FIN 320 Project One Financial Analyst Job Aid

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Apr 3, 2024

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FIN 320 Project One: Financial Analyst Job Aid Financial Responsibilities A financial analyst is an expert who guides businesses and individuals in rendering investment decisions. Furthermore, these analysts assess the operation of stocks, bonds, and other types of investments.  A financial analyst is responsible for analyzing financial information and formulating projections based on their results.  A financial analyst is responsible for providing a company and individuals with investment suggestions from their analysis results.  Financial analysts regularly produce written or visual reports synopsizing their results and suggestions.  A financial analyst is responsible for regularly researching the latest economic trends and investment prospects for the company and individuals.  One of the most important responsibilities of a financial analyst is to evaluate the prospective dangers of decisions about investments.  Financial analysts are responsible for assessing the strength of the management team (BLS, 2023).  Financial analysts are responsible for meeting with company officials to gain better insight into the company’s prospects (BLS, 2023). Financial Management Decisions Analyzing and managing finances is essential for making knowledgeable business decisions. It assists in knowing the financial health of the company, potential projections, and making strategic decisions. CFA Institute (2023) states that “A central focus of financial analysis is evaluating the company’s ability to earn a return on its capital that is at least equal to the cost of that capital, to profitably grow its operations, and to generate enough cash to meet obligations and pursue opportunities.” With the help of a financial analyst a company would be aware of investment opportunities and one of the most important aspects of finances is its cash flow. For example, an analyst should provide the company with information about cash flow just in case it needs to change some of its assets to cash to pay off short- term debt. Furthermore, an analyst who does their research on economic trends helps keep the company up on new trends, especially if it is going to be beneficial to expand in those specific markets. Without financial analysts, managers would be clueless as to what steps and or strategies to take to make well-informed decisions. If management lacked any information about investments, revenue, growth opportunities, expenses, and budgets would hurt the business as a whole. Therefore, a financial analyst’s job is especially important in providing the company with crucial information to be a successful business. Accounting Principles Accounting principles are the rules and guidelines that companies, and other bodies must follow when reporting financial data. Therefore, a financial analyst’s objective when using accounting principles is to offer a direct, all-inclusive depiction of a company’s financial health and as a result, the analyst can assist

in decision-making of investments and strategies. Financial analysts will need to be knowledgeable on three of the accounting principles to aid in making successful decisions. The specific principles are revenue recognition, matching principle, and historical cost principle and they show analysts why and how a company’s data is conveyed. Therefore, revenue recognition helps determine when revenue should be reported and it “guides accountants when it is difficult to determine whether revenues should be reported in one period or another” (Titman, et al., 2018). The matching principle “determines cost and expenses that can be attributed to a specific period’s revenues (Titman, et al., 2018). The historical cost principle “provides the basis for determining the dollar values the firm reports on the balance sheet” (Titman, et al., 2018). Furthermore, a financial analyst must understand and be knowledgeable about financial statements as they will be utilizing the income statement, balance sheet, and cash flow statement to complete their task. If information were unavailable or inaccurate the recommendations for investments and the health of the company would be inaccurate and as a result, the company could experience a major or minor setback based on the information provided to the analyst and their recommendation. Furthermore, the analyst will not be able to provide potential investment opportunities, nor will they be able to provide accurate information on the health of the company. Financial Statements Financial statements offer important findings about the effects of a company’s operations, financial standing, and cash flow. There are four important financial statements that financial analyst need to perform their job which are the income statement, balance sheet, cash flow, and statement of equity. Moreover, the information found in these statements allows the financial analyst the opportunity to present a company or individual with recommendations based on their research obtained from these statements. Each financial statement offers different info concerning the company’s financial records. The income statement discloses a company’s total revenue, total expenses, and whether the company has a net income or net loss. Statement of stockholder equity discloses the owner’s contributions, net income, or net loss and decreases to the capital such as the owner withdrawing from its equity. Lastly, the balance sheet discloses current and non-current assets, current and long-term liabilities, and the total equity taken from the statement of stockholder equity. The income statement offers beneficial perceptions into our company’s operations, therefore aiding in making profitable decisions on production capacity, sales, closing and opening new departments, and if there is a need for a new target audience. In addition, the stockholder’s equity statements show the performance of the company, specifically the company’s net value. The balance sheet helps a company decide if they will have the ability to pay current and future operating activities and or obligations. Furthermore, the cash flow statement “measures how well a company generates cash to pay debt obligations, fund operating expenses, and fund investments” (Murphy, 2023). Financial analysts will evaluate the company’s financial statements to determine what investments are appropriate and beneficial for the health and wealth of the company. Financial Terminology  Financial statement o Definition: Financial statements are records that show a company’s financial standing and assist in making vital decisions for the company’s operations and finances. o How it is used: There are four important financial statements that businesses use to determine important decisions specifically, the balance sheet, income statement, cash

flow statement, and statement of equity. Each statement offers key information to assist in making decisions such as investment opportunities, financing, and operating activities.  Liquidity o Definition: The speed with which an asset can be converted into cash without loss of value. o How this is used: Liquidity offers flexibility; therefore, it is used to determine a company’s short-term condition and if there is enough to financially pay any debt without putting the company in the hole. In other words, to see if the company can quickly turn assets into cash.  Working capital o Definition: Working capital is the difference between the current assets and current liabilities of a company. o How this is used: “Working capital is used to purchase inventory, pay short-term debt, and day-to-day operating expenses” (Boyte-White, 2021).  Diversification o Definition: The reduction in risk that comes about by combining two or more risky assets into a portfolio where the individual assets are less than perfectly positively correlated (Titman, et al., 2018). o How this is used: Diversification is used to balance the company’s portfolio. Fidelity (2023) states that “Diversification is used to help mitigate the risk and volatility in your portfolio, potentially reducing the number and severity of stomach-churning ups and downs. ”  Time value of money o Definition: Time value of money is defined as “a dollar received today, other things being the same, is worth more than a dollar received a year from now” (Titman, et al., 2018). o How this is used: Time value of money (TVM) is used in helping make decisions on investments, capital budgets, structure, and management. When it comes to investments, TVM is used to evaluate investment possibilities and to resolve challenges concerning loans, mortgages, leases, savings, and annuities. Furthermore, it is utilized to recognize the potential value of an investment and to determine the Net Present Value (NPV) and the Internal Rate of Return (IRR) of a task. References U.S. Bureau of Labor Statistics. (2023, September 6). Financial analysts : Occupational Outlook Handbook . U.S. Bureau of Labor Statistics. https://www.bls.gov/ooh/business-and-financial/financial-analysts.htm#tab-2 Murphy, C. B. (2023). Financial statements: List of types and how to read them . Investopedia. https://www.investopedia.com/terms/f/financial-statements.asp Titman, S., Keown, A., & Martin, J. D. (2018). Financial Management: Principles and Applications.

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What is portfolio diversification? Fidelity. (2023, September 20). https://www.fidelity.com/learning- center/investment-products/mutual-funds/diversification#:~:text=Diversification%20is%20the %20practice%20of,of%20your%20portfolio%20over%20time .