ACC 501 MOD 1 CASE
Interpretation of Income Statements
Income statements help all the stakeholders and especially owners of businesses to have a clear view on company’s profitability and performance over a given period of time. They are used to evaluate performance hence improve on shortcomings that are cause companies incur losses and also helps in forecasting on company’s performance in terms of costs and sales. For the owner of company to operate full time and quit from job must ensure all products bought are sold hence maximizing on total contribution (Palepu, & Healy, 2007).
Serious Reader’s Income Statement under Part Time Operations
The first income statement indicates organization performance when the owner is operating the business on part time basis. Here the owner made a contribution gain in sale of books in Category A, B and C and incurred a contribution loss on Category D and E which caused business owner to make a total net loss of $ 9,800 from sales of books. Net loss was caused by selling few books in both category D and E of less than 50% of total units bought (Garrison, Noreen, & Brewer, 2003).
Increased Units sold Up to 90% of Total Units Purchased
By increasing amount of units sold, the business managed to make contribution gains in all categories of books sold. This indicated that efficient marketing strategy to attract new customers result to increased contribution. The net profit of the company increased to amount of $ 47,600, which was a recommendable performance. The increased number of units sold did not have any impact on fixed costs hence high profitability (Garrison et al., 2003).
Increase in Prices
Increasing prices is a short term goal of making profits to the business even if it resulted to increased contribution in all categories of books sold, the prices could result to a great loss of customers. The company’s net profit was far below the performance resulting from increased number of in units sold (Palepu, & Healy, 2007).
Business owners should emphasize on selling of all products purchased to maximize the company’s profitability. They should avoid increasing prices since are short term goals in profit maximization and could result to loss of customers to competitors.
Importance of Different Type of Income Statement for Internal Purposes
Internal parties of organization including manager, business owner, and employees use internal income statements. Internal users have different purposes when reviewing and interpreting internal income statements for a business. They do not follow a standardized format, legal formula or guidelines established by Financial Accounting Standards since the documents are only used for internal purposes, but are supposed to have a semblance of order to enable owners and management to review them with ease. There are different internal income statements which are prepared to help make specific decisions and they have different purposes depending on their users (Barth, 2006).
Owners and Managers Being Users of Internal Income Statements
Internal users of income statements are people having direct and relevant relationship or interconnection with the organization. Owners and managers need income statements, which gives them an opportunity to review financial performance of the organization enabling smooth running of the company. Financial analysis is only possible through the use of financial statements prepared for internal use, which provides comprehensive view of the financial position of an organization. The managers and owners use internal income statements when a company wants to develop contractual terms with another organization. A variable internal financial statement for example, debt and equity ratios are important in deciding and determining the source of funds to be used to raise a long term capital and determining actual amount to be raised. Employees use internal statements for security for the purpose of securing their jobs and making bargaining agreements concerning their rewards. The statements also could be used when discussing matters of salary increments, rankings and promotions purposes (Benjamin, & Stanga, 2002).
Importance of understanding How Costs behave
Managers are supposed to make decisions, which are cost effectives, hence maximizing on company’s ability to generate high profits. Understanding how costs behave is an aspect of great importance hence managers could be in a position to make decisions pertaining to buy or make, outsource labor or employ and decisions towards pricing of commodities. Managers should also be aware of how total cost changes depending on various factors. Changes in total costs can be caused by a change in the single activity level, for example, in a scenario where the buying variable costs can increase with increase in the number of units purchased or manufactured units in a manufacturing company. This would help managers determine whether additional units are beneficial to the company’s contribution hence making informed financial decisions (Kaplan, & Atkinson, 2015).
Similarly, in a scenario where variations in the number of machines hours could result in changes in total costs of the company, managers would make decision on whether to use more of machine hours in production processes or replace machines with labor hours through determine true cause -effects by analyzing cost behaviors. Another scenario is when the costs decreases with increase in the level of out puts as explained under economies of scale. If costs decrease with increasing output, it is advisable for the managers to increase the level of production so as the company can maximize on profitability goals (Kaplan, & Atkinson, 2015).
Internal income statements for the companies have special purposes, which are of great benefits their users. The cost behavior analysis is of great important because it helps managers make decisions on how to regulate and control costs enabling companies to generate high profit.
Barth, M. E. (2006). Including estimates of the future in today’s financial statements. Accounting Horizons, 20(3), 271-285.
Benjamin, J. J., & Stanga, K. G. (2002). Differences in disclosure needs of major users of financial statements. Accounting and Business Research, 7(27), 187-192.
Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2003). Managerial accounting. New York: McGraw-Hill/Irwin.
Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.
Palepu, K., & Healy, P. (2007). Business analysis and valuation: Using financial statements. Boston,MA: Cengage Learning.