Finance: Tasks

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Finance: Tasks

First Task

First Question

When evaluating financial statements, it is always important to care about the industry since it is through that a financial expert or investors are able to determine the financial trends of a given business opportunity (Kioko & Marlowe, 2016). Financial trends are different depending on a given company. Every industry presents financial opportunities as well as risks. In the case of investors, this presents a major influence on their decisions to invest or not invest in a given industry. Besides, the price of stocks also differs from one industry to the other. On the other hand, depending on a given time, certain industries are more relevant to investors compared to others, for instance, online platforms such as online stores are more lucrative currently compared to other industries as agriculture.

Additionally, the type of industry does not directly reflect on the company’s or organization’s financial statement since it is just a piece of a puzzle. Therefore, understanding and knowing the industry would enable the investor to conduct more research before arriving to a decision. Identification of the type of industry is among the first steps of evaluating financial statements since this process is used to conduct value chain analysis. This analysis illustrates the activities that the company or business is involved in and this is inclusive of the creation process, manufacture and the distribution of the firm’s products or services. Besides this step is essential for the following steps such as analyzing the company’s current ratios of profitability and risks.

Second Question

The concept of relevance ensures that the major objective of providing equity to company investors by providing them with information which is relevant in helping them to determine the value of the company (Beisland, 2009). Due to this relevance, it ensures that decision making, which is based on accounting information provided to the users it is appropriate and relevant. Also, according to Choo et al. (2010), the concept of relevance shows the relationship between accounting information, the decisions made by the users, and a particular representation of the economic phenomenon, rather than the association between the economic phenomenon and the decisions.

On the other hand, the concept of representational faithfulness refers to how reliable is the accounting information that is used to inform decision making. In decision making one can have both, however when determining equity one needs relevance. One scenario that the concept of representation of faithfulness is applied is when monetary amounts are disclosed in the notes rather than identifying them in financial statements since that information is less reliable due to a major uncertainty linked with the measurement of the monetary amount. If the information used in the valuation of the company’s stoke during the provision of equity is not relevant, the investor may face losses or the price could be expensive compared to the real price he or she could have or will use to buy the given company’s stock.

Task Two

While a positive cash flow represents a positive in the business’ financial standpoint, at times, it does not represent profitability that is why there is a need for one to understand cash flow and taxes before reporting. A cash flow statements is known to list the cash inflow and cash outflow of a business while the income statements outlines the incomes and expenses of the business. There are many income items that also known to be cash flow while there are others which are not. Due to this factor, there is a need for one to be vigilant when calculating income tax. There is also the feature of depreciation. Sometimes companies are not able to report the correct income tax. Taxes operate differently based on the guidelines set by the government for given types of business. For this reason, it is crucial for businesses to be aware of the type and amount of tax they ought to pay, otherwise they may call for scrutiny from tax collection institutions. Businesses should indulge the expertise of financial tax expert when filing tax returns.

At the same time, there are various challenges that are associated with cash flow from the business point of view. For example, late payments make it hard for business to assess its cash flow. Also, there is a need for one to have an understanding of the turnover rates. High turnover rates listed in the inventory and shorter time in receiving payments increases operating cash flow. The depreciation and tax values are used in adjusting the net income (Segal, 2018). The challenge with this feature is that at times depending on the item, the rate of depreciation or tax differs. Therefore, failure in understanding this may affect the value of the business’ operating cash flow as well as the tax ought to be paid by the business.

Third Task

References

Beisland, L. A. (2009). A review of the value relevance literature. The Open Business Journal, 2(1).

Cho, M., Kim, O., & Lim, S. C. (2010). Two conflicting definitions of relevance in the FASB Conceptual Framework. Journal of Accounting and Public Policy, 29(6), 604-611

Kioko, S., & Marlowe, J. (2016). Financial Strategy for Public Managers.

Segal, T. (2018). How to Calculate Taxes in Operating Cash Flow? Investopedia. Retrieved from https://www.investopedia.com/ask/answers/012615/are-taxes-calculated-operating-cash-flow.asp