Using Financial Data To Measure And Assess Performance

Question 1

The purposes of depreciation

Answer 1

Depreciation is used to ensure that the accounts meet the principles of accounting. It’s purposes can be seen from the impact of depreciation on the main accounts.

Income statement - spreads the cost of an asset over the lifetime during which it is helping to create income, overcomes the problem of exaggerating a firms costs in the year in which an asset is bought - reducing the firms profits considerably in that year

balance sheet - depreciation shows the reduction in an assets value over its lifetime - helps show true + fair valuation of each asset in its balance sheets over the years.

Question 2

Profit quality

Answer 2

If firm sells many of its non- current assets this will increase its net profit for this year because of this one off source of income. However this may reduce future performance, as non current assets produce the goods and services that help the business to make a profit - low quality profit

Question 3

Profit utilisation

Answer 3

Dividends paid to shareholders - every 6 months plc pay a dividend to their shareholders

Retained profits - to fund expansion and capital investment the company directors will wish to keep some of the profits in the business - avoids need to pay interest on borrowed money or sell more shares in order to finance expansion, profits increase the assets of the business and therefore should increase the value