Financial Statements and Managerial Reports
Financial statements and managerial reports are important tools that are used to keep the firms’ investors informed of financial decisions made by the organization. The key tools used include three major components. Theses components are the income statement, the balance sheet, and the statement of cash flow. This report will explain the purpose of each report and identify the components of each.
The first tool that I would like to discuss is the income statement. The main function of the income statement is to explain the profitability of an organization over a defined period. This period could be monthly, every three months, or the expected business cycle of one year (Block & Hirt, 2005). The income statement is a stair step approach that explains the profit or loss realized by a firm after each expense is deducted.
The first section of the income statement will show operating profit. Operating profit is defined as gross profit (sales less cost) less such miscellaneous expenses such as selling costs, administrative costs, and depreciation costs (Block & Hirt, 2005). Operating profit measures how efficient management is in generating revenues and controlling expenses (Block & Hirt, 2005).
Once the operating profit has been determined, interest can be deducted before applying the taxes to be paid by the firm. This will now show the net earnings or profits of the firm. Before these profits can be made available to the common stock holders, preferred stock holders will be paid their entitled dividends. After the preferred dividends have been paid to these investors, an earning per share ratio can be established and used to determine if the firm is a success in the eyes of the inve ...