Question

acct 3

Write 500 word paper that addresses the following topic: Explain the impact of accounting transactions in financial statements. Describe the elements and purpose of each financial statement. Discuss the components and use of financial analysis.

Answer 1

Impact of Accounting transaction on financial statements

Every accounting transaction has its impact on financial statements. Accounting transaction like any purchase, sales, payment for any expenditure, any revenue, every type of appropriation, provision impact the financial statement. For example if we take a sales transaction for cash it will effect two accounts as cash and sales. Sales is a revenue account depicting in income statement of the firm and cash is a assets which is depicted in balance sheet of the firm, so when a sales transaction place it effect both the income statement and balance sheet of the firm. So we can say that every accounting transaction has its impact on financial statements of the firm. There may be some transaction that will put effect only on one financial statement and others can have impact on more than one financial statements like balance sheet and income statement as describe in our above example. So every transaction which can be accounted will has its impact on firm’s financial statements.

Element and purpose of each financial statement

we can categorize the main financial statement of the firm in four financial statements as below

1. Balance Sheet
2. Income Statement
3. Statement of retained earnings
4. Statement of cash flow

Now we discuss about the element and purpose of each financial statement one by one.

Balance Sheet

Balance sheet of the firm tells about the financial position of the firm on a said date. Element of the balance sheet are mainly assets, liabilities and equity of the firm. It is divided in two main parts one is assets and second is liabilities and equity. Both sides total should be matched every time without any difference which confirm the mathematical accuracy of the accounting of the firm.

Asset represent the resources and worth of the firm have when the liability shows the debts and obligations of the firm and equity represents the owners resources in the firm.

Purpose of the balance sheet is to know the financial status of the firm on a date. Which tells about the assets liabilities and owner’s equity.

Income Statement

Income statement tells about the income for a certain period of the firm by its operations. Elements of a income statement are revenue, expenses and net income/ loss. This financial statement record all the revenues and expenditures of the firm for a certain period viz a year a quarter. And tell us that how much net profit a firm earned during that period so purpose of this financial statement is to know about the net income firms earns during a certain period.

Statement of retained earning

Statement of retained earning tells the balance of retained earning of the firm. Its elements are begning balance of the retained earnings, Net profit, dividends, and ending basis of retained earning. It is also prepared for a certain period like income statement and tells about the how much retained earnings are with firm on a said date. So the purpose of this statement of the firm to know the balance of retained earnings of the firm on a said date and elements are beginning basis , net profit, dividends and ending basis of the firm.

Statement of cash flow

cash is the blood of the business so there is a need to analyze the cash flow position of the firm. Cash flow statement is the financial statement which serves this cause. Its main element are opening basis of cash , cash flow from operating activities, cash flow from investing activities , cash flow from financing activities of the firm and ending basis of cash of the firm. It like a summery of cash book on activity basis. And its basic purpose is to analyze the flow of cash in various business activities like operating, investing and financing.

Components and use of financial analysis

Financial analysis is a activity of deriving various information from the analysis of financial statement of the firm. It is a managerial activity and serves the firm in fields of controlling and planning and decision making. There are many user of financial analysis like investor creditor owner etc. they all can analyze the financial statement in the way which serves their objects viz a creditors analyze the assets and earning of the firm before giving finance and a owner analyze the operating part of the financial statements. There are many techniques of financial analysis as ration analysis is one among them. We can describe the components of financial analysis as follows.

Revenue

Revenue is the main component of financial analysis. It reveals many information about the firm we can analyze the revenue of the firm on various parameters like revenue growth, revenue per customer, revenue per segment, revenue per area. So revenue is a component of financial analysis and reveal the information to the user of financial statements

Profits

Profit is the main component of financial analysis. So many user the of the financial statement analyze the profit of the firm on various parameters like gross profit, net profit, operating profit. Gross profit tells about the profit from sale and purchase of goods whereas operating profit tell about profit from operating activities and net profit is the net income of the firm.

Operational Efficiency

This is a measure of how much efficient are the operation of the firm. Inventory turnover ratio, debtor turnover ratio etc are the tools for it. It tells about the investment cycle of debtors creditors, inventory, etc. so we can use financial analysis to ascertain operational efficiency.

Capital Efficiency

This measure that how much is the firm capital efficient. Return on equity, debt equity are the parameters to know about the capital efficiency. So we can use this capital efficiency technique to ascertain the position of the capital in the firm and this is the use of this element of financial analysis.

Liquidity

Liquidity is another element of financial analysis which user wants to know about. We can measure the liquidity of the firm form the tools like current ratio, quick ratio, DSCR ratio etc. these parameters tells about that how liquid is the firm’s resources. So this is the another element of the financial analysis.

So the above write up tells us about the impact of accounting transaction on the firm’s financial statements, element and purpose of the financial statements and the components of the financial analysis.