Using financial data to measure and assess performance

 Chapter 3: Using financial data to measure and assess performance

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10/2/11 12:09 PM
Company Accounts
Two key financial documents kept by firms are:
1. The Balance sheet ­ a document describing the financial position of a
company at a particular point in time, by comparing the assets a
organisation my have with the amounts that it owes (its liabilities)
2. The income statement ­ an account showing the income and
expenditure of a firm over a period of time.
Theses documents are required by law to show people the financial
strengths or weaknesses of an organisation in recent performance or
current situation.
They can also be used to asses the businesses potential. Both
documents are based on historical data and show what has happened in
the recent past.
Purposes and users of company accounts
Management accounting ­ the creation of financial information for use
by internal users in the business, in order to predict, plan, review and
control the financial performance of the business.
Financial accounting ­ The provision of financial information to show
external users the financial position of the business, it concentrates on
historical data
Analyzing balance sheets
A balance sheet looks at the accumulated wealth of a business an can
be used to asses its overall worth.
Elements of the balance sheet
Assets: items that are owned by an organisation
Non-current assets: Resources the can be used repeatedly in the
production process, although they do wear out or lose value e.g
Tangible assets: non-current (fixed) assets that exist physically.
Intangible assets: non-current assets that do not have a physical
presence, but are nevertheless of value to a firm.
Assets can be divided into two main categories according to time.
Non-Current assets ­ Owned for more than a year.
Current assets ­ Owned for less than a year

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Non-current assets are purchased to allow the business to operate
continuously. Land and buildings are acquired so that the firm has the
premises in which to operate.
Current assets ­ Short term items that circulate in a business on a daily
basis can be expected to be turned into cash within a year.…read more

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Capital expenditure, Revenue expenditure and depreciation.
Classifying business expenditure
Business expenditure can be classified as either revenue expenditure or
capital expenditure.
Capital expenditure exists when the spending is on an Item that will be
used frequently. In accounting terms if the expenditure on an asset
helps the business in future years, its capital expenditure.…read more

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In the income statement, depreciation spreads the cost of an asset
over the lifetime during which it is helping to create income.
In the balance sheet, depreciation shows the reduction in an asset's
value over its lifetime.
Working capital
What is working capital?
The formula for calculating working capital (net current) is:
Working capital- the day-to-day finance used in a business, consisting
of current assets.…read more

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The efficiency of supplier. If supplier can supply large quantities at
short notice, a business will be able to hold lower inventory levels.
Lead time. If it takes a long time to make a product, companies will be
more likely to hold them in stock.
Customer expectations. If the customer is prepared to wait, it may be
unnecessary to hold inventories; if the customer wants the item
immediately. Inventories should be held.
Competition.…read more

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This is a 6 page set of notes which deals effectively with the balance sheet - its composition and uses.

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