Overview
This report seeks to present to the management of Sparklin Automotive Company with the financial information of the company. This memo will discuss the three financial statements starting with the Income statement, then the statement of financial position, and finally the cash flow statement. The discussion will include the definition and the information that is contained in each of the statements and finally highlight the relevance of each statement to the management of the organization. The paper will also look at the relevance of these statements in the making decisions of the management.
The Income statement
This is a financial statement that reports the monetary valuation of the business’s operations. The income statement contains information about the revenues earned from the operations as well as the expenses incurred in order to generate these revenues (Jeffrey, 2004). The difference between the revenues received and the expenses incurred in generating those revenues is usually referred to as profit if the revenues exceed the expenses and loss in the expenses exceed the revenues (Vance, 2003).
The importance of income statement to the management of the organization is that it indicates to the management the profitability of the organization. The boon in this is that the management is able to make decisions on how to effectively manage the operations. This is because profitability is a crucial objective of all businesses and as such, there is need for a statement showing whether the objective is being achieved or not. Examples of decisions that can be made in light of the income statement are the cost management, sales decisions, hiring decisions and so on
The statement of financial position
The second financial statement to be submitted to the board and management is the statement of financial position, also commonly referred to as the balance sheet. It indicates the financial position of the company as at the date it reflects (Pauline & Sidney, 2007). The statement of financial position is divided into three major parts; the assets section, the liabilities, and the capital section. Through this statement, the accounting equation is usually completed. This equation is as follows Assets = Liabilities + Capital.
The assets section lists the net value of all the assets of the organization both fixed. The liabilities section gives the amounts that the business is owed by the creditors while the capital section provides information about the capital of the business. the assets therefore is the sum of the capital and the liabilities (Wild, Supranyam, & Hasley, 2007). The importance of this financial statement is that it enables the management to determine the value of the company. Other important information that can be extracted from the balance sheet is the liquidity position of the company and also the capital structure of the company.
The Cash Flow statement
This is a statement that indicates the amount of cash that came in and went out of the organization. This is important more so in the wake of the limitations of the income statement and the balance sheet. The income statement reports some income and expenses whereas in real sense, no money has been received and/ or expensed. This is usually the case in dealing with depreciation where no cash is actually spent since it is usually an estimate (Don, Richard, Steve, & John, 2002). Where sales have been made, the income statement also records revenue in accrual basis which means that revenue is recognized at the invoice date. In effect, the income statement indicates that money has been received whereas no money has been received in real sense.
The cash flow statement therefore indicate the actual areas where cash has been received and expensed and also adjusts the cash receipts and expenses from the entries in the income statements and the balance sheet which recognized cash without actual cash (Wild, Supranyam, & Hasley, 2007). The cash flow statement is used majorly to determine the liquidity position of the enterprise through indicating the actual cash at the date of the statement.
The use of accounting information Planning, Controlling, and Directing and motivating
Planning
This is a management function that means setting out the future action path that the organization is to follow. This is a management function is practiced in line with the organizational strategy and is aimed at setting out the future course of action that will enable the organization to achieve its objectives (Garvin, 1988). An example of planning is where the company plans to increase the human resource by a certain number within a given time frame. The financial statements assist with this measure in that the income statement shows the costs incurred in maintaining the already existing human capital and the viability of additional employees.
Controlling
Controlling implies measuring the achievement against the set standards and/ or targets. Each organization has its own strategy and the action path that has been predetermined by the management. The controlling function therefore helps in assessing whether the set targets have been achieved. The importance of this function is that the management is able to assess the viability of the chosen course of sction and make changes where necessary. An example of controlling function of management is where the management track the revenue earned against the targeted after three months. Financial information can be used to aid this through indicating the amount of sales as per the income statement.
Directing and Motivating
This is the management function that deals with setting out ways and means of carrying out the operations of the management. Motivating has to do with coming up with strategies that entice the employees to perform their duties under high morale and usually comes hand in hand with the directing function (Garvin, 1988). An example of directing is coming up with process maps that ought to be followed when doing specific activities as well as coming up with rewarding mechanisms for the employees who perform excellently. The financial statements can be useful in directing in that they can point out the areas of the operations that does not have efficiency and then helping the management in coming up with ways of enhancing the efficiency of the organization (Frederick, 2001).
Limitation of the information provided in the financial statements
The financial statements provide the position of the enterprise financially. These financial statements are then used to appraise the performance of the organization. The disadvantage of this is that the organization is composed of some non-financial attributes which are as important as the financial. The financial statements therefore fail to capture this information since they only deal with the financial aspects of organizational performance (Vance, 2003). Examples of these non-financial attributes are skills, motivation levels and talent. The other limitations of the financial statements come in where the statements are made using assumptions. These assumptions make the information presented inaccurate and as such reduce the reliability of the information.
Conclusion
The financial statements are very useful to the organization since they provide the information of the performance of the organization. The organization’s management is therefore required to maintain these three financial statements so as to monitor the progress of the organization. In addition, the management should include the non financial factors since not all attributes of the organization are quantifiable.
References
Don, D., Richard, I., Steve, H., & John, H. (2002). Capital Budgeting: Financial Appraisal of Investment Projects. Cambridge: Cambridge University Press.
Frederick, B. (2001). Executive Strategy: Strategic Management and Information Technology. New York: John Wiley & Sons.
Garvin, D. A. (1988). Managing Quality: The Strategic and Competitive Edge,. New York: The Free Press.
Jeffrey, R. H. (2004). Accounting Demystified. New York: AMACOM.
Pauline, W., & Sidney, J. G. (2007). International Financial Analysis and Comparative Corporative Performance. Journal of International Financial Management and Accounting , 111-30.
Vance, D. E. (2003). Financial Analysis & Decision Making: Tools and Techniques to Solve Management Problems and Make Effective Business Decisions. New York: McGraw HIll.
Wild, J. J., Supranyam, K. R., & Hasley, R. B. (2007). Financial Statement Analysis. New York: Mc Graw Hill.