BUSINESS FINANCE Business Finance

Business Finance

Financial statements are summaries of monetary data about an enterprise. The most common financial statements include the balance sheet, the income statement, the statement of changes of financial position and the statement of retained earnings. These statements are used by management, labor, investors, creditors and government regulatory agencies, primarily. Financial statements may be drawn up for private individuals, non-profit organizations, retailers, wholesalers, manufacturers and service industries. The nature of the enterprise involved dramatically affects the kind of data available in the financial statements. The purposes of the user dramatically affects the data he or she will seek.

The balance sheet provides the user with data about available resources as well as the claims to those resources. The income statement provides the user with data about the profitability of the enterprise detailing sources of revenue and the expenses which reduce profit. The statement of changes of financial position shows the sources and uses of a firm's financial resources, demonstrating trends in the alteration of its capital structure. The statement of retained earnings reconciles the owners' equity section of successive balance sheets, showing what has happened to generated revenue.

Comparison of financial statements forms the basis for much financial analysis. Four main types of comparison are made: (1) comparison of statements for the enterprise between successive years (2) comparison of a firm's statements with those of a specific competitor (3) comparison of a firm against an industry standard and (4) comparison with a target, such as a company's budget. Comparisons between different organizations may be difficult or even meaningless because of differences in (1) size of the organization (2) type of organization and (3) accounting methods used by the organization. Often, both the size and type of organization will dictate the kind of accounting methods used.

Non-profit organizations such as government and charities typically present statements which exhibit their resources and the way those resources are distributed or held. Stewardship and responsibility are the focus for these statements. Financial statements for private individuals focus on resources and obligations -- helping the person to assess his or her financial condition and to plan financial affairs (or obtain a bank loan) [Rosenfield, 1981]. Retailers are typically highly mortgaged, rely on credit to wholesalers (following a desire for a large and varied stock), often offer extensive credit to customers (or no credit, on a strictly cash basis) and reside in high-rent locations. Wholesalers tend to be characterized by large inventories, large sales volume (with small profit margin) and chronic credit problems with retailers. Manufacturers tend to have a substantial investment in fixed assets (machinery, equipment and buildings) and often face major problems due to a large work-force [Costales,1979]. Service industries -- such as railroads, airlines and public utilities -- have less of a problem with flow of inventory. Their focus tends to be on balancing operating revenue against operating expenses dominated by fixed assets (depreciation, repairs, replacement, maintenance, etc.). Companies with high proportions of current assets tend to be financed through short-term borrowing and shareowner ...