Fiscal Analysis And Planing

Fiscal Analysis and Planning

Income Statement

Is the major device for measuring the profitability of a firm over a period of time.

It covers a defined period of time, whether it is one month, three months, or a year. The statement is presented in a stair-step or progressive fashion so we can examine the profit or loss after each type of expense item is deducted.

Limitation of the income statement

Some economists define the income as the change in real worth that occurs between the beginning and the end of a specified time period.

Accounting values are established primarily by actual transactions, and income that is gained or lost during a given period is a function of verifiable transactions.

When a firm’s earnings are dropping rapidly or perhaps even approaching zero, its stock price, though declining too, may not match the magnitude of the falloff in earnings. This process can give the appearance of an increasing ratio under adversity.

The balance sheet indicates what the firm owns and how these assets are financed in the form of liabilities or ownership interest. While the income statement purports to show the profitability of the firm, the balance sheet delineates the firm’s holdings and obligations.

Interpretation of Balance Sheet Items

Marketable securities are temporary investments of excess cash. The value shown in the account is the fair market value. Accounts receivable include an allowance for bad debts (based on historical evidence) to determine their anticipated collection value.

Inventory may be in the form of raw material, goods in process, or finished goods, while prepaid expenses represent future expense items that have already been paid, such as insurance premiums or rent.

Investments, unlike marketable securities, represent a longer-term commitment of funds (at least one year).

Accumulated depreciation is the sum of all past and present depreciation charges on currently owned asset while the depreciation expense is the current’s year change.

Total assets are financed through either liabilities or stockholders’ equity, meanwhile the liabilities represent financial obligations of the firm and move from current liabilities (due within one year).

Concept of net worth

It is represented as the Stockholders’ equity minus the preferred stock component.

Limitation of the Balance Sheet

Most of the values on the balance sheet are stated on a historical or original cost basis. It can cause problems in the case of plant and equipment and inventory, which may now be worth two or three times the original cost.

The statement of cash flows is to emphasize the critical nature of cash flow to the operations of the firm. According to accountants, cash flow represents cash or cash equivalent items that can easily be converted into cash within 90 days.

Determining Cash Flows from Operating Activities

To determine it a the first method is called the “direct method”, in which every item on the income statement is adjusted from accrual accounting to cash accounting, in this method all sales must be adjusted to cash sales, all purchases must be adjusted to cash purchases, and so on.

Another method is the indirect method, in which net income represents the starting point and then adjustments are made to convert net income to cash flows from operations.

Determining Cash Flows from Investing Activities The cash flows from investing activities represent the second section in the statement of cash flows. The section relates to long-term investment activities in other issuers’ securities or, more importantly, in plant and equipment.

Combining the Three Sections of the Statement The depreciation represents an attempt to allocate the initial cost

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