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Introduction to Business Accounting - Essay Example

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Introduction to Business Accounting

Financial ratio analysis is one of the most commonly used method for evaluating and comparing company's performance over a period of time however it has major limitations which undermine its use and value of results produced by it (Moyer and McGuigan 2012). Firstly, the financial data that is used for calculating different ratios is historic that implies that the financial ratio analysis provides findings regarding the company's past performance which may not have relevance to the business's current position. This restricts analysts from using the results of the financial ratio analysis for predicting the future of the business and company that is operating it. Secondly, there are different ways of calculating same ratios, which makes the comparison difficult, and interpretation is subjective too (Wiley 1998). This is important as comparison between companies and industries becomes difficult as they use different definitions of accounting items, which are part of the financial ratio analysis. Thirdly, when industry analysis is done using ratio analysis then it is often difficult to define the set of companies that may be considered to be in direct competition with the company and thus makes comparison quite subjective. Fourthly, there are some financial elements, which are based on estimations and thus can affect the outcome of ratio analysis. Finally, difference in accounting standards and policies of companies and country of origins makes the comparison difficult (Keown, et al. 2005). Explain what information the Income Statement (profit and loss account) provides? The Income Statement provides information regarding the company's performance over an accounting period (Dodge 1997). It provides details of the revenues generated by business and cost of operations to generate those revenues. The different between revenue and cost of sales is referred to as gross profit. Moreover, it provides information regarding expenses incurred by the company over the period, which may be variable or fixed in relation to the revenues generated. After deduction of expenses from the gross profit from operations or profit before interest and tax is derived. The next information element that the income statement provides is the amount of interest paid by the company in lieu of its debt obligations. Then the tax amount is disclosed which is deducted from profit amount to arrive at profits from continuing operations. Any receipt or payment related to extraordinary items activities is added or subtracted to derive net profit attributable to common shareholders and minority shareholders. It also gives information related to Earnings per Share and dividend declared for shareholders (Gowthorpe 2005). The companies usually provide income statement for two years in order to allow comparison of business performance over a period of time. Explain what information the Statement of Financial Position (Balance Sheet) provides? The ...Show more

Summary

Introduction to Business Accounting [Instructor Name] Introduction to Business Accounting Profit and Loss Account Dave Brown Year ended 31December 2011 Sales 190,200 less cost of goods sold opening stock 21,000 +purchases 84,300 - closing stock 70,000 35,300 Gross profit 154,900 less expenses Advertising 1,650 Wages and salaries 42,000 Insurance 1,300 Heating and Lighting 1,800 General Expenses 13,450 Change in provision 700 Depreciation: Motor Vehicles 5,000 Depreciation: Computers 3,500 69,400 Net profit 85,500 Balance Sheet Dave Brown 31-Dec-11 Historic cost Acc…
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