November 27, 2011
Application of Financial Statement
Question 1 Select either the balance sheet or income statement and explain how the use of it may be applied to your everyday life.
The basic definition of a balance sheet is a statement, of a particular date/time, that shows the amount of assets owned by a business/company as well as the amount of liabilities and ownerâ€™s equity associated with those assets (Assets = Liabilities + Owners Equity). These three categories on the balance sheet give management and possibly investors an insight of the cash on hand, what it actually owns and what they owe. It will also usually show what the companies most valuable assets are. The utilization of a balance sheet can be applied to oneâ€™s everyday life by allowing individuals to organize their finances. Simple things such as paying bills, providing shelter, and clothing for themselves can be recorded using a simple balance sheet. It allows them the opportunity to see exactly what the most important expenses are, where they could cut expenses, where they can save, and where they may need to add in order to not become over extended. My first experience with using a balance sheet was while performing additional duties as an assistant to the company accountant at my first job right out of college. It gave me the opportunity to see what all it takes to run a company financially. It has been my experience in knowing that most employees have no idea of the entire behind the scenes details it takes in order to receive their pay checks on time. I was able to see firsthand how the overall financial health of the company impacted peopleâ€™s jobs and them receiving their paychecks.
Question 2 Using the same concept selected above, discuss how a business manager may benefit from the understanding of this statement.
Balance sheets assist business managers in making very difficult financial decisions for their companyâ€™s best interest. In order for managers to make overall effective decisions that impact their companies, he or she must know the economic standing of that company. Management can evaluate previous years of numbers stated on the balance sheet to see if the company is in a profitable position or not. This allows them to actually know the overall companyâ€™s financial strengths and weaknesses. Knowledge of things like cash on hand for last minute/emergent obligations or even having to purchase more profitable merchandise out of cycle is essential. The balance sheet may also aid in making decisions about the possibility of paying dividends, whether or not the company can afford employee raises, and what products and/or services are the most profitable.
Question 3 Discuss how your understanding of the balance sheet and income statement may be applied to our current or future position.