Complete ATC 14-1 Pg. 686 Follow The Cash In A Narrative For

Completeatc 14 1 Pg. 686follow The Cash In A Narrative Format Ans

Complete ATC 14-1 (Pg. 686) (Follow the cash) In a narrative format, answer the questions posed in the case for ATC 14-1 on page 690. What is meant by "presentation of financial statement information in common-size amounts rather than dollar amounts?" Why is this type of presentation sometimes more meaningful than use of actual dollar amounts? Why is trend just as important if not more important than information that pertains to only one year?

Paper For Above instruction

The presentation of financial statement information in common-size amounts involves expressing each line item as a percentage of a base figure, typically total assets for the balance sheet or total sales/revenue for the income statement. Instead of showing dollar amounts, which can vary significantly between companies of different sizes or across different periods, this method normalizes financial data to facilitate easier comparison and analysis. For example, if a company's net income is $100,000 and total assets are $1 million, expressing net income as 10% of assets provides a relative measure that can be directly compared to other firms or different periods, regardless of their absolute sizes.

Using common-size financial statements can be more meaningful than examining actual dollar amounts because they eliminate the distortions caused by scale. When analyzing companies of different sizes or tracking a single company over multiple periods, dollar figures may be misleading if taken out of context. For instance, a $10,000 increase in sales might seem significant for a small business but negligible for a large corporation with millions in revenue. By converting these figures into percentages, analysts can better discern the proportionate relationship between different account components, uncover underlying trends, and identify structural strengths or weaknesses that might not be obvious from raw numbers alone.

Trend analysis, or examining financial data over multiple periods, is equally, if not more, important than analyzing a single year's figures. Financial performance and position can fluctuate due to seasonal factors, economic shifts, or one-time events. By assessing trends over several years, stakeholders can identify patterns of growth, stability, or decline. For example, consistent improvement in gross profit margin or reduction in debt-to-equity ratio over multiple years provides a stronger indication of financial health than a solitary snapshot. Trends help in forecasting future performance, making strategic decisions, and evaluating the effectiveness of management strategies over time.

In conclusion, presenting financial data in common-size amounts offers a valuable perspective by normalizing figures for comparison, while trend analysis provides insight into the company's trajectory. Combining these methods enables analysts to form a comprehensive understanding of a company's financial health, its relative performance against peers, and its potential future prospects. Therefore, both are crucial tools in financial analysis and decision-making processes.

References

• Gibson, C. H. (2018). Financial Statement Analysis (13th ed.). Cengage Learning.
• Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2020). Financial Statement Analysis (12th ed.). McGraw-Hill Education.