Benefits and Limitations of Financial Account essay

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Q1.The three financial statements commonly used in a public limited company are:

a) Income statement-This is one of the most important financial statements that give a picture of how much money a company is making. It is also called a profit and loss statement showing how well management controls cost, sells, and makes a profit in the company. An income statement is composed of three components; Revenue, which is also known as turnover, or sales. It displays the amount of money getting into the company during the period under consideration. This period can be either, quarterly, semi-annually or annually (Krishna, Paul, 2008). Revenue is the amount of money that the company makes before accounting for the many expenses it has incurred. Another component is expenses representing the much the company has spend in generating revenue. Net Income is another component, which shows the difference between revenue and expenses. Net income is a result of income before tax less income tax paid in that period. It helps in the calculation of net margin.

b) Cash flow statement- this is a statement used in reporting the cash generated and spent during the period specified in its heading. It is composed of four divisions. The first component is operating activities, which converts the report on the income statement from an accrual basis of accounting to cash. Investing activities is another component reporting the sale and purchase of long-term investment and plant, equipment and property.

Financing activities- reports the repurchase and purchase of the company’s stock and bonds and the payment of dividends to their members. The fourth component is the Supplemental information, which gives a report on the exchange of a significant item that does not involve a cash transaction also reports the amount of interest and income tax paid.

c) Balance sheet- this is a statement showing the total assets and liabilities of a company at a stated time usually the last date of an accounting period. A balance sheet has two parts, a statement of current assets, fixed assets, and liabilities called the net assets. The second part is a statement showing the financing of the net assets, which can be through, retained profits or share capital.

 Q2. The two groups of individuals who analyses financial accounting are the investors, and the company itself. Investors do the analysis to get enough ideas on the investment of their funds in the specified company. This financial statement analysis is used by the government agencies in the analysis of taxation due to the company. On the other hand, the company does the analysis to know its performance over a period of time merely when they want to do benchmarking with other companies. The commonly used method is the use of ratio analysis. One of the ratio analysis methods is profit ratio analysis. This method measures the overall performance of the company and its effectiveness. Another method is liquidity ratio method, which measures the short-term solvency of the firm’s financial position. The most commonly used liquidity ratio methods are the quick ratio and current ratio method. Activity ratio is also other methods used to measure the efficiency at which the firm has employed its resources. It indicates the speed at which assets are turned to sales. The forth ratio used is the leverage ratio which shows the firm’s ability to meet payment schedules and interest cost especially those of long-term obligations.

Q3. Costing is a process of determining the cost of a manufactured product or a service rendered. Depending on the nature of the product, business conditions and production method used, different methods are used. However, mostly there are two methods;

Job costing- This type of costing is used in a business where production is done under specific orders and customer specifications. The products are normally separated and distinct from other products being manufactured. This method is commonly used in shipbuilding and house building (Mike, Roger & Colston, 2003). One of the advantages of this method is that it has an easier cost-data classification and a precise time record of the work done. However, job costing as a method has its own disadvantage. One of the disadvantages is that it ignores some other cost such as cost from other departments not connected to the specific department they are dealing with.

Process costing- This type of costing is used in business, which deals with production done continuously such as oil, chemicals, gas, and paper production. In such production, costs to specific units are difficult to be traced while the total cost is averaged to the total number of manufactured products. The use of this method has various advantages. The cost of finished goods and that of each process are determinable at a short interval, which can be in a weekly or daily basis. In addition, valuation of inventories is accurate and easy to be done. However, despite of its advantages it has its disadvantages. The fact that the cost obtain is historical, utility for cost control and managerial decisions is not significant.

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