Application Of Financial Statement Essay

Q1. Select either the balance sheet or income statement and explain how the use of it may be applied to your everyday life?
I have selected balance sheet to examine in this assignment. Balance sheet consists of the assets, liabilities and equity held by a firm. Both assets and liabilities are classified into short term and long term depending on the time period. Liabilities are what company owes to its creditors, customers and suppliers whereas assets are what company own. The shareholders equity is mainly the investments of investors and owners in the firm.
The balance sheet can be applied to our day to day life in the following ways –
a) Balance sheet gives a clear picture of our financial strength in terms of cash availability or liquidity. The liquidity helps us to plan better in short term as well as long term.
b) Balance sheet tells us how much our debtors owe to us in terms of the accounts payable. This would help us to calculate the turnover rate and plan the forecasting.
c) Balance sheet also gives the amount of debt we have from external borrowings. The debt to asset ratios help us the understand the health of the firm and future borrowing power
d) The key ratios like inventory turnover ratios, accounts receivable ratios, accounts payable rations, debt to equity ratios, liquidity and quick ratios help us to understand how leveraged the firm is and indicates the financial strength.
Q2. Using the same concept selected above, discuss how a business manager may benefit from an understanding of the statement?
A business manager would be mainly concerned about how much collections he has to make from debtors in the coming months or for the year. Also he would be worried about the accounts receivable from creditors or suppliers who buys goods or service from him. Business manager will also think about the payable and receivable turnover days for efficient collection and disbursement of funds.
The other important aspect would be the debt and interest...