Question 1: Describe the purpose of a balance sheet
The balance sheet is one of the main components of a firm’s Report and Accounts. Its primary purpose it to give users an idea of a firm’s financial position as well as display what the company owns and owes. In the marine system, a balance sheet has three parts, liabilities, assets, and ownership equity or capital. After the accountant of the marine company presents the balance sheet, the company’s creditors and potential stock investors use it in determining the company’s financial standing by analyzing what it owns and what it owes. As such, the purpose of the balance sheet is to provide information on the company’s worth for creditors and interested investors to make decisions (Calvo, et al., 2008).
Question 2: explain what is meant by a liquidity ratio
A liquidity ration analyzes the ability of a firm to pay off both its long- term liabilities as they become current as well as its current liabilities as they become due. This ratio shows the cash level of a firm and its ability to turn other assets into cash in order to pay off current obligations and other liabilities. In this manner, liquidity does not only measure how much cash a business has but also measures how easy it will be for the business to raise enough cash or convert the assets into cash. For instance, in a marine accounting system, a current ratio of one would mean that the book value of the company’s current assets is exactly the same as the book value of its current liabilities. This would not attract many investors. Most investors would go for firms with a current ratio of 2: 1, meaning the current assets are twice as large as the current liabilities. A liquidity ration of less than one would mean that the company is having problems in meeting its short- term financial obligations. If the ration is too high, it is possible that the company is inefficient in using its current assets or its short term financial facilities (Calvo, et al., 2008).
Question 3: Give a brief explanation of what is meant by the term Amortization
Amortization is the process of paying off a debt with a fixed repayment schedule in regular installments over a given period of time. Amortization is often used with mortgage loans. In such cases, the mortgage lenders provide the borrowers with loan amortization schedules. These schedules list each loan payment during the life of the loan, the amount to be paid in each installment that is for interest, the amount to be paid in each installment that is for principal, and the principal balance after each of the payments. Through the amortization schedule, the borrower sees how the loan balance will be reduced over the life of the loan (Cagan, 207).
Question 4: Describe and identify the purpose of a cash flow statement
The statement of cash flows is a financial statement that shows how the changes in income …