Summary of Chapter 3:Using financial data to measure and assess performance(Part 1)

Because I haven't got my books yet from my lovely EF...and my school is motivating me by that way,and supporting me in studying ,and because I just have the copy of chapter 3,which Mr.Chris copied to me so I will summarise it...= =

• Company accounts:

*The balance sheet: a balance sheet or statement of financial position is a summary of a person's or organization's balances. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year

*Income statement: Income statement, also called profit and loss statement and Statement of Operations, is a company's financial statement that indicates how the revenue (money received from the sale of products and services before expenses are taken out, also known as the "top line") is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as the "bottom line").

• Purposes and users of company accounts:

Internal users

1. MAnagers: managers use information to record financial activities,plan appropriate courses of action,control the use of resources,and analyse and evaluate the effectiveness of actions and decisions taken in financial terms
2. Employees: employees can assess the security of their employment and the ability of the firm to provide them with reasonable wages by examining the financial position of the business.
3. Owners and investors: Investors want to compare the financial benefits of their investment with alternatives,such as shares in different companies or placing their savings in a bank.

External users:

1. Government: The government wants to know that the business has met its legal requirements and that it has paid certain levels of tax.
2. Competitors: Competitors are able to compare their performance against rival companies and benchmark their performances.
3. Suppliers: Suppliers want information about a firm's financial situation before agreeing to supply materials
4. Customers: Customers want to know if the company is financially sound and that guarantees and after-sales servising agreements are secure.
5. The local community: The local communities relies on businesses for employment and wealth creation.

• Analysing balance sheet:

*Assets:

• Non-current assets: tend to be owned by an organisation for a period of more than 1 year
• Current assets: tend to be owned for less than 1 year

*Key terms:

• Assets:items that are owned by an organisation
• Non-current assets: resources that can be used repeatedly in the production process
• Tangible assets: non-current assets that exist physically
• Intangible assets: non-current assets that do not have a physical presence,but are nevertheless of value to a firm

*Liabilities:

• Current liabilities: are debts scheduled for repayment within 1 year
• Non-current liabilities: are debts due for repayment after more than 1 year

*Capital:

• Share capital:the funds provided by shareholders through the purchase of shares
• Reserves and retained earnings: those items that arise from increases in the value of the company,which are not distributed to shareholders as dividends,but are retained by the business for future use.

• Purposes of the balance sheet:

1. Recognising the scale of a business: adding non-current assets to working capital and gives an overall view of the capital employed by a business and thus its overall worth
2. Calculating the net assets of a business:The balance sheet shows the overall worth of a business:its total assets minus its total liabilities.
3. Gaining an understanding of the nature of the firm: the structure of a firm's assets may give information about the nature of a business
4. Identify the company's liquidity position: Comparing liquid or current assets with current liabilities shows whether a firm is going to be able to avoid cash-flow problems
5. Showing sources of capital: the balance sheet shows whether a company is raising its finance from retained profits or long-term loans
6. Recognising the significant of changes over time: Continual scrunity of the balance sheet can identify any undersirable changes that take place