business studies help required!!

[somya]

why are the following important to businesses :-
a. profit and loss account
b. cash flow forecast
c. trading account
d. balance sheet
e. break even charts

please help me out guys!!

 

[DarkEclipse]

I'm not a commerce student, but I'll try:

a. profit and loss account
The importance of Profit and Loss account lies in the fact that it provides accounting date which can be used for some managerial decisions as given below:

Net Result: It provides information about net profit or net loss earned or incurred by the business during a particular period.

Accounting data for determining efficiency: Net results provided by the Profit and Loss Account can be compared with the net results of the previous years and the efficiency of the business can be determined by such inter-period comparison of results.

Control over expenses: Profit and Loss Account provides information about various kinds of expenses. The expenses of the current year can be compared with the expenses of the previous year and effective steps can be taken for the control of expenses, where it becomes necessary.

Future Profit Planning: Net profit of various years can be taken as basis for future profit-planning. It helps the business in the allocation of sources and future expansion.

b. cash flow forecast
A cash flow forecast pretty much tells you how to direct your business. Just as a personal budget is important to ensure that you spend your pay check wisely, so too is the cash flow forecast for any company/business.
It is a key management decision making tool as it is a guide to ensuring that the business's limited resources are utilised in the most efficient manner. If prepared in adequate detail, it assists the users (usually management) to identify any possible haemorrhage or areas requiring attention.
It is also an indicator to your bankers (as most lenders require this) that you are capable of repaying any debt. Of course, the assumptions on which your cash flow forecast are based are extremely important as they MUST relate to your business and the environment in which it operates.
In today's difficult economic environment, a cash flow forecast is not only useful but critical to the success of any business. If you want to get to your goal, you need to know HOW you're going to get there and the cash flow forecast is just one means of doing so.

c. trading account
1. To determine the cost of production, which helps to calculate the gross profit, or loss of trading activities.
2. To assemble all the direct expenses of bringing the goods in saleable condition.
3. To ascertain the performance of different years of business through the gross profit ratio which is calculated by dividing the gross profit by sales.
4. To help to calculate the ratio of cost of goods sold to sales which is helpful in the fixation of price of the products.

d. balance sheet
A balance sheet is a "snap shot" of a company's financial position at one moment - it can change the next day. That's different from the Profit & Loss account which is a cumulative position over a period of time e.g. sales and costs for 12 months etc.
The balance sheet basically shows two sides (both must equal the other) - i.e. a) where the money has come from e.g. capital and short term borrowings and b) where the money has been spent e.g. long and short term assets. The capital position will change every year as profits/losses are added or deducted from the capital.
From these figures, various ratios can be applied which will tell the banker/investor of the strength of the company. That is, if the figures haven't been window dressed. There's a lot of interpretation involved!


e. break even charts
The point at which this is reached is known as the "breakeven point". And the more we sell after this point is reached, the more profit is made.
You can calculate where this point is by dividing your overheads (i.e. the fixed costs) by your Gross Profit margin. Let's take an example.
Gross Profit margin: 35%
Overheads: $200,000
Breakeven: $200,000 / .35 = $571,428
That is, you would need sales of $571,428 just to cover all your fixed costs. All sales after that point would contribute a 35% of the value of sale to your profits.
So the lower your gross profit margin the flatter the sales line on your graph, and the more you have to sell before you break even.
If our fixed costs increase, and there are no other changes, then we will have to sell more before we make a profit.
We can increase our overall profits by going out - increasing sales. Or we can do so by going up, selling lower volumes but with greater margins.
In summary, gross profit is the key to profitability. You have to decide what is the best approach in your market. Is it a price sensitive market, requiring you to have low margins, but giving you sales volumes, or is it one where you expect to sell less but with a greater margin.

I'm not really sure about e. , you should get it cross checked by someone else.
Hope I helped

 

[somya]

thanks mate, it's soo gooood!!

 

[DarkEclipse]

thanks mate, it's soo gooood!!

No problem, thanks