PROGRAMME: CORPORATE MASTER IN

BUSINESS ADMINISTRATION
COURSE: ACCOUNTING FOR MANAGER
(EBA 6113)
2013 2014 SEM 1

ASSIGNMENT 3

Name: T.Nanthakumaran s/o Thulasy (13030170)
Co-Lecturer : Mr. Michael Tinggi


Accounting for Managers
Co-Lecturer : Mr. Michael Tinggi
The normal financial statement from Income and balance sheet has been a significant
contributor of financial information about the corporate profiles to potential inventors.
Preparing a statement of cash flow highlights the importance of the firm activities. Discuss?
(Write about 2-3 pages)

What does your company own and what does it owe to others? What are its sources of
revenue and how has it spent its money? How much profit has it made? What is the state of
your companys financial health? All this questions can be answered by the three essential
financial statements: the balance sheet, the income statement and the cash flow statement.

Financial statements are the essential documents of business. Managers must use them
to assess performance and identify areas in which intervention is required. In fact, the
understanding of financial statements is an absolute must. In order to understand financial
statement of the potential corporate profile, the investors requires financial analysis skills of
understanding of the products, services and operating characteristics of the business. The
ability to select and compute the data to gain an understanding of the business processes
affecting the performance of the potential entity. An awareness of the creative elements in
financial reporting and the impact of accounting policies on financial position of the firms are
strongly required in order to minimise the risk of investments decisions.

Shareholders use them to keep tabs of how well their capital is being managed.
Outside investors use them to identify opportunities. And lenders and suppliers routinely
examine financial statements to determine the creditworthiness of the companies with which
they deal. The main aim of financial statements is providing info about the financial position,
performance, and variations in the financial position of a business enterprise. The financial
statements of any business entity should be relevant, understandable, reliable, and
comparable. An understandable financial statement helps business entitys stakeholders to get
reasonable knowledge about the business and its economic activities. As far as financial
statements are easy to understand, this helps investors to make investment decisions in the
company. The financial statements are used by prospective investors for assessing the
feasibility of investing in a company.
Balance sheet is a snapshot of a company's financial condition at a specific moment in
time, usually at the close of an accounting period. Companies prepare balance sheets as a way
of summarizing their financial positions at a given point in time, usually at the end of the
month, the quarter or the fiscal year. The balance sheet is the core of the financial statements
(the other major financial statements are the income statement (statement of comprehensive
income), statement of changes in equity and statement of cash flows). Unlike the other
financial statements, balance sheet is accurate only at one moment in time, not a period of
time.
In effect, the balance sheet describes the assets controlled by the business and how
those assets are financed, with the funds of creditors (liabilities), with the capital of the
owners, or with both. Thus, the balance sheet balances a companys assets and liabilities.
The balance sheet also describes how much the company has invested in assets, and where
the money is invested.

Income statement is a financial statement that summarizes the various transactions of
a business during a specified period, showing the net profit or loss. Income statement
measures a company's financial performance over a specific accounting period. It is often
referred as a profit and loss statement (P&L). The income statement (statement of
comprehensive income) is one of the major financial statements used by accountants and
business owners (the other major financial statements are the balance sheet (statement of
financial position), statement of changes in equity and statement of cash flows). It indicates
how the revenue (money received from the sale of products and services) is transformed into
net income (the result after all expenses and taxes). The important thing to remember about
an income statement is that it represents a period of time. This contrasts with the balance
sheet (statement of financial position) which represents a single moment in time. In addition,
the income statement tells you how much money the company spent to make that profit, from
which you can determine the companys profit margin.

The cash flow statement, the last of the three essential financial statements, is the least
used and understood. The statement of cash flows can be explained as one of the financial
reports which are required to be disclosed according to IFRS and US GAAP. This document
provides summative data regarding all inflows of cash received by a company from its
ongoing operations as well as external investment sources. Besides, cash outflows paying for
business activities as well as investments during a specific period are also included in the
statement of cash flows.

More specifically, it reflects all changes in cash as affected by operating activities,
investments and financing activities. The importance of preparing cash flow statement in
company activities is to identify the transaction of cash entries are recorded accordingly
based on historical accounting which clearly stated the assets, liability and equities. The
potential investors will use this information in evaluating their economic value added to their
future investments and minimise the risks. The potential investors will use the cash flow
statement to eliminate the factors affecting the cash flow statement such as changes in capital
stock, changes in liabilities, dividends paid to stockholders, net income and changes in non
cash assets will affect the net cash flows for a period.

The net cash flows also will determine the potential investors decision making in
reviewing the financial stability of their prospect company. The potential investors will
review the category of cash flows in depth in evaluating their future investments accordingly
to the categories as below:
Cash flows activities in operating the business
Cash flow activities in investing in productive assets
Cash flow activating in financing the business

The cash flow statement is useful because it indicates whether your company is
turning accounts receivable into cash and that ability is ultimately what keep your company
solvent. Solvency is the ability to pay bills as they come due. The cash flow statement does
not measure the same thing as the income statement. If there is no cash transaction, then it
cannot be reflected on a cash flow statement.

As conclusion, these answer those questions by explaining the significance of three
essential financial statements: the balance sheet, the income statement and the cash flow
statement. The balance sheet shows a companys financial position at a specific point in time.
That is, it gives a snapshot of the companys financial situations, its assets, equity and
liabilities on a given day. The income statement shows the bottom line. It indicates how much
profit or loss was generated over a period, for example, a month, a quarter or a year. The cash
flow statement tells where the companys cash came from and where it went. In other words
are, the flow of cash in, through and out of the company. In a nutshell, the income statement
tells you whether your company is making a profit. The balance sheet tells you how
efficiently a company is utilizing its assets and managing its liabilities in pursuit of profits.
The cash flow statement tells you how cash has been increased or decreased through
operations, the acquisitions or sale of assets and financing activities.

References

http://www.readyratios.com/reference/accounting/financial_statement.html

Harvard Business School Press (2004). Understanding Financial Statements: Making
More Authoritative Decisions.

Accounts Company An Interpretative Perspective(Notes & Slides)

Cash Flow Statements & Cash Management(Notes & Slides)