financial decision making

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Financial Statements

Published November 15, 2013 by Mayrbear's Lair

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Financial statements contain an enormous amount of valuable information with respect to a company’s financial position, the success of their operations and provides a clear insight of their future potential. They help investors make effective decisions because they answer such questions as: (a) would an investment yield an attractive return; (b) what is the level of risk they pose; (c) should existing inventory be liquidated, and (d) are cash flows sufficient to support the firm’s borrowing needs. For example, because of changes in the economy as well as advances in technology in how music products are now marketed and sold, someone looking to invest in a record company like the one I used to work at, Capitol-EMI Records (CER), would look to the financial statements of their annual report to help them determine how well the company is performing.

In it’s hey day, CER was considered a prestigious primary market record label that is still recognized worldwide today. It is part of the EMI Music Group and is a subsidiary of the Universal Music Group. The company was founded in 1942 by American lyricist, songwriter, and recording artist Johnny Mercer, who wrote the famous lyrics to Henry Mancini’s Moon River that later went on to become the trademark song for singer Andy Williams  (The Johnny Mercer Research Guide, 2012). Throughout the years, CER has consisted of an impressive artist roster including such mega stars of the past like The Beatles, Kenny Rogers, David Bowie, Tina Turner, Bob Seger, as well as the giants of today like Katy Perry and Coldplay. In the global marketplace, CER distributes a wide genre of music including, pop, rock, classical, jazz, R&B, and hip-hop through various sister labels. With offices around the globe, the Capitol Records Tower in Hollywood, California is their most famous landmark.

EMI-Capitol_Music

Investors that are looking to figure out how well the company is performing today would seek answers from the company’s annual report. Friedlob and Welton (2008) explain that the key to comprehending any annual report is understanding that they are developed to help satisfy the many needs of a variety of different people including shareholders, creditors, potential shareholders and creditors, as well as economists, financial analysts, and suppliers  (Friedlob & Welton, 2008).

EMI’s Annual Report provides information that discloses how well the company is performing, their financial condition, and where the company is headed. Fraser and Ormiston (2010) purport that segmenting the financial information helps direct individuals to the data that is relevant to them (Fraser & Ormiston, 2010). For example, a creditor may want to peruse the cash flow statements to gain insight into the company’s liquidity. The Consolidated Financial Statements however, would be useful to investors because they provide details on all the company’s financial branches that reveal the true nature of their net worth. Any person therefore, looking to invest in the Capitol-EMI family, would need to take into consideration the information provided from these consolidated statements. They are important documents that will help investors decipher how well all of the company’s affiliates are performing to give them a clearer a picture of its net worth.

References:

(2011). EMI annual review 2009/2010. Finances. Hollywood: Maltby Capital Ltd.

The Johnny Mercer Research Guide. (2012). Retrieved October 30, 2013, from The Johnny Mercer Foundation: http://www.johnnymercerfoundation.org/initiatives-charities/for-researchers/johnny-mercer-research-guide/

Fraser, L., & Ormiston, A. (2010). Understanding financial statements. Pearson Education.

Friedlob, G., & Welton, R. (2008). Keys to reading annual report. Hauppauge, NY: Barron’s Educational Series.

The Annual Report

Published November 13, 2013 by Mayrbear's Lair

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Today begins our six week adventure navigating through topics that will help us understand how business owners can make the most effective the financial decisions that help them run their companies more efficiently with higher profits. Dr. Felix Lao (2013) explains that:

“The measurement of accounting information is critical to the owners of the business to make judgments about the value of assets or liabilities owed by the business. It accurately measures profit or loss made by the business in a particular period. Shareholders can make decisions and evaluate about the future of an organization by looking at past and current financial data. It helps management actually manage the operation by looking at functional units as well as overall performance and effectiveness to plan. The information provides critical tools that reveal an accurate and true view of the financial position of the company to ensure that risks are adequately and appropriately taken and the resources are invested well.”

To give us a better understanding of the financial condition of a company, my research work will take a closer examination of the extensive financial information that is contained within a firm’s financial tome known as their Annual Report. Take for example a company like Target that does a fabulous job selling products to customers.  A good number of consumers are so pleased with this corporation’s performance in fact, that many consider buying shares in the company’s stock.

To find out more about their financial situation investors will look to their annual reports to help them determine how well the company is performing.  Unfortunately, more questions arise regarding the content of these reports because most individuals are not trained in deducing the information they contain to help them comprehend the true nature of the company’s financial health.  Technical questions about the firm’s financial condition and performance cannot easily be addressed unless the key elements in the annual report are understood. Investors must acknowledge that in order to figure out how well a company is doing they must look to the company’s financial statements because those are the documents that can provide details that address the following information: (a) where a company’s money came from, (b) how it was spent, and (c) where it currently stands.

2011-annual-report-finances

Typically, there are four kinds of financial statements in a company’s annual report: (a) the balance sheets that disclose what a company owns and owe, (b) the income statements that reveal incoming revenue and outgoing expenditures, (c) the cash flow statements which show the exchange of currency transactions, and (d) the statements of shareholders’ equity which reveal the changes in shareholder interests (Beginners guide to financial statements, 2007). Individuals who can comprehend the information these statements contain are in a better position to understand the company’s financial condition.

The financial statements in a company’s annual report are useful for many reasons. For example, Fraser and Ormiston (2010) explain that they not only reveal how well the firm is performing, they also show whether or not it is providing opportunities for growth and future advancements  (Fraser & Ormiston, 2010). The enormous volume of information in these reports can  be intimating to the untrained eye. To help with an overview of the most important aspects, each report contains a 10-K form which serves as a summary that highlight the report’s key components.

Smart investors will look to the contents of the firm’s annual report to help paint a clear picture of what a company is doing, what it claimed it was going to do, what it actually did, and most significantly, what it intends to do next. Roth (2008) also points out that annual reports are significantly more important in today’s economy because they have become a platform for which organizations use to expand their investments, launch new products, create more effective marketing strategies, address behavioral or morale issues, and can even alter a company’s strategic direction (Roth, 2008).  In other words, the information provided in them are beneficial to investors and creditors whose interpretation of the contents contained within these reports can help them assess the firm’s viability.

References:

Beginners guide to financial statements. (2007, February 5). Retrieved October 28, 2013, from U.S. Securities and Exchange Commission: http://www.sec.gov/investor/pubs/begfinstmtguide.htm

Fraser, L., & Ormiston, A. (2010). Understanding financial statements. Pearson Education.

Lao, F. (2013). Ashford University. Clinton, IA.

Roth, R. (2008). The writers guide to annual reports. Atlanta, GA: Booksurge.com.