[Solution] Step 2: Financial Control
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Author: Emily Carter
Financial Statements and Audits
Besides budgets, managers use financial statements to exercise control. While budgets plan for the future, financial statements reflect present state and past activity.
Types of Financial Statements
- Balance sheet: Lists assets and liabilities at a specific point in time
- Income statement: Summarizes financial performance over a period
Financial Ratios
- Liquidity ratios: How easily assets convert to cash
- Debt ratios: Ability to meet long-term obligations
- Return ratios: Return generated relative to assets
- Coverage ratios: Ability to cover interest expenses
- Operating ratios: Effectiveness of functional areas
If management orders an , the result will be an independent appraisal of the organization's accounting, financial, and operational systems.
View Explanation
An audit provides independent evaluation of organizational systems and may be conducted by external experts or internal employees.
A document that lists assets and liabilities at a specific point in time is a .
View Explanation
The balance sheet is a snapshot at a point in time, whereas the income statement describes activity over a period of time.
Match each description with its ratio type:
The organization has little cash and cannot easily convert assets to cash
The organization can meet interest payments on loans
The organization will have difficulty meeting long-term obligations
View Explanation
- Liquidity ratios: Asset conversion to cash capability - Coverage ratios: Interest payment ability on borrowed capital - Debt ratios: Long-term creditor obligation capacity
