Analyze a Corporation's Financial Success
Determining how financially successful a corporation is actually provides a lot more information about the corporation than simply how well it manages money. Financial performance analyses are the way we pick apart, quantify, and measure every aspect of the success of the corporation.
Because the ultimate goal of a corporation is to generate value for its shareholders (in other words, to make money), every aspect of the corporation’s activities is assessed in financial terms.
The nature of money combined with the legal obligation of corporations to maximize shareholder value make finance the ideal medium to assess how successful the corporation is, what activities are contributing to or detracting from that success, and how the corporation compares to others in the market as well as how it compares to itself over time.
A significant number of people are actually paid based on the financial performance of whatever they’re responsible for managing. Corporate executives, for example, are often paid based on the financial performance of the company (which isn’t necessarily a good thing when you consider that financial metrics can be manipulated in the short run to generate high bonuses but at the cost of the long-run health of the company).
Hedge fund managers are quite typically paid based on how the portfolio they’re managing compares to the market, and many external firms, such as investment bankers, account managers, and mergers and acquisitions (M&A) consultants, are paid based on the success of the transactions made or sales closed.
Everyone else relies on corporations to be financially successful because when they’re not, companies go out of business forcing many people to lose their jobs, suppliers to lose a customer, and the world as a whole to lose a value-generating entity.
Of course, if that entity isn’t operating efficiently, then it’s wasting resources that could be better allocated to a more competitive corporation. Analyzing the financial performance of the corporation is how you determine whether a corporation is competitive or will be lost to the natural selection of the market.
Accounting Glossary
accounting equation
The equation Assets = Liabilities + Equity, which demonstrates the two-sided nature of accounting and is useful for explaining the concept of double-entry accounting (or double-entry bookkeeping).
Accounting Glossary
accounting period
The time period for which financial information is being tracked in a business, such as monthly, quarterly, or annually.
Accounting Glossary
accounts receivable
An account that records the amounts that customers owe to a business.
Accounting Glossary
adjusting entry
A correction made to a bookkeeping account that adjusts for accounting errors or other necessary changes at the end of the accounting period.
Accounting Glossary
cash flows
Used to describe the source or sources of cash or how cash is used.
Accounting Glossary
Chart of Accounts
A list of all the accounts used by a business, including what types of transactions go into each account.
Accounting Glossary
debit
An accounting entry that increases an asset or expense account, and decreases a liability or income account.
Accounting Glossary
dividends
A portion of a company’s profits paid by share of common stock on a quarterly or annual basis.
Accounting Glossary
FASB
Financial Accounting Standards Board. FASB is the highest-ranking authority in the private (non-government) sector of the U.S. for making pronouncements on GAAP and for keeping accounting standards up-to-date.
Accounting Glossary
Federal Unemployment Tax
In the U.S., the fund that used to be known simply as Unemployment. Employers contribute to the fund, and states also collect taxes to fill their unemployment fund reserves. (The acronym FUTA means Federal Unemployment Tax Act.)
Accounting Glossary
fidelity bonds
A type of insurance — typically carried by employers for their employees — that helps guard against theft and reduce the risk of loss.
Accounting Glossary
FIFO
First-in, first-out. A method for costs of goods sold in which a business charges out product costs to cost of goods sold expense in the chronological order in which the goods were acquired.
Accounting Glossary
fungible
Describes a product that is interchangeable and virtually indistinguishable from another product.
Accounting Glossary
General Ledger
A summary of all of a business’s accounts and transactions.
Accounting Glossary
IASB
International Accounting Standards Board. The IASB (based in London) is the main authoritative accounting standards setter outside the U.S.
Accounting Glossary
Journals
The location in which bookkeepers keep records (in chronological order) of daily company transactions.
Accounting Glossary
LIFO
Last-in, first-out. A method for costs of goods sold that selects the last item you purchased first, and then works backward until you have the total cost for the total number of units sold during the period.
Accounting Glossary
LLP
Limited liability partnership. A legal structure that state laws offer to qualified professionals in which all the partners have limited liability.
Accounting Glossary
PC
Professional corporation. A legal structure that state laws offer to qualified professionals who otherwise would have to operate as an unlimited partnership liability.
Accounting Glossary
petty cash
A cash account that businesses keep on hand for unexpected expenses.
Accounting Glossary
revenue
Monies that are collected in the process of selling a company’s goods and services.
Accounting Glossary
salvage value
The amount that an asset is worth after it has been fully depreciated.
Accounting Glossary
statement of cash flows
A financial statement that summarizes a business’s cash inflows and outflows during an accounting period.
Accounting Glossary
transactions
Economic exchanges between a business or other entity and the parties with which the entity interacts and makes deals.
Accounting Glossary
worker’s compensation insurance
A type of insurance carried by employers that covers its employees in case they are injured on the job.
