Question

Explain the following financial tools used for control. Include an explanation of each of their value in business planning.

financial statements

balance sheet

income statement

audits (internal and external)

Answer 1

-> Financial statements are written records that convey the business activities and the financial performance of a company. Financial statements include the balance sheet, income statement, and cash flow statement. Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes.

-> The balance sheet is one of the three fundamental financial statements and is key to both financial modeling and accounting. The balance sheet displays the company’s total assets, and how these assets are financed, through either debt or equity. It can also be referred to as a statement of net worth, or a statement of financial position.

The balance sheet is based on the fundamental equation:

Assets = Liabilities + Equity.

=> The Income Statement is one of a company’s core financial statements that shows their profit and loss over a period of time. The profit or loss is determined by taking all revenues and subtracting all expenses from both operating and non-operating activities.

The income statement is one of three statements used in both corporate finance and accounting. The statement displays the company’s revenue, costs, gross profit, selling and administrative expenses, other expenses and income, taxes paid, and net profit, in a coherent and logical manner.

The statement is divided into time periods that logically follow the company’s operations. The most common periodic division is monthly (for internal reporting), although certain companies may use a thirteen-period cycle. These periodic statements are aggregated into total values for quarterly and annual results.

This statement is a great place to begin the financial model, as it requires the least amount of information from the balance sheet and cash flow statement. Thus, in terms of information, the income statement is a predecessor to the other two core statements.

=> the internal audit and external auditfunctions, which are as follows:

->Internal auditors are company employees, while external auditors work for an outside audit firm.

->Internal auditors are hired by the company, while external auditors are appointed by a shareholder vote.

->Internal auditors do not have to be CPAs, while a CPA must direct the activities of the external auditors.

->Internal auditors are responsible to management, while external auditors are responsible to the shareholders.

->Internal auditors can issue their findings in any type of report format, while external auditors must use specific formats for their audit opinions and management letters.

->Internal audit reports are used by management, while external audit reports are used by stakeholders, such as investors, creditors, and lenders.