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Financial Statements Associated With Good Organisational Management.

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When most of us think of finance within an organisation the term "bottom line" comes instantly to mind. "Bottom line" is a term used to describe net income for the year. The actual "bottom line" for an organisation can be found on their profit and loss accounts at the end of the tax year, along with details of all income and expenditure for said year. The profit and loss account will contain the following information:

1. Gross and net sales

2. Total cost of production including raw materials and production costs

3. Selling and distribution expenses

4. Itemised admin, general and interest costs

5. Adjustments to profit due to tax and dividends.

Once the profit and loss accounts have been prepared, a balance sheet is drawn up. The balance sheet contains a full list of all assets and liabilities for the organisation. The asset list will contain both fixed and current assets. Fixed assets are tangible items such as buildings and equipment. Fixed assets generally deprecate over time. Current assets (aka liquid assets) are a list of assets that could be converted into cash within 12 months if so required by the organisation. Examples would be stocks or prepaid expenses.

Similarly the liabilities on a balance sheet are broken up into different categories. Namely, current liabilities, long-term (aka deferred) liabilities and contingent liabilities. Current liabilities are short term debts such as an overdraft. Deferred liabilities are any liabilities payable in more than 12 months. Contingent liabilities are liabilities that may occur in the future depending on certain events (e.g. provision for bad debts).

The sources and uses of funds statement, as the name suggests, outlines where the cash flow came from over the previous tax year and how this money was utilised by the organisation. It illustrates in detail, the sources and uses of any funds. Sources of funds would include things such as, organisational profits, grants received or loans procured from the banks. Uses of funds would include items such as, the purchase of assets, dividends given to shareholders or reducing equity capital.

All of the financial statements discussed thus far have been from accounts calculated at the end of the tax year. However, it is important to prepare certain financial statements throughout the year in order to monitor cash going in and out of the organisation. One such example would be cash flow forecasting. This involves predicting the cash coming in and the cash going out on a monthly basis. Cash coming into the organisation would be things like completed sales. Outgoing cash would be things like wages or expenses. It is possible to predict this figure quite accurately using historical data from previous months or years.

Pro-forma statements are financial statements with a certain assumptions or hypothetical conditions built into the data. Pro-forma statements show the expected financial position for example at the end of a project. Pro-forma statements forecast assets and liabilities as well as future cash positions.

Ratios: A.L.A.D.A.N.

Liquidity Ratio:

Working capital ratio = Current Assets / Current liabilities (ideally 2:1)




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