Question

Describe the information provided by each of these financial statements: Income Statement, Balance Sheet, Statement of Cash Flow. Identify ten business questions that can be answered by using financial accounting information. For each question, indicate which financial statement (or statements) would be most helpful in answering the question, and why.

Identify ten business questions that can be answered by using financial accounting information. For each question, indicate which financial statement (or statements) would be most helpful in answering the question, and why.

Answer 1

Tens business questions that can be answered by the Income statement , Balance Sheet and Cash Flow Statement are:
1. The profitability of the company, the Net profit and gross Profit margin can be answered.(Income Statement)
2. The return to equity holder and return to total assets can be answered. (Balance sheet)
3. The leverage ratio, debt equity ratio and risk can be calculated. (Balance Sheet)
4. The debt repaying capacity, the interest coverage ratio, times interest earned can be answered. (Balance Sheet and Income Statement)
5. The liquidity position of the company, the cash ratio, current ratio and quick ratio can be answered. (Income Statement)
6. Total cash flow to the company (Cash flow Statement)
7. The cash flow from operations, investing activities and financing activities (Cash flow Statement)
8.The dividend pay-out ratio to the shareholders and the retention ratio of the company. (Income Statement)
9. The growth of the company can be answered by finding ROE and retention ratio (Income statement and Balance Sheet)
10.The cash conversion cycle, the inventory days, debtor and creditor days can be answered (Using income statement and Financial Statement)

The Balance sheet and Income statement are most important because profitability, repaying capacity to creditors, operational efficiency and liquidity position can be easily calculated through above.