The Home Depot, Inc. Annual Report in Fundamentals of Financial Accounting - Essay Example

Interest paid on borrowed money is deducted from total operating income to get earnings from operations before making provisions of income taxes. Earnings net of tax are known as net earnings that can be appropriated among shareholders. The income statement is extremely important for any business operations; otherwise, one cannot know whether one makes profit or loss. The statement has been so designed that it informs about gross profit, operating profit and net profit that enables decision maker to understand weaknesses in its business operations by noticing any extraordinary over expense in percentage terms in relation to peer companies.

For example, gross profit in percentage terms is higher or lower indicate whether its raw material procurement is efficient or not. Incidence of above normal selling or administrative expenses can be found from the operating profit and decisions can be taken to reduce those expenses to improve the results. Depreciation is another head that is deducted from the gross profit to arrive at the operating expense. Depreciation is not an out flow of cash; on the contrary it generates cash for the firm. A. The balance sheet is important financial statement that provides information about the companys assets and its liabilities.

Financial structure of any company is made of venture capital (equity) and loans (debt). Usually, debt part is kept to a level where interest payment does not become so much that the firm find it difficult to pay for it. Balance sheet informs about how funds have been used to create its assets – current and fixed assets. It is the nature of business that decides what proportion of funds will be deployed to create fixed assets or current assets. Hospitality business needs more significant amount to create fixed assets and little for current assets.

Conversely, capital intensive businesses such as steel or aircraft manufacturing need more funds to create fixed assets that