Question

You have been named the Chief Financial Officer (CFO) of a two year old company, ABC Analytics. Financials have been prepared by a bookkeeper. As CFO, you responsible for the preparation of accurate financials, analysis and review of the financials before they are released and communication of the results of your company to banks, investors, creditors and the government, as necessary. One of the members of the board has asked you to prepare a memorandum which addresses the following points. Each point should be answered in a separate paragraph and be written to be as clear and concise as possible (2 points each).

a. What are the four major financial statements and discuss their purpose?

b. What is the purpose of a budget and what are the components?

c. Why is it important for the CFO and his/her staff to analyze variances of budget to actual or forecasted to actual amounts, and investigate reasons for significant variances on a timely basis?

d. If you are an investor in ABC Analytics, what are the pitfalls in reviewing earnings per share without accompanying pertinent information, i.e. what are the things that can distort earnings per share from year to year? Why do you care about diluted earnings per share?

e. Why is management’s discussion and analysis included in the annual report?
In order to obtain maximum credit, the Individual Paper should

• Demonstrate a comprehensive understanding of accounting and business concepts, analysis, and unique insights. Properly citing FASBs or other authoritative literature helps demonstrate this ability.

• Be clear and concise, directly addressing issues with the proper use of English grammar and spelling, free of errors.
• Make well developed business analyses with strong supporting arguments.

Answer 1

A. The four major purpose of financial statements are :

• Income statement. Represents the revenues, expenses, and profits/losses generated of a reporting period. This is considered as the most important financial statements, since it presents the operating results of an entity.
• Balance sheet. Represents the assets, liabilities, and equity of the entity as of the reporting date. Thus, the information is as of a specific time. The report format is structured so that the total of all assets equals the total of all liabilities and equity (known as the accounting equation). It is typically considered the second most important financial statement, since it provides information about the liquidity and capitalization of an organization.
• Statement of cash flows. Represents the cash inflows and outflows that occurred during the reporting period. This can provide a useful comparison to the income statement when the amount of profit or loss reported does not reflect the cash flows experienced by the business. This statement may be presented when issuing financial statements to outside parties.
• Statement of retained earnings. Represents changes in equity during the reporting period. The report format varies, but can include the sale or repurchase of shares, dividend payments, and changes caused by reported profits or losses. It is the least preferred of the financial statements, and is commonly included in the audited financial statement package.

B.

The Business Income Component

One of the two main components of a master budget is income. This includes the sales and any interest, dividends, royalties or other capital gains that is earned. If a company is not using the latter forms of income to run the company, leave them off the master budget, making it an operating budget focused on income from sales. Some master budgets include a bad debt entry, calculating it using a percentage of the sales income.

The Company Expense Component

The other main component of a master budget is expenses. Many small-business owners create sub-components of the master budget expenses to help calculate variable elements that can be cut during slow times or to help calculate production and overhead costs. After it is listed all of your expected expenses for the year, label each as a fixed or variable cost. A fixed cost is one you can’t easily change from month to month, such as your rent, insurance premium, loan payment or copier lease. The CFO be more likely to be able to cut variable expenses if short on cash, because many of the discretionary. To create a flexible budget, use formulas that change the discretionary spending based on one’s income.

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