Question

1) Describe in 1-2 short paragraphs, a) the purpose of the following types of financial statements and b) why as a leader/manager you must be familiar with them:

   - Balance sheet

   - Income statement

   - Capital statement

2) If, as a manager, you could only pick one financial ratio to look at on a weekly/monthly basis, which would it be?

   a) Write/type out the equation

   b) Discuss (1-2 short paragraphs) why you picked that equation, what information that would give you on your business’ or department’s performance, and how you would use that to better your business/department.

Answer 1

Purpose of following statements

Balance Sheet- It provides the information about organisation’s assets, liabilities and equity/capital at a specific point of time and provides basis for computing various ratios so as to measure financial performance of an organisation.

In short, we get to know about organisation’s assets and how these are financed. The balance sheet is based on the fundamental equation:- Assets= Liabilities+ Equity

Income Statement- The Income Statement shows the organisation’s revenue and expenses during a particular period, giving information about its net profit or losses during a particular period. It is also called Profit and Loss statement.

Capital Statement- This statement summary all the changes in the owner’s equity that happened during a specific accounting period. We get to know about opening equity, introduction or withdrawal of capital during a period and the profits earned during the year.

A leader must be aware of the balance sheet, income statement and capital statement as it helps them to gather various information so as to evaluate the performance of the organisation.

Through Income Statement, he may gather information about the revenue and expenditure and may draft policies as to how to increase revenue and decrease expenses.

Through Balance sheet, he may evaluate the sources of funds

Example- An organisation may be in profits during a particular financial year but it may be running with huge debts (this information will be checked from balance sheet)

Through Capital Statement helps to evaluate equity portion out of total assets.