Ch 24 + 25 - income statements + balance sheet

Question 1

4 reasons why profit is important

Answer 1

Reward for risk-taking
Reward for enterprise
Source of finance
Indicator of sucess

Question 2

Why is profit a reward for enterprise and risk taking (2 sep reasons)

Answer 2

Enterprise - Rewards the entrepreneur for their many important characteristics and qualities to develop a successful business

Risk taking - Rewards on taking the risk to start or invest into the business. In addition they provide an incentive to business owners to make the business even more profitable or investors to put more capital.

Question 3

Why is profit an important source of finance

which profit

Answer 3

Retained profits are a good source of finance. They are debt free and interest free source of finance the business can use to expand production

Question 4

How is profit an indicator of success

Answer 4

If an existing business is highly profitable, it indicates to other entrepreneurs and businesses that there is potential in that industry. If the existing businesses were making losses then it would not be a good signal to set up in that industry.

Question 5

What does the balance sheet allow a reader to see and interpret

Answer 5

If the value of the equity has gone up or down

What method of finance the business is using to expand (taking loans - increase in non-current liabilities, or selling inventory - decrease in current assets)

Question 6

What does the balance sheet allow a reader to see and interpret/adv of balance sheet

Answer 6

If the value of the equity has gone up or down

What method of finance the business is using to expand (taking loans - increase in non-current liabilities, or selling inventory - decrease in current assets)

Calculate working capital

Capital employed

Ratio analysis