Free Analyzing Concepts In Business Mathematics Business Plan Sample
We live in an age where shareholders, governments, and public financial markets need, and are legally entitled to, accurate proof of a company’s performance and status. Words alone are not enough to communicate all of these issues. Business mathematics is the answer to communicate factual data on a company’s performance, status quo, and future to shareholders and the public. Over the years, and through standards and guidelines as dictated from governmental and market entities such as the Internal Revenue Service (the IRS), the Securities and Exchange Commission (also known as the SEC), and the American Society of Certified Public Accountants (credited with developing “Generally Accepted Accounting Principles” known as “GAAP”), business operating and reporting standards have been developed (Graham, 2006). These standards, using narrative and mathematical guidelines, govern the creation of the data and financial statements which are the basis of annual reports. These groups do not necessarily govern how the data is portrayed.
It’s been said that “figures don’t lie, but liars figure” so savvy investors don’t just believe the data reported, they use business mathematics to accurately and uniformly compute these, and other key facts and ratios: the value of a company; make an analysis of assets, debts, revenues, and dividends; compare how a company’s stock price is relative to other company’s stock price; and compare how that stock price compares relative to the earnings and dividends of other companies. Some examples of key calculations and ratios used include: the current ratio (calculated by dividing the current assets by the current liabilities); the net earnings ratio (which is percentage of net earnings to total revenues); the return on assets ratio (dividing net earnings by total assets); the stock price multiple (dividing stock price by dividend); the gross profit margin (gross profit divide by revenue); and return on equity ratio (net income divided by shareholders’ equity) (Buffet & Clark, 2008).
Using the 2014 Wal-Mart Annual Report we see how business mathematics is used to help report and analyze the performance and status of Wal-Mart. Being the largest publicly traded corporation on the planet means the task of managing current operations is vast and complex. As such the Report summarizes key elements of Wal-Mart’s complete financial statements, using the standard business operating and reporting guidelines as previously noted (Walmart, 2014).
At its most basic level the tabulation and reporting of each of these facts needed to create financial statements would not be possible without business mathematics. The Report shows that business mathematics differs from basic mathematics in the areas of the use and computation of: interest, compounding interest, discounted cash flows, net present values, bond and debt calculations, derivations, yield analysis, amortization, and weighted averages, among other ways. In addition the Report uses mathematics specific to banking, investment, securities, and taxation issues, among other ways (Walmart, 2014). Through analyzing and using the data the Report provides, which was assembled by the use of business mathematics, you will note that the Report discloses some problems Wal-Mart has encountered. For instance, by reviewing line items of the Balance sheet across the several years disclosed in the Report (also known as a horizontal analysis) you can notice problems such as the decrease in net cash; the increase in short term liabilities and long term debt; and the decrease in sales growth. Indebtedness on their balance sheet includes long term property lease obligations, bonds, supplier debt, liability exposure, and traditional lending. Each type of indebtedness has its own method for calculating the total cost of the debt (also known as the interest owed for that debt) and the total amount to retire the debt. The terms of each specific debt are governed by the contract that created the debt, and usually is calculated by taking the balance of the indebtedness, plus the interest owed. The interest owed is calculated by multiplying the balance of the debt by the rate of interest for each period that payment on that debt are due, whether they be monthly, quarterly, or annually. This same horizontal analysis also reveals that for the same period there was an increase in dividends paid per share and overall end of year stock price. How could they achieve gains in the dividends and the stock price given the others problems the Report disclosed? By going down through the specific elements of the Income Statement (known as a vertical analysis) you will note that even though sales growth was less than in previous years cost reductions were actually higher in 2014 than in previous years, which is part of the reason Wal-Mart had a higher dividend and stock price for 2014 than in previous years (Walmart, 2014).
Per the Report Wal-Mart uses various cost recovery methods in the areas of income/sales, short and long term liabilities, taxes payable, asset valuation, and several other categories. For instance, the cost recovery method applied to income/sales is when a business does not recognize any income related to a sale transaction until such time as the cost element of the sale has been paid in cash by the customer. When reading a financial statement or report it is important to know if cost recovery methods are being used, what they applied to, and how they are being used. This is necessary to be able to give a uniform and standard comparison of one company versus another (Walmart, 2014).
Regardless of what an annual report may declare regarding the performance, status, and future of a company, the reader of any annual report should, through the use of business mathematics and these ratios mentioned, ascertain the truth and form their own opinions about the company whose annual report they are reading: even one a company as large, successful, and powerful as Wal-Mart.
Graham, B. (2006). The Intelligent Investor – Business Essentials Revised Edition. New York, NY: Colliers.
Buffet, M. and Clark, D. (2008). Warren Buffet and the Interpretation of Financial Statements. New York, NY: Scribner.
Walmart Corporation (2014) Walmart 2014 Annual Report. Bentonville, AR.
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