Peter Enterprises - Essay Example

An income statement represents a company’s activity or performance over a period of time. The income statement is intended to provide investors an accurate depiction of the company’s profitability over the period of time (in this case 1 year). This includes mainly the sales and cost figure of the company over the period of time. Cost which are capitalized are included in the category of either depreciation or amortization expense. The income statement is generally full of accounting assumptions; fundamentally the matching principle.

The matching principle dictates that the revenues of the company should be matched with the expenses incurred during the period. Any accrued sales (Credit Sales) or expense is accounted in the income statement. Earnings from the income statement are essential criteria when investors evaluate or opt for a company to buy its share. It is earning power of the company which lifts its value and attracts the investor about the profitability of the company. In the case of Peter enterprise, it has generated a net profit of £444,400 which is 14.

79% of the sales. This implies that the net profit margin is 14.79% which is promising; however the company is profitable but we cannot jump into any conclusion unless we compare it with the industry standards for the particular year or a company which has risk similar to the Peter enterprises. (c) Peter Enterprises Balance Sheet As of 31 December 2009 Assets       Current Assets   Accounts Receivable 294,800 Stock 287,000 Total Current Assets 581,800     Fixed Assets   Machinery 1,480,000 Equipment 163,100 Motor Vans 148,700 Total Fixed Assets 1,791,800     Total Assets ?

2,373,600     Liabilities       Short-term Liabilities   Trade Creditors 273,000 Bank Overdraft 54,000     Long Term Liabilities   Loan 1,500,000     Total Liabilities ?1,827,000     Net Assets or Shareholder's Equity ?546,600     Capital 417,200 Add: Net Profit 444,400 Less: Drawings 315,000 ?546,600 (d) A balance sheet shows a company’s financial position at a particular point in time (Krakhmal & Day, 2010). We can determine through balance sheet that how much financially strong and economically efficient a company is.

It shows how much the company owns or how much money is owed by it. The assets are financed by either debt or equity and the balance sheet can reveal important information about it. We can compute a lot of ratios using the numbers in balance sheet and compare them with the industry standards. The most common ratios are liquidity, solvency, and profitability and efficiency ratios. A balance sheet can explain how the company is being managed. For instance, a high day on receivable implies that management is not efficient in collecting money.

This impacts cash flow cycle and can cause liquidity problems for the organization. Furthermore, Solvency ratios such as the Debt/Equity ratio can provide an important insight to creditors to whether grant a loan to the organization or not. It also gives an insight to shareholders about the current worth of the company. An analysis of Peter’s balance sheet shows that it has a very high Debt/Asset ratio which is equivalent to 70%. Answer 2a) Cash Forecast for the next 6 months   Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Cash Inflows             Cash Sales* 262000 254000 268000 288000 296000 292000