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Cash flows case: (indirect method). Messi Company has not yet prepared the statement of cash flows.
Net profit margin
2016
=230/7600
=0.030
2017
=230/7200
=0.032
Comparison between the two years shows that the company has increased its profitability as it has been able to maintain the same level of net income with lesser sales than in 2016.
Cash generated from operating activities has also increased from 2016 to 2017
3. Use the analysis of Messi Company to illustrate how information in the balance sheet and the statement of cash flows helps the users of the financial statements.
Shareholders and Investors
Shareholders are interested in getting a return from the company and also growing their wealth. Investors provide funds which are used to purchase assets are therefore interested in the return on assets (ROA) to measure the efficiency of the company in utilizing its assets.
ROA=Net Income/Total Assets
Messi company shows a decline in profitability of use of its assets as it is able to come up with the same net income with more assets 2017 than in had in 2016
Shareholders also look at the cash flow statement to determine whether they will be able to earn dividends on their shares.
Lenders and Suppliers
These users of financial information are interested in the ability to pay their liabilities as and when they fall due.
The liquidity ratios such the current ratio calculated from the balance sheet provide information about the companies liquidity e.g
Current Ratio=current assets/current liabilities
=2708/1032
=2.6
This shows that the company is able to meet its obligations such as of paying suppliers and interest and principal for lenders
Government
The government is interested in the amount of tax it collects from Messi Company and therefore will be interested in both the cash flow statement and the balance sheet of the company. The balance sheet shows that the income tax liability of the company which at the end of 2017 stands at $152 million. The cash flow statement in particular the operating activities shows the ability of the company to meet its tax liability.
Managers and Employees
Although managers regularly make operating and financial decisions based on information that is more detailed and timely management accounting they also require analysis of the financial statements. This is in order to satisfy the other user groups.
too bad I found it on chegg
