Financial Statement Analysis

Financial Statement Analysis

1.        How in your FSA subject do you view the income statements, including cash flow statements and the balance sheet in determining the profitability of a company?                

1.1       Income Statement

Income statement or profit or loss statement is basically a financial statement of an organization for a specific time period that measures the financial performance which shows the revenues and the business expenses through operating and non operating activities (Berends, 2010). This statement also shows the net profit or loss incurred by the company over a specific time period. There are two main portions in an income statement, income portion deals with operating items and this portion is used to analyze by the investors to disclose the information about sales/ revenues and incurred expenses through business operations (Black, 2011).

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Source: Author

                                   Assets = Liabilities + Owner’s equity

The other portion is non-operating that contains the information about revenues and expenses that does not generated by the business to perform business regular operations (Bragg, 2013). This statement is used to assess organizational profitability by deducting the expenses from the generated revenue over a specific time period (Boone, 2013). If net income positive this means profit otherwise is loss.

1.2       Balance Sheet

Balance sheet is the financial statement that summarizes the organizational assets, owner’s equity and its liabilities over a specific time period (Brealey and Stewart, 2011). The main purpose of balance sheet is to have an idea about the financial condition of an organization that shows the own and owes of organization. It helps the businessmen to understand the strengths and capabilities of organization (Brendy, 2012).

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Source: Author

Total Assets = Current assets + Other Assets + fixed Assets

Liabilities = Current Liabilities + Long term Liabilities

Net Worth = Assets – Liabilities – Book Value

Retained Earnings = Earnings retained for business opportunities/ investments

1.3       Cash Flow Statement

Cash flow statement contains about 17 items listed in the specific order they need to appear, cash flow statement is prepared monthly for the first year, quarterly in 2nd year and annually for 3rd year of business (Broadbent and Cullen, 2012). Cash shows the cash in hand, sales shows the income from sale paid for cash receive able means income from collection on cash owed to the business resulting in sales, other incomes means liquidation of asset, income from any investment and loan interest that has been extended (Dayanada, 2012). Total income in cash flow statement shows the total money (sales + receivables + other income). Merchandise or material is raw material used by the company to manufacture products, when raw material comes in, cash goes out. The labour required to manufacture product is called direct labour, expenses required incurred for business operations called overhead (Drury, 2012). Under marketing the expenses, commissions and direct costs related with marketing and sales departments are considered. Research and development are expenses for R & D operations. Some expenses called general and administration expenses incurred during the general administrative operations of business. Information about the paid taxes, except payroll are also treated as expenses in cash flow statement (Dyson, 2013). Capital shows the investment amount need to create income, loan payments are the payments use to reduce long term liabilities, material cost plus direct labour, marketing sales, research and developments, taxes, loan payments, capital and overhead expenses shows the total expenses (Fridson, et al., 2013). Whereas the cumulative cash flow is calculated by subtracting previous cash flow from current cash flow (Gartner, et al., 2013).

2.         Importance and role in determining profitability of a company

The financial statements provide the information to the creditors and investors to evaluate an organizational financial strengths and performance. Manager, creditors and investors need published financial information of an organization to make measurements and making analysis (Berends, 2010). The financial conditions of an organization are of important and major concerns to creditors and investors, as well as financial managers also need this information for making financial decisions and to know financial condition of company. Balance sheet shows the liabilities, assets and owner’s equity, it does not contains the information about business operations and changes occurred during the specific period to run business and final results, so the creditors, investors and financial manager need income statement to know the profit and loss, and cash flow to evaluate the cash flow in and out of company account to carried out business operations (Boone, 2013). Through income statement past and current incomes can be compare that shows the performance of an organization. A retained earning is part of equity is of important for the creditors and investors to understand the strengths and performance of an organization because if there is an increase in retained earning it means that a steady growth in organizational shareholder’s equity (Black, 2011).

3.         Explain 5 ratios clearly

3.1       Profitability ratio

Financial ratios are used to measure the business abilities to generate revenue as compared to it expenses and other costs incurred in a specific time period (Bragg, 2013). Higher values of these ratios as compared to organizational competitors show that organization is doing well business. These ratios assess the ability of organization to earn profit, sales revenue and cash flow (Brealey and Stewart, 2011). The creditors and investors and business owner also need these ratios to make investment decision for future or to understand the business performance in past period.  The most important ratios are return on capital employed (ROCE), gross profit margin, net profit margin and cash return on capital invested (CROCI) (Brendy, 2012). ROCE indicate how well an organization is using capital to generate returns and money for its shareholders is indicated by return on investment. Higher values means organization is executing operations in well manner to earn profit (Broadbent and Cullen, 2012).

3.2       Debt ratio

This is another financial ratio that is used by the creditors, investors and business owner to measure the degree of consumer’s leverage (Drury, 2012). This is ratio of total debt to total assets, and is expressed in percentage. Higher this ratio indicates that the risk associated with this company is high lower value of this ratio indicate low risk (Dayanada, 2012).

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Source: Author

3.3       Liquidity ratio,

Liquidity ratio basically indicates the organizational ability to repay short term to the creditors to reduce short term liabilities (Dyson, 2013). Liquidity ratio can be calculated by following formula

Liquidity Ratio = Liquid Assets / Short term Liabilities

If the value of the liquidity ratio is greater than 1 then it means that fully covered. High ratio indicate low risk of default, low ratio indicates higher risk of default (Fridson, et al., 2013).

3.4       Turnover ratio,

Turnover ratio indicate the number of times (frequency, repetition) of organization inventory replaced during a specific time schedule (Gartner, et al., 2013). Turnover ratio can be calculated as cost of goods/products/ services sold divided by average inventory over a specific time period. High value result indicates that organization is producing and selling products/ services quickly (Berends, 2010).

Inventory Turnover

Source: Author

3.5       Employee ratio

This ratio indicates an important ratio of organization between sales and number of employees (Boone, 2013). Higher value of this ratio means more productivity of organization higher value indicates more revenue generated by an employee (Black, 2011).

Revenue Per Employee

Source: Author

A critical discussion of The Work of Art in the Age of Its Technological Reproducibility

1.          Introduction

The essay is important for its early analysis of photography, and the influence photography and technological reproducibility have had on art and our perception of it. I summarized the essay below, dedicating a short paragraph to each of the chapters of Walter Benjamin’s essay. I have commented briefly after each paragraph to indicate strong and weak points in the essay. First of all, Benjamin observes that the reproducibility of art is a consequence of the advances of productive capitalist society, and that the political interest of its consequences should not be underestimated. Benjamin’s main observation is correct and extremely important. One may quarrel with the Marxist style of his preliminary observations (Samuel, 1996). However, they are explicit, not hidden and do not influence his main analysis of the consequences of the reproducibility of art, and should rather be seen as hallmarks of intellectual integrity and openness (Taylor, 1997).

2.          First Paragraph

 Next, he observes that though reproducibility of artworks has been known for a long time (casting, stamping, woodcuts, movable type, engraving, etching, lithography), with the advent of photography, reproduction in detail was vastly accelerated, with minimal effort. He sets out to analyze the effects of the reproduction of artworks and the art of film, on art in its traditional form. Again, Benjamin’s main observation is acute, and acknowledges the strong influence that reproductive society has on our perception. He rightly considers the influence of photography on art as dominant compared to the influence of art on photography although the latter is also important. In fact, he stops short of analysing the wider influence of photography on culture in society, although he alludes to it often in the sequel of the essay. He could have allowed his observations a wider applicability (Walter, 1988). Benjamin is clearly aware of that but chooses nevertheless to concentrate on the influence on art. The choice of domain is artificially small, and is presumably the cause for a much less refined treatment of much broader subjects in the introduction and epilogue (Theodor, 1997).

3.          Second Paragraph

Benjamin argues that the work of art is distinguished from a reproduction by the here and now of the artwork. He argues that photographic reproduction is not forgery, since it can reveal details unobservable to the human eye, and can place the artwork in otherwise unreachable contexts. Reproducibility endangers the original’s aura. Mass existence detaches the authentic object from the sphere of tradition. Once more, Benjamin makes an important observation. The reproduction of an artwork is not like the original, however, note that Benjamin chooses here to think of photography of art, and not of photography by itself. He considers the artwork as reproducible via photography, and concentrates on the difference between the reproduction and the original, identifying authenticity and aura of the artwork as qualities that are lost in the process of reproduction (Samuel, 1996). Aura and authenticity are vague concepts, in my view, and I associate them with an old view on art in which a Master realizes a singular work of art, and distils magic on a canvas. However, it is true that the concepts of aura and authenticity can, in many particular instances be filled in concretely, and they are therefore useful. More examples would have been appropriate. To me the most important point at this junction is that photographs are reproducible independent of their application (Taylor, 1997). It is one of their most important characteristics, here applied only to the reproducible reproduction of a work of art. In fact the paragraph show that Benjamin is only concerned with a particular application of photography, namely in art. His essay cannot be read as an analysis of photography proper, although it contains important elements for such an undertaking. In particular, anything photographed becomes a mechanically reproducible image. That is an important characteristic of the act of photographing (Walter, 1988).

4.          Third Paragraph

Modes of perception change. Aura is associated to distance. By reproduction, distances gets smaller, sameness is extracted from uniqueness, the work of art becomes repeatable and transitory. The reverence for true art is again manifest in the description of what photographical reproduction does to the artwork, perhaps, to make the transition clearer, Benjamin consciously exaggerates the starting point (Samuel, 1996). However, that is unnecessary and refers to a very classic view on art. I often want to be close, feel close is taken in by the artwork, are emotionally touched by its mastery. Moreover, associating repeatability to transistorize does not make little sense, nor does associating art to eternity make sense, although again, it is a classic mistake. Eternity is a concept that I won’t easily fit into my lifetime. It is a negation of the finitude that we are familiar with in our lives, and that I should cherish. Benjamin makes the very important point that our perception of art changed through its reproducibility. That is certainly true, and needs to be analyzed in more detail (Taylor, 1997).

5.          Fourth Paragraph

The uniqueness of the work of art is determined by its basis in ritual. Art in the age of reproducibility is revolutionized. It is based not anymore on ritual, but politics. Ritual is advanced as a prerequisite for art. Without ritual, art becomes a goal in and of itself. However, there is nothing wrong with that, and I believe that art has gained its independency of ritual, and that it deserved to do so (Walter, 1988).

6.          Fifth Paragraph

The stress on the cult value of works of art has shifted to their exhibition value. Photography and film are ideally suited for realizing that shift. Again an acute and visionary observation, a further analysis of the consequences of this fact, both negative and positive, is necessary (Theodor, 1997).

7.          Sixth paragraph

From some cult value in early photography portraits, fleeting human presence via at get photography has become evidence for a historical process. Perhaps, when photographs were less widely spread, they kept cult value. However, they were always ideally suited for exhibition, and they still are, even the eldest ones.

8.          Seventh Paragraph

Certainly, it is true that we must not ask whether photography is an art, for various reasons. The technological innovation underlying photography and film revolutionized our vision, and we must undertake the definition of new categories to cope with its advent, instead of trying to fit them into an old dictionary. However, it is also insufficient to ask how photography as a technique of reproduction has changed art. It has changed art in more drastic ways than as a means of reproduction. It seems that Benjamin underestimates still the importance of photography (Taylor, 1997).

9.          Eight Paragraph

The actor is tested optically by cinematography. The audience is not in personal contact, but takes the position of the camera, the optical tester. The approach contradicts the cult value.

10.      Ninth Paragraph

In film, the actor loses his person, his here and now. The best acting is where the actor acts as little as possible losing his aura entirely, the actor need not identify with a role. Indeed, the best acting is often minimal and I believe this is partly due to the viewer’s capability for empathy and her imagination (Samuel, 1996).

11.      Tenth Paragraph

The screen actor confronts the consumer. Capital sets the fashion. Film is only revolutionary in its criticism of the traditional concepts of art. Everybody can be filmed, everybody writes. The masses are involved. The revolt of the masses is a fact and I associate it to a rise of the overall standard of living rather than to one particular facet of technological revolution and the breadth of its manifestation is, by nature, large (Theodor, 1997).

12.      Eleventh Paragraph

Vision of reality is one via apparatuses, diminishing distance and increasing detail. Our daily perception of reality has remained more or less constant, from our ape days until now, and the influence of apparatuses on our daily lives should not be exaggerated. Their technological importance, and their importance in scientific discovery, of course, can hardly be overestimated and it is true that to some degree, the associated sense of possibility has influenced popular culture (Walter, 1988).

13.      Twelfths Paragraph

Pleasure becomes fused with expert appraisal, in the relation of the masses with art. Simultaneous mass reception of painting is unthinkable, and does not naturally confront masses directly. Art is again associated to an elite, individual activity, while it is essential that culture is public, and only in its publicity and public value, it can be culture. However, it is clear that a reaction of the masses cannot replace an expert opinion, when better informed, based on a broader interpretation, a finer analysis of distinguishing characteristics, etcetera, the larger public should take time to listen to experts, but should by no means be excused from an attempt to shape an informed opinion (Taylor, 1997). Any suggestion to that effect is tantamount to cultural suicide.

14.      Thirteenth Paragraph

Film sharpens and deepens our optical and auditory impressions. Artistic uses and scientific uses of photography are identical, as will be demonstrated by film. My field of vision is enlarged, our eye is sharpened. We see things we could not see before, discovering the optical unconscious. Benjamin rightly estimates that photography and film have influenced and enlarged our visual perception. This society has developed a far more subtle visual language, due to the omnipresence of imagery and a linguistic analysis of visual language in contemporary imagery is called for (Walter, 1988).

15.      Fourteenth Paragraph

Dadaists destroyed the aura of art and outraged the public. Film is shock replaced by shock. The analysis of cinema is certainly not simplified by the continuous visual attack on our brain during viewing. The analysis of film should be approached with caution, time delay, and a stop button.

16.      Last Paragraph

The artist enters the painting the masses absorb the work of art. Concentration is contrasted with distraction. The public is a distracted examiner. Benjamin again uses a classic image of art in which the artist loses himself in the painting, contrasted with the masses devouring art. The latter is a more optimistic view on art than we are used to from Benjamin. Fascism allows masses to express themselves, not changing the property relations and war delivers the artistic gratification of a sense of perception altered by technology (Samuel, 1996).

Conclusion

The Work of Art in the Age of its Technological Reproducibility points towards very important consequences of the invention and pervasiveness of photography. Benjamin wrote an essay about art and about the influence of photography on art. He identifies technological reproducibility as a paramount feature of photography. His concept of art is classical, and his essay seems to have a pessimist undertone about the influence of modern media on the experience and social consequences of art. He rightly identifies the strong influence of photography and film on our modes of perception. By contrast I would like to argue that photography and its reproducibility are still underestimated in this essay, where its function is too often narrowed down to the reproduction of art. I wish to stress the necessity of a linguistic analysis of visual imagery and a more thorough study of the special relationship between art and politics, from the perspective of quieter times. It is necessary to understand photography and film better, to better control its potentially destructive use. Clearly, photography has made fine art more democratically accessible to a much wider public and the influence of this fact on art should not be overestimated, whereas art is bought by a small fraction of the people that have been reached by photography and it is true that expert critics and potential buyers have gained easier access to art works through photography, but it would be fair to conclude from this that better art has gotten a better chance of getting the upper hand, not only in the market, but everywhere worldwide (Theodor, 1997). The influence of the public at large on the expert critics and buyers exists but should not be exaggerated. We should not confuse products of distraction and entertainment with the production of works of art. Though it is extremely interesting to analyze precisely the way in which Benjamin identifies, like a visionary, salient features of technological and cultural streams during his lifetime, more than half a decade later it should strongly be recognized that his analysis is dated (Samuel, 1996).

impact of finance on the financial statements

Impact of Long term Loans

Chief executive must be aware of impact on long term loan on the company because liabilities are debts the company incurs. As Chief executive should understand that the liabilities are the basically source of funding and they can grow large, and may find itself owing more than it earned the profit. So the Chief executive must manage the long term loans because it is liability that contributes its role for earning profitability. Secondly the long term loans are borrowed money and if the company has less amount payable the value of the company will increases (Catherine, 2011). In the balance statement the long term loans are the assets (Kenneth and Willinger, 2009). The balance sheet equation is as Assets= Sum of Liabilities + Equity.  It simple means that the business resources (long term loans) are acquired by incurring obligations to creditors, and when the amount of loan will be low means that the value of assets will be decrease. Change in the assets means that the change in the liabilities and owner’s equity (Agnes, et al., 2010).

Impact of Equity Share

Chief executive must maintain the value in the organization that is actual equity share. Equity share is basically the part of the business that could not be funded by the loans amount but it could be earned from the buying of shares of the business (Olsen and Dietrich, 2011). Equity share always have a positive impact on the business especially in financing for a business, so the Chief executive must consider this factor. If by mistake if the value of equity shares drops, in this way the worth or value of the company will be decrease and investors will not invest money (Juan, 2008). Repurchase of share will reduce the cash holding and also the total assets it will also shrink the shareholder’s equity. As a result return on asset and return on equity typically improve (Patricia, et al., 2011).

Impact of Finance and Operating Leases

To purchase an asset the companies borrow the money from creditors and in this way the assets side is debited in the balance sheet (what comes in) and the interest amount (what goes out) is always deducted from the operating profit (expenditures) (Ball and Watts, 2009). In this way the operating profit will be low (Mary, et al., 2013).

Importance of financial planning

The financial planning is so important for the Emaar group of properties due to following reasons (Michael, et al., 2011).

It will be possible for the chief executive manage the income and he can understand the money for tax payments and other expenses and he will come to know about the savings (Patricia and Ilia, 2012). Chief executive will be able to understand the expenses and the cash flows (what comes in and what goes out) and he can monitor the expenses (tax planning, utility bills etc.) and income. In this way while planning finance the chief executive will be able to understand the income and he can increase the capital amount by improving the investment plans. Financial planning will also provide him chance to secure his family financially, by having proper insurance policies he will secure with financial security in future (Badertscher, et al., 2010). In the financial planning the chief executive of Emaar group of properties personal circumstances, his objectives and risk will be considered and it will provide him help to choose the effective type of investments as according to his needs, goals, objectives and wants. Chief executive can improve his financial situation by financial planning and can save his money which will be helpful for him in bad days e.g. he can secure him while buying insurance policies. And he will utilize his all resources and will control all the business operations for more income and in this way he will save time and money. And through budgeting he can make more savings for him and his family. He can come to know the real value of assets, because some time costs are attached with assets and in this way he will be aware of actual value of his assets and he can understand the liabilities of the company as well and through effective planning he can pay the liabilities that will increases the value of his assets (Ali, 2008).

Implications of legal status, Dilution of Control and tax affects

Each financial resource has its own implications for example interest rate on loan, late payment penalties etc. legal status means that when the business has been started then there are so many legal responsibilities on the business entity including tax payments, legal agreements, on time payments, wages rates, tax rate, sales tax payments, value added tax (VAT), bill payments and business entities are liable to pay all these payments on time and must avoid to breach legal agreements and to pay amount in time (Ali, 2008). In condition of non payment it may affect the business operations and credit score of company and trust on financial institutes and services providers may stop to provide their services and business may be flopped. The balance sheets, profit and loss statement must be neat and clean and accounts must be submitted to the company’s house and statements must be published in time, dividends must be paid well in time to the share holders (Robert, et al., 2008).

Dilution in control means that the decline in the percentage of the shareholder’s must be in control of the company because it have a great impact on the shareholder’s mind and when the company will issue new shares in the secondary market. New shares always issued after the general meeting with share holders after their approval and other parties issued the reports (auditor’s reports) with legal aspects (protection) (Richard, 2008).

Main Sources of Finance

Short term

Trade credit

Overdrafts

Operating lease

Medium term

Debenture

Public deposit

Commercial banks

Financial institutes

Lease finance

Long term

Share capital

Retained earnings

Debits

Loans (more than 5 years)

Preference shares

1.1.1   Bank Loan

Banks and trust unions tender lending to bulky and mean businesses (Richard, 2008). When party take out a loan from a terrace, they have accessibility to a prepare amount of funds, but are bound to the escarp’s reimbursement terms and interest proportion. Interest is the fee for use the money, which hoard supported on how much of the loan is necessity and how long it will seize the employment to hire backing the reserve (Kenneth and Willinger, 2009).

1.1.2   Home Equity Line of Credit

Owner of the business can apply for the credit line if he or she has the house, the financial institutes can give credit line loan to make investment in business. Interest rate on credit line is always fluctuating so the business owners should monitor interest rate closely (Catherine, 2011).

1.1.3   Investor group

Many investor groups are also looking for such companies those require financial investors to overcome their problem (Olsen and Dietrich, 2011). These capitalists invest money in different projects from £500,000 up to 10 Million Pounds (Agnes, et al., 2010).

1.1.4   Personal Resources

Business owners can use their personal savings as an investment, they can use their retirement accounts as financial source, they can use their personal credit cards and overdraft limits (Juan, 2008).

1.1.5   Factors affecting financial decision

Basically these factors vary from one organization to another; micro economic and macroeconomic factors always influence the financial decision of an organization (Patricia, et al., 2011).

1.1.5.1           Microeconomic Factors

Organization size

Nature of business

Liquidity position

Pattern of ownership

Asset structure

Risk

1.1.5.2           Macroeconomic Factors

Government policies

State of economies

As the nature of the business is to build the hotel building and project managers want to convince investors for capital gain, so for this project risk will play an important role while making financial decision, financial managers always consider risk as an important factors because if the risk is high then the income level may not be stable (Ball and Watts, 2009). Liquidity position of a firm is the other factor that has influence on financial decision, if the firm has sound liquidity position means it has strong dividend policy (Mary, et al., 2013).

State of economy and government policies are the other two major factors that influence the financial decision in an organization. Structure of money market referred to as state of economy and tax rates, wages rates, wages hours, income tax, foreign exchange rate, interest rates are always designed by the legislation political parties, similarly licensing, securities and business policies are always affected by the government policies and economics policies and political stability is also concerned with economic stability (Michael, et al., 2011). If the risk is high the financial manager will design conservative policies because the shareholders seek profit in cash. If the interest rate is high then the cost will be high and the profit will be low. Tax rates, wages rate, working hours, exchange rates and income tax rate can be change and it will disturb the financial position of an organization so the financial manager consider these important factors into consideration while making financial decision (Patricia and Ilia, 2012).