a lot of good tools available for investors. but did give a basic understanding of what info is available for use.
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