Components Of Financial Management Essay
Managers within the firm, as well as the firm’s owners and lenders, keep track of the firm’s performance by reviewing its financial statements - income statement, balance sheet, and statement of cash flows.
Every business firm, small or big, from a sole proprietor to Partnership to the business organization, all of it keeps the record of its financial transaction. It is known as financial statement. Financial statement is the mirror of the financial situation of a company. Financial statement includes various types of financial transaction depending on the operation of cash.
Income Statement - It is the financial statement that shows the change that has occurred in firm’s position as a result of …show more content…
Revenues: it is the gross sales business made during particular period. It consists of the money actually received from sales but this is not always the same.
Components of Financial Management
b. Expenses: These are the costs related with producing goods and services. E.g. the expenses associated with the sale include cost of acquiring, selling and delivering the product. Sometimes there are expenses that will be paid later.
c. Net Income: It is the revenue over expenses during a particular period. If revenue exceeds expense, it is net profit and if expense exceeds revenue, it is net loss. At the end of the period, all revenues and expenses with sales of goods and service are added and expenses are subtracted to know the overall profit or suffered an overall loss.
Balance sheet is a snapshot of a firm’s asset, liability and equity as of specific date. It shows what the business is worth at one point in time. It has three parts: Assets, Liability and ownership equity or capital. Its purpose is to give people the idea of company’s financial position along with displaying what it owns and owes. a. Assets:
i) Current assets: It is assets that are easily converted to cash over the operating …show more content…
Liability: It is a responsibility on behalf of the entity to give up an economic benefit arising from past transactions or events.
c. Ownership equity: It is the owner’s investment in the business minus the owner’s withdrawals from business add/minus net loss since the establishment of the business. It is the amount of assets minus amount of liability.
The common stock accounts reflect the number of outstanding shares of common stock carried a stated or par value. Par value is an arbitrary value and thus is not related to a firm’s stock price or market value.
The paid-in-capital account represents the amount over and above the par value that was paid by shareholders purchasing stock when it was originally sold.
The third account is called the retained earnings account and it shows the accumulated undistributed earning within the corporation over time.
The statement of cash flows provides a summary of the cash inflows and outflows during a specific period. The three sections includes
a. Operating cash flows: It shows cash received and used during normal operating activities. It details changes in ledger account balance for current asset and current liability. It includes account payable, account receivable, prepaid insurance and unearned