Financial statements are important in business management in that they show the profit and the loss that the business incurs. The profit and the loss incurred by a business is the only indicator of the business success or failure. Some financial statements like the balance sheet clearly show the financial status of the business and the long term and short term assets and liabilities of the business. Financial statements show the cash inflows and outflows of the business and help the managers of the business to assess whether the business is able to clear all its short term liabilities.
Financial statements also indicate the amount of money that the business is owed by people outside the business and they also provide the owners or shareholders with information on how their money is being spent and how much they should expect in return. They also assist managers to calculate the amount of tax that the business is supposed to pay. Financial statements are also used by auditors to determine whether the business is running correctly without any misallocation of resources.
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2: The balance sheet is important to businesses in that it shows what the business has (assets) and what the business owes against those assets (liabilities). The balance sheet shows the net worth of the business by the difference between the assets and the liabilities. Managers of businesses get the information on how best the business can repay its debts from the balance sheet. The information on the balance sheet is also used to analyze the ability of the business to finance all its operations.
The balance sheet assists the managers of businesses in making decisions regarding purchasing of equipments for the business. Business managers need the balance sheet so as to decide the best source of credit for the business at that time. The balance sheet shows the physical presentation of the accounting equation. The balance sheet also shows the owner’s equity. The balance sheet is also used by the government agencies to make sure that the business is complying with the set laws.
It also provides information to any potential lenders of the business on the credit worthiness of the business. 2. 3: The income statement provides information on how much revenue was collected by the business during a certain period. It also indicates how profitable the business activities were during that time; this is shown by the gross profit or loss of the business. The income statement also provides information on how much it cost the business to conduct its activities during that time.
The income statement is important in that it shows the rate of growth of the business. The information on the income statement is also used by the investors, analysts, lenders and the stockholders of the business so as to assess the financial health of the business. Due to the fact that the income statement is prepared from the information that is entered in other books of account, it shows the accurate information on the revenue and expenses of the business at any time.
The income statement assists the investors and lenders of a business to know the past performance of the business, predict the future of the business and assess whether the business is capable to generate cash in the future. 2. 4: The cash flow statement provides information that is drawn from the owner equity statement, income statement and also the balance sheet, hence the cash flow statement is important in adding accountability and validity to the other financial statements. Lenders, investors and business analysts use the information on the cash flow statements so as to assess the financial status of the business.
The cash flow statement is important in that it clearly shows net earnings or the loss of the business, any change in the inventory, expenses incurred due to depreciation and any changes in the net cash generated from the business activities. The cash flow statement is also important to the accounting personnel because it provides them with information whether the business will be able to cover all its expenses and the payroll. Cash statements also provide a clear picture of the business ability to repay its debts and this information is quite important to the business lenders.
Cash flow statements provide information to the potential workers and contractors of the business on whether the business will be able to compensate them. The statement also indicates the movement of cash in the business and allows the managers to assess the sources of the cash and monitor the flow of cash. 2. 5: Managing by ratios enables the managers of businesses to spot the trends in the business and it also allows them to compare the performance of their business to that of the average businesses in the same industry.
This is done by comparing the business ratios with the ratios of other businesses and also comparing the ratios of a certain period to those of previous periods. Managing businesses by ratios enables the mangers to detect any unfavorable trends in the business and come up with ways of tackling these trends. Management by ratios acts as an early warning to businesses. Balance sheet ratios are also meant to measure the solvency and liquidity of the business. The leverage ratio shows the extent to which the business relies on debts.
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