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COMM 200 (56)
Chapter 14

Chapter 14 - Financial Statements..docx

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Queen's University
COMM 200
Gary J Bissonette

Chapter14FinancialStatementsThe Role of Financial StatementsFinancial statements keep managers uptodate on the success of the organizations sales and control its costs and maintain itsoGross profit margin Contribution Margin the portion of an organizations revenue that is left over after the organization has paid the direct costs wages components materials etc associated with its products or servicesoProfitability margin is the portion of an organizations revenue that is left after all operating expenses associated with its products or services have been paidThree Fundamental StatementsFigure 141 In analyzing the current financial situation of a company managers generally rely on three primary financial statements the income statement the balance sheet and the statement of cash flowsTwo Fundamental Types of Business TransactionsOperational Transactions represent the flow of money within the organization that is directly related to daytoday business dealingsoRevenue and reoccurring expenses relating to the manufacturing distribution and selling of goodsservices are primary examplesoIncome Statement provides us with this informationCapital Asset Transactions decisions that managers make with respect to investment and divestment of capital assets buildings equipment business subsidiaries that may be needed or are no longer neededoCash Flow Statement provides us with this informationLiquidity Solvency Efficiency and Financial CapacityFigure 143Current and Future Liquidity and SolvencyLiquidity how much cash andor near cash do I have Must generate sufficient revenue from the sales of their productsservices in order for companies to meet its ongoing financial obligationsie paying employees suppliersSolvency refers to a longerterm assessment of the financial stability and profitability of the firm Ability of an organization to meet its longterm expense obligations and to profitably grow the companyEfficiency refers to how effective the organization is in deploying its resources and managing its operational processes ie how quickly we are collecting money owed to us from customers converting sales how productive employees are etcCapacity an organizations cash reserves and borrowing power We must analyze and interpret the financial statements income statement balance sheet and statement of cash flows to draw conclusions relating to these four assessment metricsBusiness in ActionThe risk of wanting immediate shortterm results despite the benefits may result in failure to see the longterm health of the business For example the willingness to trade growth opportunities customer service advantages and employeebased intellectual capital in order to achieve stronger nearterm results can compromise the future of the firmoExample Circuit City laid off 3400 knowledgeable experienced store employees for minimum waged workers to reduce the cost of labour however it reduced productivity customers and a significant loss of intellectual capitalThree Primary Financial Statements
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