Question

Discuss relationship between various corporate activities and financial statements, components of each financial statements, accounting cycles. In addition to the summary, please consider incorporating implications of each topics on the investors' and/or creditors' use of financial statements.

review of accounting terminology, techniques, and information that financial managers and analysts can use to effectively evaluate an organization. Specifically, chapter 2 examines the four basic financial statements – the income statement, balance sheet, statement of retained earnings, and statement of cash flows. In addition to analyzing the statements, the meaning of the information contained within these statements is also examined. It is important to remember that while producing accounting information is important, in order to do a thorough analysis, the users must understand what this information is saying.

Answer 1

Relationship between vaious Corporate Activities , Financial Statements Components and Accounting Cycle
S.No.	Corporate activities	Sub part of Activity	Fiancial Statement	Component of Fin. Statemnt
				Balance Sheet	Income Statement	Cash Flow Statement
1	Raising Fund	Equity	Balance Sheet	Change of Equity		Financing Activity
		Loan	Balance Sheet	Loans		Financing Activity
2	Creating Asset/ Investment		Balance Sheet	Assets		Investing Activity
3	Inventory		Balance Sheet	Assets		Change in working Capital
4	Procurement	Cash	Balance sheet /Income statement - Trading and Profit & Loss	Current Asset-Inventory	Purchase	Change in working Capital
		Credit		Current Liability- Creditor		Change in working Capital
5	Sales	Cash		Current Asset- Debtor	Sales	Change in working Capital
		Credit				Change in working Capital
6	Expenses	Cash	Income statement - Trading and Profit & Loss	If prepaid part of current assets	Expenses	Change in working Capital
		Credit			Expenses	Change in working Capital
7	Charity				Expenses	Change in working Capital
8	Taxation				Expenses	Change in working Capital
9	Disputes		Disclosures
10	Dividend etc		Appropriation Account			Investing Activity
Accounting Cycle
Accounting cycle is a process by which an organisation record transaction in books and prepare financial statement .
This cycle has following steps
1	Transaction		Only monetary transaction are part of Accounting cycle.
2	Recording		Transaction need to record as per accounting rules
3	Posting		All transaction need to be reflect in relevant account i.e. Purchase , sales, Debtor, Creditor etc.
4	Trial Balance		All Accounts need to be summarized for a specified period.
5	Finalization		Adjustment entries and correction
6	Preparation of Financial statement		Balance sheet, Income statement , Change in equity etc.
7	Checking & Auditing of Books		By auditor
8	Closure of Books		Year end process
Evaluation Techniques used by investor/ Creditors
1	Credit Rating
2	Fund in reserves
3	Key ratio
4	Corporate Governance
5	Disputes
6	Legal cases
7	Goodwill
8	Market capitalization
9	Product sustainability
10	Key managerial person
How to examine four basic Financial statements
S.No.	Financial Statement	What it indicate	How to evaluate
1	Balance sheet	State position on a particular date	Share of owner, reserve position, creditors position, assets- current -non current
2	Income statement	Give statement of income & expense	Share of main business and other income, Share of major expenses, expenses of research and development
3	Statement of Retained Earning	State position of reserves & surplus from previous years	Position of Free reserves show good financial health of organisation
4	Cash Flow Statement	State Cash flow from operating, investing and financing activity	Fund generating (inflow) from operating activities and fund outflow in investing activities shows good trend.