Abstract
In Sect. 1.1 of this text a formal definition of accounting was provided in which it was described as the communication of information to enable informed judgement and decisions to be made by users. Many of the intervening sections have concentrated on the preparation and presentation of this information. The end result is a set of financial statements which provide an overall picture of the firm’s performance for an accounting period. The profit and loss account measures the increase in wealth which the firm has generated from operations; the statement of source and application of funds demonstrates how the funds generated from operations, together with any additional funds from other sources, have been used within the firm; and the balance sheet gives an overall picture of the closing position of the business.
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Notes and References
It is true that in comparing different firms financial performance care must be taken to compare like with like. However, an investor (say, in ordinary shares) may simply be concerned about obtaining the best return available, in which case it may be necessary to compare the performance of companies from different industries.
An example of this is given in Sect. 14.3 in relation to the impact of inflation on reported trend figures.
Liquidity, solvency and financial risk are also discussed in Sections 10.7, 10.10 and 10.11.
Reference to the balance sheet of Marks and Spencer Plc in Appendix B shows that at 31 March 1989 the Revaluation Reserve of £456.5m constituted 24% of the net asset total of £1922.7m.
Very liquid assets is in this example interpreted as cash (plus marketable securities if there had been any in this company). In some situations debtors may also be included.
We have used a 365 day year in the calculations; in Chapter 10 we used a 240 working day year. Both are used in practice, but obviously care must be taken to ensure that the same basis has been used when making a comparison.
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© 1991 Arthur Hindmarch and Mary Simpson
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Hindmarch, A., Simpson, M. (1991). Interpretation of Financial Statements. In: Financial Accounting: An Introduction. Palgrave, London. https://doi.org/10.1007/978-1-349-21765-6_13
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