FIN-610_Wk-2_Financial-Analysis

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University of Maryland Global Campus (UMGC) *

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610

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Finance

Date

Feb 20, 2024

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docx

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Uploaded by MajorMoleMaster406

1. List some of the reasons that financial analysis is conducted. Identify some of the participants that analyze the firm's financial statements. Reasons for conducting financial analysis include: 1. Easy to understand and generalizable: information from financial analysis generally uses GAAP (generally accepted accounting principles) and can therefore be used to easily compare across different businesses and/or statement periods 2. Decision-making purposes: information can be used for developing future business plans including the recognition of decisions that were not beneficial to allow for future corrective action 3. Evaluation of business value & performance: measured by different financial ratios and used to evaluate the health of a company (Kenton, 2021). Participants that analyze a firm’s financial statements include all stakeholders such as: 1. Management: used internally for evaluation of financial performance and to plan for the future 2. Employees: often times the performance of the company directly effects the employees and therefore financial analysis is likely of interest to employees 3. Investors/Loan Officers/Banks: information regarding the health of a business and whether or not it’s a reasonable “risk” to lend money or invest in the company 4. Shareholders: Owners of shares in a company benefit financially when the company thrives financially (Kenton, 2021). 2. Explain how internally generated funds are used to reduce the need for external financing to fund asset investments. Internally generated funds are sources of finance that exist within the business itself. This can include the sale of stock, services, or business assets. Particular advantages include the sale of assets that have become obsolete to the business and can instead be turned into a funding opportunity (GoCardless, n.d.). Ultimately, internal funding sources reduce the need for external financing which can oftentimes take time to obtain, require collateral, and may reduce flexibility. However, internal funding has limits so it’s important to determine how much capital is necessary and recognize that too much internal funding can put a strain on the company that may make it more difficult to obtain external funding if it’s so-needed (Leonard, 2018).

3. What is cost-volume-profit analysis? How can a firm use it? Cost-volume-profit analysis is a form of managerial accounting that aims to assess how changes to costs and volume affect a firm’s operating profit. The formula is as follows: Breakeven Sales Volume = Fixed Costs / Contribution Margin. It can be used to determine how many units are required to be sold in order to reach the breakeven point. This can then be used for decision- making in regard to if a product will be profitable if manufactured (Kenton, 2021). GoCardless., n.d. Internal vs. external financing. https://gocardless.com/guides/posts/internal- external-sources-of-finance/ Kenton, W. 2021. Cost-Volume-Profit (CVP) Analysis. Investopedia. https://www.investopedia.com/terms/c/cost-volume-profit-analysis.asp Kenton, W. 2021. Financial Statement Analysis . Investopedia. https://www.investopedia.com/terms/f/financial-statement-analysis.asp Leonard, K. (2018). The Advantages of Internal Funding. Chron. https://smallbusiness.chron.com/advantages-internal-funding-24209.html

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