Question

1.) Why do cash flow calculations not include the addition to retained earnings?

2.)Most people find that calculating ratios is easy, but struggle with interpreting ratios. What should you consider when evaluating financial statements?

Answer 1

Solution

1)

Net income is equal to revenues minus expenses. Corporate net income minus dividends declared is equal to that corporation's change to its retained earnings due to the company's running of its operations for the period. Retained earnings is an account that records the accumulated profits that the corporation has reinvested into its operations rather than distribute as dividends. In contrast, net-cash flow is the total change in the business' cash and cash equivalents due to its operational expenses for the period. Since retained earnings has no connection to net-cash flow, it does not appear on the cash-flow statement that lists all changes in cash and cash equivalents for the period. Instead, retained earnings has its own separate financial statement called the retained-earnings statement.

2)

Ratio analysis is the process of determining and interpreting numerical relationship b/w figures of financial statements.

It helps analysis to make quantitate judgment about the financial position &performance of a firm. Ratio analysis is used to evaluate various aspects of a company's operating and financial performance such as its efficiency, liquidity, profitability & solvency. The trend of these ratios over time is studied to check whether they are improving or deteriorating. Effective planning and financial management are the keys to running a financially successful small business. It is critical for helping you understand financial statements, for identifying trends over time & for measuring the overall financial state of your business. In addition, lenders &potential investors often rely on ratio analysis when making lending &investing decisions. Ratios are critical quantitative analysis tools. One of their most essential functions lies in their capacity to act as lagging indicators in identifying positive &negative financial trends. The information on trend analysis provides, allows to you to make & implement ongoing financial plans when necessary& make course corrections to short-term financial plans. Ratio analysis also provides ways for you to compare the financial state of your business opposed to other businesses within your industry or between your business & businesses in other industries.