The uses of income statements.docx

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Department
Management Information Systems
Course
MGIS 317
Professor
Ronald Schlenker
Semester
Winter

Description
The uses of income statements This information contained on the profit and loss account can be used in a number of ways: - It is used to compare the performance of a business over time or with another business. - Predictions in profits can be made. - Helps creditors to decide whether to lend money or not. - Gives a futuristic vision to investors. Key definitions: - Low-quality profit – one off profit that cannot easily be repeated or sustained - High-quality profit – profit that cannot be repeated and sustained - The balance sheet - what it shows about a business Key definitions: - Balance sheet – an accounting statement that records the values of business ’assets, liabilities and shareholders’ equity at one point of time. - Asset – an item of monetary value owned by a company - Liability – A financial obligation of a business that it is required to pay in the future. - Shareholders’ equity – Total value of assets – total value of liabilities. - Share capital – the total value of capital raised from shareholders by the issues of shares. The balance sheet records the net wealth or shareholders’ equity of a business at one moment of time. The aim of most businesses is to increase the shareholders’ equity by raising the value of business assets. Shareholders’ equity comes from 2 main sources: - The capital obtained by the purchase of shares - The retained earnings of the company which are accumulated Key definitions: - Non-current assets – Assets to be kept and used by the business for more than one year (fixed assets) - Intangible assets – items of value without any physical presence - Current assets – assets that are likely to be turned into cash before the next balance sheet - Inventories – Stocks held by a business in the form of materials, work in progress and finished goods. - Accounts receivables (debtors) – The value of payments to be received from customers who have bought goods on credit. Also known as 'Trade receivables' - Current liabilities - debts of the business that will usually have to be paid within one year. - Accounts payable (creditors) - value of debts for goods bought on credit payable to suppliers. Also known as 'Trade payables' - Non-current liabilities - value of debts of the business that will be payable after more than one year. Non-current of fixed assets The most common examples of fixed assets are; land, buildings and machinery. These are tangible assets. Intangible assets include: -Patents -Trademarks -Copyrights -Goodwill The reputation and prestige of a business that has been operating for some time also give value to the business over and above the value of its physical assets. Goodwill- Arises when the Business is valued at or sold for more than the balance-sheet value of its assets Current Assets: These are important to a business. The most common examples are inventories, accounts payable (debtors who have bought goods on credit) and cash. Current Liabilities: Typical current lia
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