Type: Business
Pages: 3 | Words: 768
Reading Time: 4 Minutes

Question 1: Select either the balance sheet or income statement and explain how the use of it may be applied to your everyday life.

The balance sheet refers to a financial statement that gives a summary of the assets and liabilities of an individual or a trading organization (Norton, Diamond & Pagach, 2008). For companies, the balance sheet will also indicate the amount of equity held by shareholders, whereas for an individual, the balance sheet shows the net worth of that particular person at a given point in time.

The use of balance sheet can be applied in everyday life to determine total value of assets that a person owns. It can also be used to determine the amount of money that an individual owes other people. It is used in calculating the amount of debt that a person owes other people. Furthermore, the balance sheet can be used by financial institutions to determine the net worth of a person as well as his or her credit worthiness.

In my opinion, the balance sheet provides reliable tools and techniques for managing personal finances, for instance, determining the total amount of debts or liabilities owed by an individual to other people is useful in determining the creditworthiness of that person. Similarly, when the net worth shown by a personal balance sheet is positive, this implies that the person has more assets than liabilities and, thus, he or she is in a better financial position as compared to another person with negative net worth. Various items on the personal balance such as cash at hand, savings in the bank and long-term investments are useful in making future investment decisions.

Question 2: Using the same concept selected above, discuss how a business manager may benefit from an understanding of this statement.

Using the concept of balance sheets, a business manager is able to determine the total assets and liabilities of the business as well as the total amount of shareholders’ equity. According to Spurga, the balance sheet shows the financial position of the company at a specific time (2010). A positive balance in the company’s balance sheet indicates good financial position, whereas a negative balance indicates poor financial position. Thus, an understanding of the balance sheet is a crucial planning tool for business managers. The balance sheet also depicts the amount of profits generated by the business. This helps the business manager in determining viable and profitable business transactions or operations.

In my opinion, knowledge and understanding of the financial position of a company is vital in projecting the future of the company. The information obtained from balance sheets can also be used by the manager to plan appropriately. For example, when the company has many liquid assets, such assets can be converted into long term investments that would earn the company more interests and returns. Furthermore, a good understanding of the liabilities of the company enables the business manager to determine when the debts are due and the total amount owed (Colin & Tracy, 2010). The balance sheet also assists the business manager in determining the net worth of the business.

According to Antle, the balance sheet assists the manager in determining the best way in which the company would be able to pay its debts or liabilities using the available resources or assets (2011). A comprehensive understanding of the balance sheet enables managers to make reasonable decisions with relation to purchase of business assets such as equipment and machinery, trading stock, office furniture and motor vehicles among others.

Question 3: Discuss how your understanding of the balance sheet and income statement may be applied to your current or future position.

In my opinion, an understanding of the balance sheet and income statement is vital in making financial and investment decisions. For example, through information derived from the balance sheet, an individual is able to determine the amount of assets that he or she owns and, thus, can make proper plans for future investments. Similarly, information derived from income statements helps in diversifying personal finances towards profitable investments. This helps in creation of additional wealth, hence, increasing personal net worth.

Additionally, I may use the balance sheet and income statement to secure loans from financial institutions such as banks in the future for personal development projects or expansion of businesses. The income statements would also be useful in reducing personal expenses in the future. It also indicates sources of income that would be expected in future.

In conclusion, I would argue that financial statements are very useful management tools for both individuals and business organizations. Both the balance sheet and income statement measure various financial aspects of an individual or organization.

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