ACCOUNTING QUESTIONS 2
Allfirms carry out various accounting procedures to monitor and evaluatetheir present and expected future performances. To do this, they makeuse of four financial statements that are useful in making theirfiscal and managerial decisions and projecting future performances.The financial statements include: the income statement, balancesheet, statement of cash flows and retained earnings statement. Thesestatements also provide a means for financial reporting. Thesefinancial reports are useful to government agencies, creditors,investors, shareholders and other financial stakeholders as they maketheir investment decisions based on this reports.
Petersonand Fabozzi (2012) defined, analyzed and illustrated these financialstatements fully in ‘Analysis of Financial Statements.` Accordingto them, income statement presents the results that have beenrealized by an institution over a given period. It reveals if aparticular company has made profits or losses. On the other hand, thebalance sheet is defined as a report on a company`s capital, assetsand liabilities over a given period, described as a financial year.It details the balances of liabilities and income posted during thepreceding period. The cash flow statement is a document used infinancial accounting to analyze how changes in a firm`s revenue andbalance sheet accounts affect cash all the related cash equivalents.This statement breaks down this analysis to investing, operating andfinancial activities. Lastly, the retained earnings statementoutlines how profits are shared between dividends for theshareholders and retained earning which are recorded in the balancesheet as owner`s equity. Retained earnings are the net earnings aftertax. In financial accounting, cash flow is defined as the totalamount of money inflow and outflow in business (Peterson and Fabozzi,2012).
Mypreferred statement for making decisions is the income statement.This statement has an advantage over the other financial statementsbecause it shows the profitability of business. The importance ofprofitability is emphasized by the fact that making a profit is theprimary objective of every business it is the yardstick for measuringthe success of a business enterprise. The income statement,therefore, tells if a company has succeeded in fulfilling its primaryobjective. A balance sheet shows how much a company owns in assetsand effective business decisions cannot be based on assets ownership.A business may be huge in terms of physical structures, labor force,and output but still suffer losses at the end of a given financialyear. There are so many big businesses that are struggling to meettheir obligations. The statement of cash-flows only shows cash inflowand outflow. This does not necessarily mean that a business with asubstantial cash-flow is making a profit. Consequently, retainedearnings statement only indicates how profits were shared out tovarious stakeholders. What matters most is not how profits are sharedbut how much the company has made in terms of those profits beingshared. The significance of profits in financial decision making isfurther illustrated by the fact that the income statement is preparedfirst of all other financial statements.
Goodwillis defined as the intangible asset that is generated when one entityacquires another. It comes in various forms such as location, brand,reputation, commercial secrets, domain names, etc. (Peterson andFabozzi 2012). It is difficult to calculate goodwill, but it isinitially determined by subtracting the purchase price from the baseof the fair value of that particular entity’s assets. Fair value isthe value of assets less the value of liabilities. The personality ofthe manager or employees does not necessarily have everything to dowith goodwill but may only affect it mildly. As it is true that thepersonalities of the manager or employees affects the workingenvironment and subsequently the performance of the business,goodwill is not entirely valued based on the performance of thebusiness. Goodwill is mostly valued based on the net assets, and thisis not affected by the personalities of either.
Investingin research and development
Investingin research and development involves directing finances, energy andtime towards introduction, innovation, and improvement of products,services and processes (Peterson and Fabozzi 2012). It is importantthat companies invest in research and development to stay ahead ofthe competition. Companies stand to gain considerable benefits frominvesting in research and development. The businesses whose businessplan includes investing in research and development stand to gain acompetitive edge other those who don’t. From researching anddeveloping new ideas, products, and services, businesses can avoidbecoming obsolete and evolve to effectively address the constantlychanging demands of the contemporary markets. Innovating new ideas,products, and services are what keeps one business ahead of theircompetition. Research and development also helps a company inconnecting their various strategies such as marketing and costreduction. Appropriate and innovative marketing strategies increasemarket participation and sales considerably. Although it involvesinvesting more resources, companies can come up with efficientproduction processes, and this ultimately results in reduced costsand efficient products. To make informed decisions, managers need toinvest in research and development. This helps them to estimatefuture values of any intended investment strategy. After determiningpossible and expected returns of a proposed project, managers canassess its viability, and they can consequently make informed andintelligent investment decisions. It is, therefore, paramount thatcompanies invest in research and development to enhance theircompetitiveness in these highly unpredictable markets.
Peterson,D. P., & Fabozzi, F. J. (2012). Analysisof financial statements.