Financial Statements

Respond to the following in a minimum of 175 words. Remember to in-text cite and then reference materials where required. As a note, most of the initial response questions require demonstrated research.

Discuss the Following in a Single Initial Reply:

1) We have likely all heard the phrase that time is money, or money is time. While that is very true, time value of money has a different meaning from a financial perspective. In fact, time value of money has a number of components associated with it’s meaning. For now, who can define this topic in broad terms? Specifically, what is the meaning of time value of money?

2) Last week, we identified the primary financial statements found in organizations. This week, we are going to explore ratio analysis as it applies to financial statements. Who can describe what ratio analysis is and why is it an important area of financial management? Is ratio analysis limited to financial statements?

ANSWER

Financial Statements

Time Value of Money

The concept of time value of money (TVM) emphasizes that the money at hand is more valuable than the identical sum in the future (Irena & Mariana, 2017). Since money has a potential earning capacity, the concept of TVM is that money is more valuable the sooner it is received. Investors prefer to receive money at the earliest convenience rather than receive the same amount of money in the future. This is because of the potential of money to grow in value throughout the waiting period, which may reduce value. One of the causes of the reduction of money value is the potential of accumulating compound interest over time. In order to ascertain the time value of money, the formula FV = PV x [ 1 + (i / n) ] ^{(n x t)}  is used in that;

FV= future value of money, PV=present value of money, i=interest rate, n=number of compounding periods per year and t=number of years.

Ratio Analysis

By studying a company’s financial statements, including the balance sheets and income statements, ratio analysis helps understand the company’s liquidity, operational efficiency and profitability (Irena & Mariana, 2017). The company analysis all its departments by marching previous annual records to ascertain whether there is growth. Ratio analysis is essential for financial management as it monitors the company’s return. Financial management can also be enhanced by comparing the company’s ratio analysis with the other competitors that operate within the same parameter. This helps the company not overspend, take risks, and know what financial decisions to make, thus promoting its management. Ratio analysis is not limited to financial statements as it also analyzes the performance of employees in terms of their input and output contributions to the company.

References

Irena, M., & Mariana, B. (2017). The Time Value of Money in Financial Management. Ovidius University Annals, Economic Sciences Series, 17(2), 593-597.