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Financial Management Theory and Practice Essay

A- Annual report :- it’s a statement that gives an accounting picture of a firms operation and its financial position , there is two types of information are provided in annual report

First :- the verbal section witch often represents the firms operation result during the past two years or any period , and discuses new developments that will effect future operation . and explain why things turned out the way they did .

Second :- the presentation for four basic financial statements ( the balance sheet , the income statement , the statement of retained earnings and the statement of cash flows). these four statements illustrate (what has actually happened to assets , earnings , and the dividends over the past few years .

These information is used by investors to help form an expectation about the future earnings of the firm and dividends

B- Balance sheet :- it’s a snapshot of firms financial position in the last day of given period . and a balance sheet changes daily because of
:- * Inventories are bought and sold .
* Fixed assets are added or retired .
* A bank loan balances are increased or paid down.
Its composite of a table of two sides :-
The left side of a balance sheet lists assets (which are the things that company owns) in order of liquidity or the length of time ,
The right side lists the claims that ( supplies , banks , bondholders , stockholders ) have against company and they must be paid in order ) .

C– the income statement :- reflects the financial performance over each of a given period of time ( monthly , quarterly and annually ) . witch contains net sales excluding (EBITDA) .which means earning before interest , taxes , depreciation and amortization .

D- depreciation :- its a policy applies by accountants , rather than treat the entire purchase of assets in a purchase year , they treat the expenses of assets by the assets useful life , in many years after , and it calculates in tangible assets in balance sheet .

E- Net worth or common equity :- it’s the asset net of liabilities and sum of common stocks and retained earnings , In case a company’s assets are sold and liabilities and preferred stocks were actually worth their book value , then the company in case of bankruptcy can sell its assets to pay liabilities and preferred stocks and remaining cash would belong to common stakeholders .

F- (EBITDA) :- its earning before interest , taxes , depreciation , and amortization .

G- STATEMENT OF CASH FLOW :- represents a claim against assets , instead of distributing the money as dividends , they spend it on buying new assets .

H- The statement of cash flow :- it’s the amount of cash reported on its year-end balance sheet , it can be used in variety of ways , (pay dividends , increase inventories , keep it in bank , or to invest in fixed assets .

(3-2) what four statements are contained in annual report ?

Answer :-
1- the balance sheet ,
2- the income statement ,
3- the statement of retained earnings
4- the statement of cash flows
These information is used by investors to help form an expectation about the future earnings of the firm and dividends . (3-3)
If a “typical” firm reports $20 million of retained earnings on its balance sheet, could its directors declare a $20 million cash dividend without any qualms whatsoever?

Answer :-
No , because the retained earning could be used in variety of ways , like pay dividends , increase inventories , keep it in bank , or to invest in fixed assets .

(3-4)
Explain the following statement: “While the balance sheet can be thought of as a snapshot of the firm’s financial position at a point in time, the income statement reports on operations over a period of time.”

Answer :-
Because the balance sheet changes daily as inventories are bought and sold , fixed assets are added or retired , or as a bank loan balances are increased or paid down . while the income statement is the financial performance of a firm during that period , and its more precise to analyze . (3-5)

What is operating capital, and why is it important?


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