Question

Explain the importance of the balance sheet and income statement in financial decision making. Describe the difference between average and marginal tax rates. Identify the sources and uses of cash represented on the statement of cash flows.

Answer 1

A Balance sheet is one of the fundamental financial statements which displays the company's total
assets, and how these assets are financed by the company.A company's assets are financed either by debt
or equity.Balnce sheet is also referred as statement of Net Worth ,or a Statement of Financial position,
as it shows the financial position of a company.It shows what a company owns and what a company owes
on the balance sheet dates.It is very important statement as it shows the business owners informed about
companies financial statnding.It is also important to banks as it lets banks know whether the business
qualifies for additional loans or credit.Balance Sheet helps investors to understand where their funds will
be invested and what they can expet to receive in the future.Investors expects business with high cash assets,
as the company can grow more and prosper .In Balance Sheet you can track spending and earning.A Balance
Sheets consists of Assets ,Liabilities and Equity.It Is based on fundamental equation Assets = Liabilities +Equity.
A Income Statement is also known as Profit and Loss Statement, which reflects revenue and expenses during
a particular period of time.It shows how a company has performed listing income and expenses, which gives result
to either profit or loss .It shows whether a company can generate Sufficient cash internally for maintaining a healthy
business.Management , shareholders, investors , creditors government agenices etc are always interested to know
the success of business operations of the company in terms of profitability.
Average Tax Rate is total amount of tax which is divided by total income.Average tax rates measures household
tax burden , how taxes effects household's ability to consume today or in future through savings.
Marginal Tax Rates is the incremental tax which is paid on incremental income.It effects the degree to which
taxes effect household or businesses whether to work more , accept more risk in investment portfolio etc
A cash Flow Statement is a financial statement that shows how changes in balance sheet and income affects
cash or cash equivalent.It is analysed in three parts that is operating, financing and investing activities.
It is Statement which shows hows cash is generated (source ) and cash is used (applied) in a company.
Cash flow from operating activity is a main source of generating cash in an organisation.It shows how the
revenue is generated from operating activities.
Cash flow from Investing activity .Cash is generated from investment in fixed assets and firms earns profit
from such investment of fixed assets through operating activities.Acquision of fixed assets is a outflow or
application or uses of cash whereas disposing of fixed assets is a source or inflow of cash
Cash flow from financing Activity.Its arrises from proceeds from issue of shares/debentures.