Income Statement or Profit and Loss Account - Assignment Example

Question 1:
a) The rationale of an Income Statement or Profit & Loss Account is to record the events of financial transactions (that is all incomes and expenses relating to the business) for a financial period. (economic(UK), 2014) The Income State is useful to evaluate profit or loss for the financial period. (economic(UK), 2014)Two Income Statements from different financial periods (often subsequent statements) can be compared to determine the growth of the business in that period. For example, in the case of Helen Harris Handbags, we find that the Net Profit (Gains) in the year 2012 was £ 158,109, and subsequently for the year ended 2013 was 88,982.
b) If we were to compare the 2013 Income Statement with the 2013 Statement, we would find that Helen Harris Handbags had a decline in profitability of £69127. Various reasons can be outlined for this decline in profits. Some reasons can be identified through an Income Statement others may be issues affecting the business such as an increase in competition, recession in the markets, etc. However, looking at the Income statement alone, we can see a sharp increase in Marketing Expenses for the year 2013, as well as a slight fall in Total Sales. Other expenses have increased as well, but marginally. As total sales have fallen, inventory has gone up. The fall in total Sales might be a matter of concern for the business, especially since Marketing Expenses have increased.

Question 2:

a) The Balance Sheet of a business is used to show the “net worth” of a company at a given point in time. (e-conomic(UK), 2014). It is particularly useful in monitoring the health of the company that is what the business owes and what it is owed. The Assets and Liabilities are the two main sections of a Balance Sheet and are always equal. The Balance Sheet is divided into two parts as mentioned above, and into various sub-parts which include Fixed Assets, Working Capital, Current Assets, Equity or Shareholders Stake (which includes any profit/loss and drawings)
b) In the case of Helen Harris Handbags, Inventory has increased, which has been the result of a fall in Sales (discussed earlier). However, a matter of concern is a huge increase in Bank Overdrafts from 2012 to 2013. This tells us that the business has increased its debts considerably since last year. There is an increase in the Debtors as well.

Question 3:

a) The purpose of the Cash Flow Statement is to evaluate the cash inflows and outflows of a business during a financial period. (e-conomic(UK), 2014). The main avenues of Cash Inflows and Outflows can be described in three categories:
1. Operating activities: “The cash inflows and outflows related to transactions which are entered in determining net income.” (economic(UK), 2014)
2. Investing activities: “These transactions involve the acquisition and sale of long-term assets that are used by the organization, as well as non-operating investment assets”. (economic(UK), 2014)
3. Financing activities: “These transactions include cash inflows and outflows between the business and its creditors and owners, i.e. the sale of stock for cash.” (economic(UK), 2014)
b) There is a sharp decline in Net Operating Cash Flows in Helen Harris Handbags for the year 2013 compared to 2012. This is mainly due to a fall in sales. The major point of concern for the business is the net fall in Cash Flows for the year 2013 compared to 2012. This fall is being financed by using the Bank Overdraft facility.
Question 4:
The business has seen a sharp decline in Sales, and hence a rise in Closing Stock or Inventory compared to the previous year. The major point of concern for the business is the sharp fall in net cash flows, which were then financed by the Bank Overdraft facility. No major investments were made during the course of the financial period 2013. Still, there was a net decline. This may be due to the investment in marketing expenditure for the period.
If the business were to approach a Bank for a loan, it would have to justify the fall in Net Sales. The business should explain to the bank that it has been paying its past loans on time (demonstrated in the financial statements). Moreover, it has already made an investment in marketing, which although may not have seen the benefits in the current year, is expected to produce results in the future. Helen Harris Handbags has a pile of inventory that can be kept as collateral with the bank, to pay back part of the loan via sales of inventory.
Helen Harris Handbags needs to make investments toward the future expansion of the company. A lot of its fixed assets have depreciated in value and will soon require major investments. Such investments should be made as soon as possible to avoid the Fixed Assets becoming obsolete. Read More