The assets on the sheet are company holdings. The liabilities are the salaries, accounts payable, and notes payable. The balance sheet is a quick look at the company as a whole at any time which is usually over a specific period of time. The balance sheet should be available on demand for accounting managers to make decisions on where the company stands on dispensable cash and what can be used to purchase materials for inventory. The statement of cash flow tracks all the cash moving in a company during a specific accounting period.
These are important to the investors who are looking at the company but also to managers. Exercise 7-2: Answer the following questions about the statement of cash flow and the statement of retained earnings. 1. The current month’s net cash provided by operations is $34,936.57 2. The year-to-date’s net cash provided by operations is $4,717.37 3.
Why should organisations collect, file and maintain accurate financial records? To have a record of how the business is running. To determine how the business is sitting financially and to inspire different processes to assist in growing the business. It will also display what money is going where and whether there is any room for alterations in staffing, produce, and marketing. Basically, it is used to anaylse the business as a whole and per section and to determine performance.
With the cash budget, the company can determine shortage or excess cash at any point in time. Items to be included in the cash budget include wages and salaries, sales, rent, purchases, etc. IN the cash budget the following are assumed
Know the customer by examining; do they have the ability or credit to pay and do they pay by check, credit card, or electronically. By examining these different customer aspects, it is possible to determine which process has a quicker turn around time and improves company receivables. Payment due prompts earlier in the payment cycle can remind customers to make on time payments, helping to decrease days in collections and receivables turn over. Tightening credit requirements,
The computation of ratios facilitates the comparison of firms which differ in size. Ratios can be used to compare a firm's financial performance with industry averages. In addition, ratios can be used in a form of trend analysis to identify areas where performance has improved or deteriorated over time. Because Ratio Analysis is based upon Accounting information, its effectiveness is limited by the distortions which arise in financial statements due to such things as Historical Cost Accounting and inflation. Therefore, Ratio Analysis should only be used as a first step in financial analysis, to obtain a quick indication of a firm's performance and to identify areas which need to be investigated further Profitability.
The income statement is important because it will show whether the company’s revenue exceeded expenses for a specific period resulting in net income or the amount the company may have lost because the expenses exceeded the revenue. The retained earnings statement is equally important because it will indicate the exact reason why the company’s retained earnings increased or decreased over the reporting period. The balance sheet is important because it is the overview of the company’s financial condition at the time of the reporting period and the statement of cash flow’s is important because “Reporting the sources, uses, and change in cash is useful because investors,creditors, and others want to know what is happening to a company’s most liquid resource.” (Weygandt,
P7 Solvency is when a business is able to pay is expenses as it has money available within the business. To determine solvency, businesses can use ratios such as current ratio and acid test ratio. These ratios allow businesses and potential investors to see how well that are able to meet their liabilities. Current Assets Current ratio = Current liabilities The acid test ratio shows the assets compared to liabilities, like the current ratio, but by taking out the stock figure from the current assets, it shows how well a business can meet its liabilities without having to sell stock, Current assets - stock Acid test ratio = Current liabilities Profitability Ratios can also show how profitable a business really is either as a snapshot or over time. There are three ways of working out how profitable a business really is: * Gross profit percentage – This calculation shows gross profit as a percentage of the turnover.
To ensure there are enough products for all customers, an organization will usually forecast the demand of the item. This makes the forecast accuracy indicator important to ensure there isn’t a shortage of stock or an overage. Monitored forecast accuracy can also alert management of a potential problem with demand forecast or other problems in the chain. A product overage in the warehouses can lead to higher carrying cost, especially when holding the products for an extended time to meet the next demand, or a reduction in price to clear the stock. Carrying cost take into account all expenses an organization incurs to operate the holding facility as well as order cost and any other cost associated with the
Every business has to meet internal and external reporting requirements to show its financial health and to meet legal and other requirements financial health means that will have enough cash at any one point in time to be able to meet demand for short-term cash outflows. One of the reasons why businesses like ASDA keep accurate records is, assessing its financial position, Asda assess their financial position every year so they know if they are making efficient use of resources to provide the necessary financial return to achieve a profit or a suffered loss. Keeping accurate accounts helps ASDA to know if there is any product which is not making any profit so they can stop selling in order to make more profit and less lost. ASDA uses figures from the profit/loss account and balance sheet to work out appropriate ratio such as acid test ratio which shows the liquidity of the business. Other reason is that accurate accounts allow ASDA financial team to compare its financial performance with previous year, it is really important because this can show business its future prospects and forecast cash flow and will show them profit and loss.