[Instructor Name] Modern Furniture (1.a) Purpose of Profit and Loss Account: Profit and loss account is one of key area of the financial statements. It covers the transaction relating to the two fundamentals of accounting; that is the revenue, and expenses (Day and Krakhmal)…
However, profit and loss account does not provide information about future. (1.b) Profit and Loss Account Review: When looking at the profit and loss account of the Modern Furniture of both years, there are some items that are worth considering for decision making. The gross profit has declined by 10.75% from 2011. The major reason is the increase in the inventory cost. The other important thing to notice is that, there is a sharp decline of 5.8% in the net profit from last year which clearly indicates that there are no effective controls over the cost. Specially, salaries, maintenance and cleaning costs have increased to a significant amount. In addition to the facts mentioned above the Modern Furniture has also paid a bank interest of ?5200 due to the bank overdraft facility availed by the business in 2012; whereas, there was no such facility in the previous year. Marketing cost has also increased to ?51,500 from ?45,000 which is normal in a growing business like Modern Furniture. (2.a) Purpose of Balance Sheet: As the profit and loss account shows the results of revenue and expenses for the whole year, the balance sheet reflects the financial position of the entity on a particular point of time including the details of total assets, liabilities and owner’s equity. ...
It is a picture that shows the strength and weaknesses of the business. (2.b) Balance Sheet Review: There are many observations in the balance sheet. The liquidity position has deteriorated since last year. There is no cash balance available at the end of year 2012. Investment in the non-liquid assets such as inventory and prepayments has increased together with the investment in receivables since last year. In addition to this Modern Furniture has also availed the bank overdraft facility so, there are major problems regarding liquidity. The business is holding more inventory than the previous year due to the growth in the business. Higher inventory levels will counter the threat of stock out at the price of higher inventory cost. The business has also made heavy investment of ?70,550 in fixed assets keeping in view the future expected demand. The overall position of the business is reasonable except the liquidity issue which requires prompt action from the owner. To overcome the current situation the business should make investment in the liquid assets such as cash and securities otherwise it will be difficult to pay the liabilities in due time. (3 a) Purpose of Cash Flow Statement: Cash flow is also one of the most important parts of the financial statements which reflect all the receipts and payments made by the company during the financial year. The purpose of preparing the cash flow statement is to ascertain whether there are sufficient cash flows available to finance the operations. Cash act as a blood to run any organization. If the business is unable to produce sufficient cash, there will be going concern threat due to severe liquidity problems. The most important of all three activities in the cash flow statement is the ...
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