Question

Describe the basic financial information that is produced by corporations and explain how stakeholders use such information.

Answer 1

The Basic finacial informatio which corporations produce include :

Income statement

Balance sheet

Cash flow statement

Statement of changes in owner's equity

The balance sheet basically gives the overview of the corporation as of particular date. It contains detail list corporations' assets (current and non current), liabilities (current and non current) and shareholders' equity. Stake holder can use this information to get to know how company's assets and liabilities are moving and are there any areas of concern for the company. There are various balace sheet ratio also which stake holder can analyse:

Current Ratio - current assets / current liabilities

Quick Ratio - (current assets - inventory) / current liabilities

Cash Ratio - Cash and marketable securities / current liabilities

Debt Ratio - Debt / Assets

Debt / Equity

Income Statement : It gives the summary of comanies sales, costs, gain, lossses etc for a particular period of time. This will give you holistic view of how company' sales is moving, how cost is moving etc.Stakeholder can analyse this statement to get to know more about companies operations, their sales, gain/losses. Various ratios to be analysed here

Operating profit margin - Operating profit / sales

Net profit margin - Net income / sales

Time interest expense ratio - EBIT / Interest expenses

Stakeholder can compare these ratios over the year to see the trend.

Cash flow statement : Both of the above statement will give you glimpse of corporation. But picture is incomplete without cash flow statement. This actually talks about how the cash is moving in the corporation and how cash rich/deprive the company is. There are various components of this statement, Cash flow from operations, Cash flow from investing, Cash flow from Financing. Each of the component will have its own story to tell. For example if Company has high cash flow from financing, it means that they have taken huge amount of Debt which can be problematic if company's revenue and sales are decreasing.