Finance Question

8 August 2017

An income statement is used to show profit and loss; Kathy can compare each financial year to see how the company is getting on and what department is doing well. An income statement will show all expenses incurred in the business such as delivery, office space, staff wages and the products. The income statement becomes useful to Kathy when deciding to see how Designer Labels is getting on because it would show the income from sales and this can be broken down rather than Just showing a sum of money.

The sales will be matched up against the costs of goods so he can see how much profit is made. This statement should also give a growing business an idea of the projected income for the next year. Statements like this use accrual accounting which is done by looking at income and expenditure projections are usually undertaken by professional Judgments of accountants.

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B) The income statement for Designer Labels shows the year 2011 and 2012. Kathy may look and see that the income had dropped by 12. 5% in year ending 2012. However more money was used on wages, maintenance, delivery and travel.

Another aspect that ay have affected the profit is that the 2011 year had 17. 7% more stock then the 2012 year. Looking at the statement I do not think that there are any particular concerns for Kathy to look at other than the net profit at the end. Kathy has increased more expense then in her previous year. You can see the net profit has dropped significantly; the increase of money spent on wages can be blamed for some of the 81% drop in profit between the years 2011 and 2012 as expenses only went up by 4%. I believe this could be due to Kathy not investing in as much stock and she may be overstaffed.

Question 2 a) The purpose of a balance sheet is to show the financial position of a business; each accounting period has 2 balance sheets and 5 basic accounting elements these are- incomes, expenses, liabilities, assets and equity. A balance sheet shows a point in time rather than a period in time. It also shows several figures of fixed assets- original cost of business, total amount by which assets have depreciated and the net book difference. The balance sheet will show the total value of fixed assets the company will have. A fixed asset could be a building or a car.

The balance sheet could help Kathy because she could see what total assets she has when liabilities are taken away from the income. This then gives Kathy a figure that is profit after all her other costs are subtracting. B) The balance sheet for Designer Labels shows the company’s equity is more in the year 2012 compared with 2011. However they have gained more liabilities in the year 2012 from creditors and the bank overdraft. I can see from the sheet that although Kathy may not have available cash but she does have assets which she can borrow against.

So although Kathy does owe more o creditors she also has more equity. This offsets the fact that she has gained more debts. The only problem is she does not have much free cash to spend on items such as stock. The difference between equity in 2011 and 2012 is 4%. I do not think this Balance Sheet should concern Kathy she has increased her equity which is good although seen NAS gained more debts Kathy should think about trying to clear some of her debt but other than that I cannot see anything that would concern me. Question 3 a) A cash flow statement is used to show the money flowing in and out of a business.

This will be shown through trading receipts, borrowings, interest received and money flowing out of the business which is shown through paying for costs (wages, building), investments in fixed assets, interest and loan repayments. Cash flow is important to business owners as most things need to be paid by cash- (wages, maintenance, supplies). A business cannot pay with assets so it is important to see what cash flow it has so the business knows what it can afford. Another way a Cash flow statement can be broken down is by looking at operating activities, investing activities and insane activities.

If Kathy looked at this statement she could see whether she can afford to expand the business or whether she can take on more staff these are the types of decisions she can make when looking at the available cash as well as seeing what assets she has. B) From the cash flow statement I can see that there is a lot less profit in year 2012. There has been an increase in debt from overdrafts, creditors and debtors. Kathy has also made fewer payments on her loan then the previous year by 69%. The cash flow from operating activities decreased by 63% this was due to the operating profit decreasing by 80%.

The Cash Flow Statement show that Kathy did not spend as much money as she did the year before- she invested less in fixed assets, re-paid less of her loan but increased her debt and overdraft. Analyzing the Cash Flow Statement I think Kathy should be concerned by the lack of profit which was made during 2012. A drop of is huge and she will need to find the reason for this as it affects everything, with no available cash she will not be able invest in stocks, pay employees, pay expenses, or repay her debts.

Kathy needs to see how he can create more cash flow to pay for these outgoings. Question 4 a) After analyzing Astrakhan’s business I would not sell her business I believe that she should continue what she is doing and she will gain more and more profit. In the year 2012 she didn’t invest as much in stock and this is some of the reason she did not make as much as profit. I believe that there is potential to grow for Kathy with different seasons for clothing. Once she does make enough profit to invest more she can expand and introduce new ranges or new stores.

You can see from the tenements that the profit dropped dramatically from 2011 to 2012 but with Astrakhan’s research she could release a desirable range and bring in lots of custom. Kathy also knew that the retail sector was going to suffer so making profit was actually a good thing so she should carry on how she is and perhaps invest more in stock and the profit will increase. Word Count- 1113 part 2 a) In TGIF 3. 1 it was discussed how people keep a track on their own life. Personally before I get paid I know what exactly is and isn’t going out of my bank account.

I will aka sure I have paid all my bills and know exactly how much is left that I can live on for the month. All my expenditure is noted and I make sure all my payments are ready to go out on the day I get paid I tell by doing this I will not miss any payment nor spend any money I should not. Although I know other people are laid back this saves for any confusion after I am paid and I am trying to gain a good credit rating so this would increase my chances of this. If you don’t know where you are with money then you won’t know what’s in your account. Word Count- 151

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