Question

Describe and summarize the key financial statements used in a business organization. Explain three to five key financial ratios used to analyze a company.

Answer 1

The key financial statements used in a business organization are :

• Balance Sheet - This is a statement of the financial position as on a specified date. It lists the assets, liabilities and equity
• Income Statement - This is a statement of the income, expenses and profits during a specified period
• Cash Flow Statement - This lists the cash inflows and outflows, and reconciles the beginning and ending cash during a specified period.

Some of the key financial ratios used to analyze a company are :

• Net profit margin - It measures the net income as a percentage of sales. It is calculated as (net income / sales). It indicates the profitability of the company
• Current ratio - This measures the short-term solvency position of a company. It indicates whether there are sufficient short-term assets to meet short-term obligations. It is calculated as (current assets / current liabilities)
• Debt ratio - It measures the leverage of the company. It indicates the proportion of total assets that are financed by debt. It is calculated as (total debt / total assets).
• Total asset turnover - This measures the efficiency of using assets in generating sales. It is calculated as (sales / total assets)