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. 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 may have affected the profit Is that the 2011 year had 17. % 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; ACH 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 would 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 to 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 s 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 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 equines 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 finance 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. ) 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 as made during 2012.
A drop of 80% 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 she 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.
