Financial Statements: Balance Sheets, Income Statements, ROE
Explain the following statement: Although the balance sheet can be thought of as a snapshot of a firm’s financial position at a point in time, the income statement reports on operations over a period of time.
What is free cash flow? If you were an investor, why might you be more interested in free cash flow than net income?
If a firm’s ROE is low and management wants to improve it, explain how using more debt might help.
Suppose you were comparing a discount merchandiser with a high-end merchandiser. Suppose further that both companies had identical ROEs. If you applied the DuPont equation to both firms, would you expect the three components to be the same for each company? If not, explain what balance sheet and income statement items might lead to the component differences.
Your initial response should be a minimum of 200 words. Then write a subsequent in support of your initial response as well as one in opposition of your initial response. Each response response should be a minimum of 125 words.
Financial Statements: Balance Sheets, Income Statements, ROE
Balance sheets and income statements are financial reports that are used during the appraisal of a business. These financial statements aim to assess a business's stability and determine potential risks to the company. Additionally, they guide investors who may wish to invest in a company. The critical difference between a balance sheet and an income statement is in the period covered. A company's income statement is also called the profit and loss statement and gives a report of a company's financial situation for a given period. For example, if a company prepared an income statement for the year 2021, it would be referred to as the Income Statement during the year 2021. This means that the statement would cover the entire year from 1st January 2021 to 31st December 2021. The income statement report will contain the revenues, profits, and losses recorded throughout that year. However, a balance sheet is just like an instant picture; it shows the assets and liabilities as well as the shareholders' equity at a particular date. An example would be a balance sheet showing the assets, liabilities, and owner's equity on 1st September 2022. This balance sheet will only contain information as of that date.
Supporting The Statement
From the above definition, it is possible to conclude that a balance sheet is a snapshot of the financial position of a business. It provides the financial position at the exact date when the final accounts are balanced. It does provide detailed information on the financial situation of the business. Additionally, a balance sheet is a static financial document. Therefore, it is impossible to look at the trends over time. To look at progress, business owners must compare balance sheets of different dates. Income statements are dynamic. They provide the business with a step-by-step guide and insight into the profit and losses incurred by the company throughout the year. Income statements are periodic, meaning that they tell a story of how the company has been fairing...