Question

a) Who are the key stakeholders accounting and finance teams communicate with? How does the communication change if a company is privately held vs public?

b) How does a classified income statement and balance sheet allow us to interpret a company's results? What are some key metrics or KPI's we would be interested in?

Answer 1

(a) A stakeholders is an individual or group who can affect or be affected by the action of a business. mainly two types of stakeholders are available i.e internal stakeholders and external stakeholders.

Internal stakeholders are entities within a business for example employees, managers, directors, investors everyone has its own interest employees wants to earn money and stay employed whereas owners are interested in maximising profit the business make, investors are concerned about earning income from their investment.However exernal stakeholders are entities not within the business itself but get affected by its performance such as goverment who wants the business to pay taxes duties follow the law and truthfully report the financial statements, customer who wants the business to provide high quality goods or services , creditors want to repaid on time etc. So accounting and finance term are communicating keeping the stakeholders in mind.

(B)The balance sheet presents a company’s assets, liabilities and equity as of a specific date in time. An income statement known as profit and loss account Presents a company revenue, expenses and net income for a specific period, such as one year or six months. Depending on the company’s intended use of the financial statements, the statements can be audited, reviewed or compiled by a Certified Public Accountant. Financial statement interpretation is an important management tool as it identifies trends and unusual or unexpected anomalies.

Following are some key metrics or KPI's we would be interested in:-

1.Prepare a common sized statement for the financial statements presented. A common sized balance sheet shows the value of each asset, liability and equity account as a percent of total assets for each balance sheet account. A common sized income statement shows the value of each income and expense account as a percent of total revenue.

2.Analyze the common sized financial statements for unusual trends. For example, if a company’s cash balance was 5 percent of total assets over the course of four years and in the fifth, or most recent, year cash dipped to only 2 percent of total assets, a question should be posed to management to confirm the reasons for the drop. If the company purchased fixed assets near the end of the year or paid off a mortgage in full, the drop in cash is adequately explained.

3.Prepare a ratio analysis for the financial statements presented. Ratios commonly used to analyze balance sheet accounts include working capital and debt to equity ratio. Working capital is calculated by subtracting total current liabilities from total current assets for a specific year. Working capital is a measure of a company’s liquidity. A working capital ratio in excess of 5:1 may be an indication of excess cash on hand or poor inventory management.

4.Determine the company’s debt to equity ratio. Divide total debt by the company’s total equity. The greater the ratio, the greater the company risk. For example, a company with a debt to equity ratio of 5:1 has greater risk than a company with a ratio of 2:1. Simply put, a higher ratio indicates a company with greater, and often excess, amounts of debt that can be handled by the company.

5.Calculate the company’s gross profit by dividing total cost of goods sold by total revenues. Gross profit may vary from industry to industry. However, a company’s gross profit should remain somewhat consistent from one year to the next. If a company’s gross profit increases dramatically, it may be an indication of skyrocketing material or labor costs or a poorly managed project.