Do financial statements help in Financial decisions and corporate valuation

However, the richer the person is or the bigger the company is, the more sophisticated is the financial statement. Below is an example of a simple personal financial statement.

“CASHFLOW 101” (Kiyosaki and Lechter, 2002)

Profession __________

Goal: To get out of the rat race and onto the fast tract of building up passive income to be greater than total expenses

Income Statement

Income
Description	Cash Flow
Salary:
Interest:
Dividends:
Real Estate:
Businesses:
Expenses
Taxes:
Home Mortgage:
School Loan Payment:
Car Payment:
Credit Card Payment
Retail Payment
Other Expenses:
Child Expenses:

Source: CASHFLOW ((Kiyosaki and Lechter, 2002)

Auditor _________________

Passive Income = _________

(Cash flows from interest + Dividends + Real Estate + Businesses)

Total

Income: ________

Total

Expenses: _______

______________________

Monthly

Cash Flow: ____________

(Pay Check)

Usually, in an income statement as exemplified by the table of two columns above, the record begins with description or the source of the income and the cash flow or the amount earned from the source.

Balance Sheet

Assets	No. of Shares	Cost/Share	Liabilities
Stocks/Mutual’s CDs			Home Mortgage:
			School Loans:
			Car Loans:
Real Estate	Down Pay	Cost:	Credit Cards:
			Retail Debt:
			RE Mortgage:
Businesses	Down Pay	Cost
			Liability: (Business)
			Bank Loan:

Source: CASHFLOW (Kiyosaki and Lechter, 2002)

As illustrated on the sample table above, before a managerial decision can be made, there is a clear-cut need to know the difference between the company asset and the company liability. Therefore, the managerial accountability which obviously means understanding company bookkeeping gives the manager an accurate control over company finances as well as subsequent company future (Pratt, 2003; Kiyosaki and Lechter, 2002).

Theoretical Liquidity: Do financial statements help in Financial decisions and corporate valuation

Consequently, the liquidity ratios, the profitability ratios, and the solvency ratios can be used for wage negotiations, takeovers and mergers, and private share purchases (Keown, Petty, Scott, and Martin, 1998; Hunt, Weygandt, Kieso, and Kimmel, 2003).

Financial Documents

Income 1. 2. ↓

Expense 1. 2. ↓

Assets 1. 2. ↓

Liabilities 1. 2. ↓

Consequently, decision-making capability requires the precise examination and understanding of these two documents, as exemplified above, which will likewise allow recognition of contracts, trends, requirements of the consumers and vendors, and especially the route that the money is streaming(Pratt, 2003; Albrecht et al, 2002 Kiyosaki and Lechter, 2002). In this regard, Warren Buffet, a business tycoon who went up the ladder of riches through appropriate investments in America, Alan Greenspan, the then chairman of the Federal Reserve Board for almost 20 years, Paul O’Neill, who was a secretary of the treasury for sometime, all basically supposed the need for everyone to learn reading and writing financial statements (Kiyosaki and Lechter, 2002).

According to Kiyosaki and Lechter in 2002, “It is the direction of the cash flow in a financial statement that counts and not the glittery fool’s gold”.

Theoretical Solve: Do financial statements help in Financial decisions and corporate valuation

Solvency ratio arises from debt to total assets. This is the link of total debt in excess of total assets. Solvency ratio, which is a relative amount, determines the proportion of total loan provided by creditors. This solvency ratio also supplies the required precise information about a company’s facility to survive losses without prejudice to creditors’ interest. Thus, when a company has small fraction of debt in relation to its overall assets, the company is seen to be at a vantage point and attractive to creditors considering the amount of shield prior to bankruptcy. Additionally, solvency ratio with small fraction of debt in relation to its overall assets apparently determines a company’s ability to get hold of extra sponsorships. The relationship is written as:

Solvency ratio = Debt to total assets = Total debt

Total assets

(Hunt, Weygandt, Kieso, and Kimmel, 2003).

Theoretical Prof: Do financial statements help in Financial decisions and corporate valuation

Meanwhile, the profitability ratio arising from return on common stockholders equity is actually the link of net income in excess of common stockholders equity. The ratio, which is the relative amount, determines the productivity of the proprietors’ outlay. In cases where this profitability ratio of common stockholders equity is found to be higher than the rate of return on total assets ratio, then, clearly, this indicates that the company employed creditor sources. As such, the company is satisfactorily operating on the equity. However, a company operating on equities or on loans apparently boosts the company’s financial risk. Nonetheless, equities or loans improve sustainable income every time the rates of return on assets go beyond the expenditure of liabilities. The relationship is written as:

Profitability ratio = Return on common = Net income

Common stockholders’ Common stockholders’

Equity Equity

(Hunt, Weygandt, Kieso, and Kimmel, 2003).

Theoretical Cont.:Do financial statements help in Financial decisions and corporate valuation

The liquidity ratio or the current ratio is the link of current assets in excess of current liabilities. To such an extent, the relative amount determines interim debit disbursement competency of a company. Obviously, this ratio is a clear marker that the company can pay current liabilities through the stream of money generated by current company assets. Typically, this ratio is known as the working capital which apparently also discloses the fact that the finer ratio means finer interim solvency. The relationship is written as:

Liquidity ratio = Current ratio = Current assets

Current liabilities

(Hunt, Weygandt, Kieso, and Kimmel, 2003).

On the other hand, profitability ratio can be computed using return on assets and return on common stockholders equity. The return on assets ratio is the link of net income in excess of total assets or total chattels. The ratio, which is the relative amount, determines the wide-ranging productivity of employed chattels. To such an extent, the ratio which is likewise the relative amount determines the disposable income. This disposable income or profit is actually the per dollar sales turnover. The relationship is written as:

Profitability ratio = Return on assets = Net income

Total assets

(Hunt, Weygandt, Kieso, and Kimmel, 2003).