Entrepreneurship

Name of Reporters:
Benneth stella:
K. Income Statement
L. Statement of Retained Earnings
Clairese Dulay:
M. Statement of Financial Position (Balance Sheet)
N. Statement of Cash Flows
Melissa Kaye Quilalang:
O. Interpretation of Financial Statements
P. Users of Financial Statement
Jaeron Mordeno
Q. Ratio Analysis
R. Focus of Analysis
Andrela Vicencio:
S. Profit Margin Ratio
T. Accounts Receivable Turnover Ratio
Interpretation of Financial Statement
Financial statements include a balance sheet and an income statement, commonly
referred to as a profit and loss statement. The balance sheet presents a company’s
assets, liabilities and equity as of a specific date in time. An income statement presents
a company’s 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.

1. Prepare a common sized statement for the financial statements presented. A

common sized balance sheet shows the dollar 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 dollar value of each income and expense account as a
percent of total revenue. The best and easiest way to do this is to use a spreadsheet
program, such as Excel.

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.

Users of Financial Statement

There are many users of the financial statements produced by an organization. The
following list identifies the more common users of financial statements, and the reasons
why they need this information:
Company management. The management team needs to understand the profitability,
liquidity, and cash flows of the organization every month, so that it can make operational
and financing decisions about the business.
Competitors. Entities competing against a business will attempt to gain access to its
financial statements, in order to evaluate its financial condition. The knowledge they
gain could alter their competitive strategies.
Customers. When a customer is considering which supplier to select for a major
contract, it wants to review their financial statements first, in order to judge the financial
ability of a supplier to remain in business long enough to provide the goods or services
mandated in the contract.
Employees. A company may elect to provide its financial statements to employees,
along with a detailed explanation of what the documents contain. This can be used to
increase the level of employee involvement in and understanding of the business.
Governments. A government in whose jurisdiction a company is located will request
financial statements in order to determine whether the business paid the appropriate
amount of taxes.
Investment analysts. Outside analysts want to see financial statements in order to
decide whether they should recommend the company's securities to their clients.
Investors. Investors will likely require financial statements to be provided, since they are
the owners of the business, and want to understand the performance of their
investment.
Lenders. An entity loaning money to an organization will require financial statements in
order to estimate the ability of the borrower to pay back all loaned funds and related
interest charges.
Rating agencies. A rating agency will need to review the financial statements in order to
give a credit rating to the company as a whole or to its securities.
Suppliers. Suppliers will require financial statements in order to decide whether it is safe
to extend credit to a company.
Unions. A union needs the financial statements in order to evaluate the ability of a
business to pay compensation and benefits to the union members that it represents.

Ratio Analysis
A ratio analysis is a quantitative analysis of information contained in a company’s
financial statements. Ratio analysis is used to evaluate various aspects of a company’s
operating and financial performance such as its efficiency, liquidity, profitability and
solvency.

Focus of Analysis
Lahman clearly states that contrary to structured development, where the focus of
analysis is problem analysis, in the object-oriented paradigm, problem analysis is done
during requirements elicitation, and the goal of object-oriented analysis is to specify the
solution in terms of the problem space, addressing functional requirements only, in a
way that is independent of the actual computing environment.

Is the purpose of an analysis model understanding the problem or proposing a solution?

I have discussed this a few times with different people. This is how I used to see it:
• Analysis deals with understanding the problem domain and requirements in detail

• Design deals with actually addressing those (functional and non-functional)

requirements.

• A detailed design model can be automatically transformed into a working

implementation.

• An analysis model can’t, as in the general case, it is not possible to automatically

derive a solution based on the statement of a problem.
Accounts receivable turnover
is an efficiency ratio or activity ratio that measures how many times a business can turn
its accounts receivable into cash during a period.
In other words, the accounts receivable turnover ratio measures how many times a
business can collect its average accounts receivable during the year.

Profit Margin
Profit Margin, net margin, net profit margin or net profit ratio is a measure of profitability.
It is calculated by finding the net profit as a percentage of the revenue.
References:
 http://smallbusiness.chron.com/interpretation-financial-statement-3769.html
 https://www.accountingtools.com/articles/users-of-financial-statements.html