The uses of income statements.docx

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Management Information Systems
MGIS 317
Ronald Schlenker

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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