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First student - James-

(1) Identify the four principal financial statements and describe their functions.

Balance sheet- The balance sheet shows the assets, debts and how much the company is worth at a point in time (Adkins, 2019).  The balance sheet is also referred to as a “snapshot of a company’s financial condition” at a specific time (UMGC, 2019).  Usually, the balance sheet is created once a year to be included in the company’s annual report and is used to evaluate the company’s value and how it is performing (Adkins, 2019). 

Income Statement- The income statement is used to evaluate a company’s financial performance over a specific period of time (Chen, 2021).  It evaluates the company’s profits and expenses to show whether the company made or lost money (UMGC, 2019).  Unlike the balance sheet, the income statement displays information over a period of time, not a specific point in time.

Cash Flow Statement- A cash flow statement shows how cash is flowing in and out of a company through operating, investing and financing actions (UMGC, 2019).  This statement shows the cash that is coming into the business through payments from customers or loans and the cash going out of the business to pay debts such as utilities and salaries for example.  This statement is beneficial in helping to show the short-term viability (UMGC, 2019).

Statement of Changes in Equity- The statement of changes in equity is important because it shows changes in owner’s equity during the period of time specified (Becker, 2015).  It shows issue and redemption of stock, dividends paid, and profits or losses of the company (UMGC, 2019). 

(2) Discuss how ratio analysis can be used to evaluate a company's financial strengths and weaknesses. 

Ratio analysis can be used to predict future performance and to compare their performance to similar businesses and can show areas of the business that may be a concern (Cadden & Lueder, 2012).  There are five main categories for financial ratios; liquidity, financial leverage, profitability, asset management and market value ratios (Cadden & Lueder, 2012).

Liquidity ratios are used to make sure the company can meet its short-term debt obligations and is found by dividing assets by liabilities with a number one or greater meaning the company better meet their short-term obligations (Cadden & Lueder, 2012).  Most small businesses are not traded, so market value ratios are not applicable to non-publicly traded businesses (Cadden & Lueder, 2012).

Financial leverage ratios provide insight into the company’s ability to meet their long-term debt obligations from the balance sheet and income statement (Cadden & Lueder, 2012).  Dividing total debt by the total assets shows how much of the company’s assets are paid for through debt (Cadden & Lueder, 2012).

(3) Discuss the difference between cash flow and profit in the world of finance. Which one do you think is more important, and why?

Cash flow is how much cash is moving in and out of business at a specific time and profit is how much remains after all of the company’s operating expenses are subtracted from the revenue (Stobierski, 2020).  Cash flowing out is from the company paying utility bills, buying inventory, paying salary, etcetera; while cash flow is in when customers pay the company for the product or service.  Cash flow can be positive, more cash is coming in, or negative which means the company has more cash going out of it (Stobierski, 2020).

I think positive cash flow is more important than profit because it means the company has cash coming in and is still able to pay its debts.  Having cash coming in allows the company to pay its debts on time and pay more for financing or to take out loans (Stobierski, 2020).

(4) How would you choose the best financial institution (commercial bank, savings bank, credit union, etc.) for your small business? What factors would you look for? Better priced loans, fees, regular personal banker interaction, etc.

When choosing a financial institution for the business I plan to open, a brick-and-mortar institution would be a must in order to easily deposit cash from cash sales.  I would like to open a brewery and this type of business would require an easy way to deposit cash and receive cash to have on hand for the cash register.  I currently use USAA for my personal banking and when I need to deposit cash it is rather difficult, I need to have some write or check or get a money order that costs money.  That would not be an effective method to operate a small business.

For a small micro-brewery, a local credit union could be a better opportunity than a bank since they typically offer higher rates for savings accounts and CD’s (Goldberg, 2022).  Depositing money into savings and CDs could be a way to let the brewery’s money work for itself.  A local bank could also be an option depending on if they charge fees and if the fees can be waived (Goldberg, 2022).  The ultimate deciding factor would be balancing the interest rates on loans and the interest rate on savings accounts and CD’s.  Sticking with a local bank or credit union also offers the ability to build a relationship with them, unlike with an online institution.

References

Adkins, W. (2019, July 30). What Is the Function of a Balance Sheet? Retrieved from Bizfluent: https://bizfluent.com/about-4672142-function-balance-sheet.html

Becker, E. (2015, August 1). The Statement of Changes in Equity or Statement of Retained Earnings Explained. Retrieved from OSYB: https://www.osyb.com/blog/small-business/the-statement-of-changes-in-equity-or-statement-of-retained-earnings-explained/

Cadden, D., & Lueder, S. (2012). Small Business Management in the 21st Century. Retrieved from Saylor Academy: http://www.freebookcentre.net/business-books-download/Small-Business-Management-in-the-21st-Century.html

Chen, J. (2021, March 16). Income Statement.Retrieved from Investopedia: https://www.investopedia.com/terms/i/incomestatement.asp

Goldberg, M. (2022, April 12). Banks vs. credit unions: How to decide. Retrieved from Bankrate: https://www.bankrate.com/banking/banks-vs-credit-unions/

Stobierski, T. (2020, April 21). CASH FLOW VS. PROFIT: WHAT'S THE DIFFERENCE?Retrieved from Harvard Business School: https://online.hbs.edu/blog/post/cash-flow-vs-profit

UMGC. (2019). University of Maryland Global Campus. Retrieved from Boundless Textbook FINC-331-finance-for-non-finance.pdf



Second student - Anna 

  1. The four principal financial statements are the balance sheet, profit and loss statement, statement of cash flows and statement of shareholder’s equity.  The balance sheet shows the assets, liabilities and owner’s equity of a company and is the foundation of double entry accounting.  Assets are items that a business owns and uses to produce products or services.  The profit and loss statement shows the income and expenses of the business venture.  Items or services that are sold appear as income items and the outflows that are incurred to produce the revenue appear as expenses.  The statement of cash flows shows the inflow and outflow of cash in a business organized by the type of activity.  The operation is shown first, followed by investing and then financing activities.  This report helps to show the differences between profit and cash amounts.  Lastly is the shareholder’s equity statement.  This report highlights the changes to the shareholder’s equity holdings in a business for a specified period.  It is basically an expanded statement of the equity section of the balance sheet that provides more detail of the changes.   

  1. Ratio analysis can be used to determine trends and provide insights into business operations that are not evident on the financial statements.  Examples include ratios such as return on equity, where net profit is divided by shareholder equity.  The result can then be compared to other investment choices.  Another example is total asset turnover, where revenue is divided by total assets, which can show how well the business is generating profit from its assets.   

  1. The world of finance sees cash flow and profit differently.  Cash flow shows the results of the inflows and outflows of the business.  The net profit of the business is the result after all expenses have been paid.  Both of these statements are important to see how a business is performing, one is not more important than the other, although the profit and loss statement is far more commonly used.  If an investor was considering purchasing shares of a business, they would want to examine both of the reports to assess the profitability and viability of the venture.   

  1. Choosing the best lending institution for me would be based on cost factors.  I would make sure that the interest rate is as low as possible, that the length of the loan is short as possible, and any fees are minimal.  Credit unions typically offer the best value in both lending and banking products.  I don’t expect any interaction with bank personnel if I’m making the payments in a timely manner.  I have shopped for mortgage loans for rental property several times and credit unions have always been the best value for me.    

 

Reference: 

https://www.demonstratingvalue.org/resources/financial-ratio-analysis



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