Managing Financial Resources and Decisions

Managing Financial Resources And Decisions

Managing Financial Resources and Decisions

Income statement

The income statement, also labeled the statement of operations measures a company's performance a specified period of lime. It is frequently called “profit and loss account” For this reason the statement is titled for a period of time for example, year ending May 27, 2011. The statement is different from the balance sheet because it is a cumulative record of activity for a month, quarter, multiple quarters, or for one year. Creditors, investors, and many others use the income statement as a measuring stick of how a company has performed, where it appears to be heading, and what its future cash flows will be.

An income statement, also known as a profit-and-loss statement, is a financial document that indicates the sales, expenses and profit of an organization during a specified time period. The income statement lists the sales first, then lists direct materials and direct labor incurred while producing the sales. Direct materials and direct labor, also called cost of goods sold, are the materials used and the labor costs incurred during production. The difference of the sales and cost of goods sold is the gross margin, which is the profit that a company creates before deducting its nonproduction costs. The net profit, which is calculated by deducting all nonproduction-related costs, such as office supplies and executive and administrative labor, is the bottom-line figure that shows how much money the organization made (Tshabalala 2007, 69 - 169).

Significance of income statement

Unlike a balance sheet, which communicates information about a point in time, the income statement relates to a period of time. It summarizes certain transactions taking place over that period. In terms of published reports, the period is normally one year, although most businesses of any size produce income statements more regularly, usually quarterly and often monthly. These monthly or quarterly accounts are normally for internal consumption only, although often banks request copies or make the production of such accounts a condition or lending money.

Balance Sheet

A balance sheet represents a still snapshot of the company's financial position at any given point of time. The balance sheet contains monetary information on the company's equity capital, liabilities and assets. The assets are the belongings of the company. These are classified into long-term and short-term assets. The long-term assets include items like land, buildings, plant, machinery and equipment. Short-term assets are all those assets that the company holds for terms less than a year. These are cash, stock and bills receivable. Liabilities are also classified in a similar manner. Short-term liabilities include bills payable and accrued taxes. Long-term liabilities are loans, debentures and mortgages. Equity is bifurcated into common shares and preferred shares (Shipman & Doye 2004, 89 - 198).

The balance sheet is a financial document that is prepared to show the asset, liability and equity allocation of the company. The balance sheet is prepared by listing the assets, which include cash and cash equivalents, receivables, prepaid assets and property, ...