Step 1 - Review the scenario below.
Assume you are preparing for a job interview with a major corporation. You have accessed the company's most recent annual report and financial statements from their website. Specifically, you are trying to get a feel for the company's financial strength in order to make a determination about employment if you are offered the job.
Step 2 - Answer the questions related to the scenario.
The three main types of financial statements that you can use to assess the financial situation of a company are: 1) Income statement or Profit and loss statement, 2) Balance Sheer and 3) Cash flow statement
Income statement will list down all expenses and incomes of the company over a specific period. This will translate to Gross profit (the profit by reducing sales income from cost of the goods sold) and Net profit (reducing gross profit from other expenses related to the operations).
Balance sheet will list down the assets and liabilities of the company.as of a specific date. It also includes funding from shareholders equity.
The cash flow statement is a detailed version of the cash that will appear in the Assets of a balance sheet. It has different sections to identify the nature of the cash flows (eg operating cash flow, investing cash flows and financing cash flows)
To be sustainable a company should be making profits consistently over the years. If the salary expense in the income statement has been rising (approximately by its growth rate) it could indicate that the company rewards its employees. Irrespective a high sales growth rate would be ideal because you would want to be part of a growing company
A balance sheet would display how much debt burden a company has which shouldn't be too high. Further a cash rich company is more safe because it can easily sustain periods of downfall.
The cash flow statement shows the sales that are actually received as cash. Although high sales is important it is equally important to receive cash for the sales which can be seen in the cash flow statement. The cash flow statement also shows how efficiently companies invests its cash balances.
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