1. Describe the purpose of a balance sheet
A balance sheet is a statement that summarizes a company’s assets, liabilities, and owner’s capital at a specific point in time, usually one financial year. The total assets held by the company must be equal to the liabilities it owes and the amount of capital the owners have invested. The balance sheet is important because it helps creditors and people interested in investing in the company to determine its financial health (Reeves 1). A company can also use the balance sheet to project growth in the long-term or short-term depending on how it wants to utilize its retained earnings. The balance sheet can also be used for comparative purposes in a related industry to determine if the different balance sheet items such as ratios are within industry standards. In the shipping industry for instance, managers can compare with other competitors against an industry standard to determine the company’s performance in terms of competitive advantage and market share.
2. Explain what is meant by a liquidity ratio
A liquidity ratio is a measurement that is used to determine the ability of a company to meet its short term obligations (Melicher, Norton 52). There are two types of liquidity ratios namely; current ratio and quick ratio. The former is derived from dividing the company’s current assets by the company’s current liabilities while the latter excludes inventory in the calculation. Therefore, the higher the number, the better the financial footing of the company and the ease with which it is capable of converting current assets into cash to pay off its short term obligations. Examples of current assets are cash, accounts receivables, and inventory. Examples of current liabilities are short term loans, accounts payable, interest payable and so forth.
3. Give a brief explanation of what is meant by the term amortization
Amortization is the charging off of the cost of an intangible asset as an expense over its estimated useful life (Ross 1). For example, if a patent on a specialized shipping container’s useful life is estimated to be 30 years, the cost involved in developing the container can be spread as an expense on the company’s income statement over the same period. Amortization differs from depreciation in that depreciation only involves tangible assets such as equipment, plant and fixtures and so on. An amortization schedule is a chart or table that outlines each periodic amount to be paid or received during the lifetime of a loan. It will include a portion that goes to interest and another portion that will cover the principal.
4. Describe and identify the purpose of a cash flow statement
A cash flow statement is a financial statement that shows how changes in profitability, assets, liabilities, and owner equity affect cash and cash equivalents (Helfert 7). Therefore, it will show how cash is moving in and out of a business during a given financial period- usually annually. It is segmented into operating activities (sales, buying inventory, interest payments etc), investing activities (acquisitions, purchase or disposal of assets etc), and financing activities (payment of dividends, sale of shares etc). The purpose of the cash flow statement is to determine a company’s ability to pay its bills such as payroll. Potential creditors may also use the cash flow data to determine the ability of a company in repaying debts. Lastly, potential investors can use the cash flow statement to make decisions on whether to invest in the company or not depending on how it is managing its finances.
5. Give a brief explanation of the stock concept in the shipping industry
A stock is a form of security that reflects ownership of a company. This stock is usually valued at a specific point in time and price fluctuations are common depending on the demand and supply and earnings. In relation to the shipping industry, stock which includes vessels, containers and so forth are capital items that may increase through investing or decrease through depreciation. Companies may raise money from the public by offering stock to potential buyers which may ultimately affect the overall valuation. However, the net effect will depend on the market forces of demand and supply. Stock holders who are people that own stock receive returns on investment through dividends.
6. Give two reasons why money has time value
Time value of money means that money received today is worth more than the same amount received in the future (Khan Academy). You can invest money today and earn a return on investment as agreed upon by either party. For example, assuming I invest $100 at a 10% risk free interest rate invested in a savings account- In one year, it will accrue interest and be worth $110. Conversely, if I keep it under a mattress for one year, it will be worth $90.90. Therefore, money has time value due to the ability to earn more money which can be received at a future date. Secondly, it will enable an individual to determine the best investment option by comparing different portfolios that are available to him or her. The key elements during calculation of present value or future value or both are; interest rate and number of periods. Thus investors can calculate the present value of a future anticipated return and decide if it is a worthy investment.
7. With the aid of a simple sketch, show how a multiple copy (5 parts) paper order form is used and explain the purpose of each copy.
A 5-part copy order form can be illustrated using a shipping invoice system. When need for supplies arise, a purchase order is generated which contains five copies: Two copies are retained on the ship, one is sent to the supplier, one to the accounts payable, and one last copy is retained by the superintendant office. When the goods are delivered, the delivery is checked against the two copies that were retained on the ship. One annotated copy is filed and the remaining one is sent to the superintendant office for processing the invoice. Once it is processed, annotated copy is sent to accounts department for payment.
Works cited
Reeves Laura. “The purpose of a balance sheet and income statement”. Small Business Chron. Web. 16 February 2016. http://www.smallbusiness.chron.com/purpose-balance-sheet-income-statement-61847.html
Melicher Ronald, Norton Edgar. “Introduction to Finance: Markets, investments, and financial management, 15th ed. Wiley. Print
Notre Dame University. “Financial ratio analysis”. Web. 16 February 2016. <www3.nd.edu/ ~mgrecon/simulations/micromaticweb/financialratios.html>
Ross, Sean. “What is the difference between amortization and depreciation?”. Web. 16 February 2016. <www.investopedia.com/ask/answers/06/amortizationvsdepreciation.asp>
Helfert, Erich. “The nature of financial statements: The cash flow statement”. Financial Analysis- Tools and Techniques- A guide for managers. Print
Khan Academy. “Time value of money” Video. 16 February 2016. https://www.khanacademy.org/economics-finance-domain/core-finance/interest-tutorial/present-value/v/time-value-of-money
