Section 5

Question 1

list the different users of accounts

Answer 1

• managers
• shareholders
• creditors
• banks
• workers
• government
• other companies

Question 2

explain the manager user of accounts

Answer 2

• to help keep control over the performance of each product to tell which ones are profitable and which ones aren’t in order to take better decisions
• to compare ratios with other firms and also with previous years in order to see how they are doing e.g. say gross profit margin is 35% and net profit margin is 5%; this means the business has very high expenses that is causing a huge difference between ratios

Question 3

explain the shareholder use of accounts

Answer 3

• it is a legal requirement that the owners of limited companies are presented with financial accounts
• profitability ratios such as ROCE can show existing shareholders and potential investors whether they should invest in the business or not
• they can compare ratios with other companies and make the most profitable decision

Question 4

explain the creditors and banks use of accounts

Answer 4

-balance sheets and ratios will tell suppliers and banks the cash position and debts of a business to see if the bank can lend and for suppliers whether to supply or not e.g. if the business is facing liquidity problems they may stop supplying

Question 5

explain workers and trade unions use of accounts

Answer 5

-they want to see if the business’ future is secure or not. if the business is continuously running at a loss it is in risk of insolvency (not being liquid) it may shut down operations and workers may lose their jobs

Question 6

explain government use of accounts

Answer 6

• using profitability ratios governments can tell how profitable and liquid a business is and create fixed tax rates according to their profitability as well as
• seeing if it profitable and liquid enough to continue operating and to protect workers’ jobs

Question 7

uses of a cash flow statement

Answer 7

–keeping bank manager informed
a statement of cashflow forecasts are required by the business when applying for a bank loan

-starting up a business
manager needs to know how much cash is required to set up a business and the cash flow forecast helps to calculate the cash outflows such as rent etc

-managing cash flow
if the cash flow forecast gives negative cash flow for a month or months the business will need to apply for an overdraft so that negative balance is avoided
-running an existing business

Question 8

importances of a cash flow statement

Answer 8

• how much cash is available for paying bills, purchasing fixed assets or repaying loans
• how much cash the bank will need to lend to the business to avoid insolvency
• whether the business has too much cash that could be put to a profitable use

Question 9

uses of an income statement

Answer 9

1 - to know whether a profit or loss was made in the business
2 - compare their performances with previous years; e.g. seeing where they went wrong and rectifying the problems
3 - to know the profitability of individual products; production of a product can be stopped if its making losses
4 - it helps to decide what products to launch in future by seeing what does well and what doesn’t