Financial management discussion questions and concepts

¶ … Owner's Equity statement is a crucial part of the financial process from a shareholder's perspective. It is essentially a financial statement, like a balance and cash flow sheet, but reviews additions and deductions of cash from an individual's equity account. Thus, the owner, or shareholder, is being told of the balance additions and deductions for particular periods of time, normally about a year just like a balance sheet, so they can review their equity just as a corporation or organization would review its profit and loss margins. This allows the shareholder to be in control of their equity, and make decisions to sell or keep the stocks and equity they have invested in. It is very similar to an organization-wide balance sheet, income statement and cash flow statement because they are similar in technical form, but also in purpose. It shows the shareholders income and reflects the cash flow of the entire organization.

Session

The Du Pont-triangle ratio is an equation to help break down the ROE, return on equity. The ROE is broken down into three main parts in order to provide a more in-depth analysis for shareholders and financial managers. These three parts include the profitability, operating efficiency, and financial leverage. The profitability of the equity is measured essentially by examining the profit margin of the organization, while the operating efficiency is analyzed through understanding and evaluating the asset turnover of the organization. Finally, the financial leverage is measured by using the equity multiplier in order to understand how much working capital the company can leverage in order to better benefit individual equity plans.

Session 3

Managing cash flow is a huge part to financial managing in general. It helps a company understand its capabilities and plan for future budgeting strategies. In order to understand the cash flow, one must be able to conduct appropriate forecasting through thorough cash flow projections. These are done through a number of ways. One is by examining a company's receipts and disbursements directly. This is appropriate for short-term forecasting, normally of about 30 days. Additionally, there is adjusted net income, where the initial operating income is added or subtracted from the balance sheet changes. Another way to the pro-forma balance sheet, where the cash account is the primary mode of analyzing forecasting numbers. Finally, there is the accrual reversal method, where major accruals are reversed in order to statistically understand cash flows.

Session 4