B120 Tma 03 an Introduction to Accounting and Finance in Business

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Question 1 (A) The purpose of a profit and loss account is to examine the income earned verses the expense incurred to a business, resulting in profit, if income is higher, and loss if expenses supersede the income. Michael's Chairs can use this information to make sure his business is profitable. • He can see if he is meeting targets to repay loans and overdrafts. • He can assess his expenses and see if they are too high. • He can see if his investments in new machinery are paying dividends. • And he can also assess the amount of stock that he is carrying in the business. Question 1 (B) The identified Issues within Michael's Chairs profit and loss account lie in a few areas. Purchases are up +35% on last year due to a £170000 spend on high-precision sawing equipment which has increased overall expense. Stock is up by +115% on last year, but a 20% rise in sales due to new machinery speeding up production is expected and planned for. The high levels of finished stock need to be available for immediate delivery with a +7 rise in orders on last year. Maintenance and cleaning is up by +135% on last year, with the increase in large machinery, this will be an expense that will have to factored in to ensure smooth production. Overall net profit is down, but machinery is a long term investment and will decrease in expense and generate profit in the next few years. Question 2 (A) The balance sheet will indicate the financial position of a business at any one point of time. This sheet deals with the company assets, any liabilities the company has, and the equity within the business. Basically showing what the business is worth. The balance sheet will show Michael's Chairs - • what long and short term assets are of value to the business and depreciation incurred on those assets. In Michaels case the purchase of machinery and vehicles being the

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