Explain the Impact of Accounting Transactions in Financial Statements

There are two words that need to be understood in the right way to comprehend the impact that the accounting transactions have on the financial statements. The first is a debit and the second is a credit. A debit is when something goes into your account and a credit when something goes out of your account. When we buy something, we get something that we have to give back. When a company uses double-entry bookkeeping, both sides of each transaction appear on the books and these sides are equal to each other. For example, office supplies are purchased with cash. Both accounts are assets here.When office supplies are bought, they are debited and cash is credited with the same amount. Both are assets mean company owns both the items, and items that a company owns are shown on the balance sheet as assets. The assets are offset by the liabilities and equity. The balance sheet is made on the basis of the following formula: Assets= Liabilities + Owners Equity

In addition to this, income statement or profit loss statement is also made which shows company’s revenues and expenses, so that the profit or loss from this statement could be added or subtracted from the balance sheet.

Describe the Elements of each Financial Statement.

There are four types of financial statements and each of it have different pupose and different elements:

1.Balance sheet:

Assets: shows what the company owns which has a tangible value. Current assets include all the items which can be converted into cash within 12 months.

Liabilities: The liability has 2 sections long term and current liability. Long term liability generally includes long term loan and short term liability includes accounts payable, bank overdrafts.

Owners Equity: It shows the owner’s investment in the business minus withdrawals plus the profits (minus loss).

2.Income statement:

Revenues: gross amount earned by the company by selling goods/services

Expenses: The cost the company incurred while selling goods and services

Profit: revenue is more than the expense

Loss: expenses exceed revenues

3.Cash Flow Statement:

Operating: source of cash in this section comes from revenue, gains/losses

Investing: source of cash from purchases and sales

Financing: cash used in long term liability, payments of dividends or sale of company stock are shown

4.Statement of Shareholder’s Equity:

Outstanding shares: The amount of company shares that has been sold and not purchased back by the company

Additional paid in capital: includes money paid for shares, above the par value

Retained Earnings: the income which is left after dividends.

Treasury stock: this is the amount of shares that have been repurchased from the market by the company itself.

Describe the components and use of financial analysis

Financial analysis is done to analyze and assess a company’s performance, risk, and its profitability. It utilizes the available information in the financial statements together with other relevant information to make economic decisions. The basic purpose of financial analysis is to assess whether to invest in a company’s securities or recommend it to investors or not. It is also used to compare the performance of the company from the past trends or predict its performance in future. The components of financial analysis include:

Common Size Analysis:

It allows the analyst to compare performance across firms,evaluate single firm across time and quickly view certain financial ratios.

Financial Ratio Analysis:

These are the ratios according to which the company is assessed. They can be classified into liquidity, activity, solvency, profitability and valuation ratios:

Activity Ratios:

Include receivable turnover, days of sales outstanding, inventory turnover, days of inventory on hand, payables turnover, payables payment period, and turnover ratios total assets, fixed assets, and working capital.

Liquidity Ratios:

It includes current ratio and cash ratios, the defensive interval and cash conversion cycle.

Solvency Ratio:

Includes debt to equity, debt to capital, debt to assets, financial leverage

Profitability Ratios: include net, gross, operating profit margins, return on assets and return on capital, common equity and total equity.

Refernces

Financial Statement Analysis - Framework and Application (2017). Retrieved from: https://www.simplilearn.com/financial-statement-analysis-rar25-article

How Debits and Credits Impact Your Financial Reports (2017).Retrieved from :

http://www.dummies.com/business/accounting/how-debits-and-credits-impact-your-financial-reports/