Importance of Profit and Loss, Balance Sheet and Cash Flow Statement in Accounting Practices

The report discusses the importance of Profit and Loss, Balance Sheet and Cash Flow Statement in accounting practices. It presents comments on the Profit and Loss Statement and evaluates the Balance Sheets of a company for two consecutive years. The report also highlights the significance of these statements and their internal correlation with each other. The financial aspects of the company are analyzed to provide insights into its performance. Subject: LDT3106, Course Name: Introduction to Accounting, College/University: Not mentioned.

INTRODUCTION TO ACCOUNTING
INTRODUCTION
Accounting refers to the system of
recording and summarizing business and
financial transactions and analyzing,
verifying, and reporting the results also
the principles and procedures of the
system studied accounting as a freshman.
IMPORTANCE OF PROFIT AND LOSS, BALANCE SHEET AND CASH
FLOW STATEMENT
IMPORTANCE OF BALANCE SHEET-
The management of the balance sheet play vital role within the organization
as it provides the summary of assets and liabilities the company is having for
the forthcoming period.
Along with that the organization is able to determine the growth rate of the
company and allow the organization to take imitative steps for the
forthcoming time period.
IMPORTANCE OF PROFIT AND LOSS STATEMENT
On the other hand, the profit and loss account give assistance in identifying
the income of the business unit along with the expenses of the company
Apart from that on the basis of the P&L account the organization take major
steps for the further growth.
IMPORTANCE OF CASH FLOW STATEMENT-
Cash flow statement is the document which reflects that how the cash has
been flowed in the organization between two time points
For managing cash, it is essential to know the pattern it is being flowing in an
organization.
CONCLUSION
From the report above it can be concluded that the all three discussed
financial statements be is profit and loss statement, balance sheet and
cash flow statement are having their significant role in accounting
practices of an organization.
REFERENCES
Horton, J., 2020. Project manager: Duncan Jones Project number: 18260
Name of organisation: Artefact Heritage Document version:
Final.
COMMENTS ON PROFIT AND LOSS STATEMENT-
Company has generated gross profit of rupee 36,200,
Which is around 9.16% of the total sales revenue.
. GPR of the company is less than 10% it is not a good sign.
Labor cost or wages are also sharing a big proportion of
production cost. It is around 8.86% of sales revenue
The net profit of the company is quite low since it is around
19,100 which is a bit more than the gross profit of the
entity.
FINANCIAL ASPECTS OF THE COMPANY
As per the given balance sheet of Grenco PLC it can be
reflected that there have been a few variations in the
financial position of the company in two consecutive years.
But the rate of depreciation in 2015 was 9.8% but it was
9.47% in 2016 which is a bit higher.
If in 2016 the liquidity factor of the company is seen then it
got lower, earlier it was 3500 million and in 2016 it was nil.
If the current liability factor of the company is seen, then
there was a little jump in trade creditors in 2016 which
imposes outsider short term liability on the company.

INTRODUCTION
Accounting refers to the system of recording and summarizing business and financial
transactions and analysing, verifying, and reporting the results also the principles and procedures
of the system studied accounting as a freshman. The report will be discussing various dimensions
of accounting with presentation of role or importance of statement of financial performance or
Profit and loss account, balance sheet and cash flow statement. How these statements are having
their prominence in an entity and how these statements are internally correlated to each other.
The report will also be making profit and loss statement for the company and would also
comment on that. The balance sheets of the company for two consecutive years will also be
taken and comments will be made to elaborate financial aspects of it.
IMPORTANCE OF PROFIT AND LOSS, BALANCE SHEET AND CASH
FLOW STATEMENT
IMPORTANCE OF BALANCE SHEET-
The management of the balance sheet play vital role within the organization as it provides
the summary of assets and liabilities the company is having for the forthcoming period. With the
assistance of the balance sheet the investors and the creditor are able to determine the progress
and performance of the company in effective as well as efficient manner. Basically it helps the
organization or the investors in identifying the financial stage in the domestic as well as
international marketplace. Balance sheet is considering as the essential tool for determining the
financial stability of the company.
Along with that the organization is able to determine the growth rate of the company and
allow the organization to take imitative steps for the forthcoming time period. Moreover, it
allows the company to compare the performance of the company in different years. With the
assistance of the balance sheet the company is able to apply and squire the loan from the
financial institute. In the process of decision-making of expending the business in the market the
organization can develop the plans of action as per the analysation of the balance sheet. It

provides guidances in the process of planning and developing programme within the
organization.
If the profits of the entity are higher than the capital figure of the balance sheet would
also be higher so ultimately both are related. If the balance sheet is showing high amount of debt
then it would be leading higher financial cost in profit and loss accounts, further it will be
reducing tax burden of the entity since financial costs are deductible in profit and loss accounts.
If in the balance sheet cash figures are higher it shows high frequency of cash flows in the
organization.
IMPORTANCE OF PROFIT AND LOSS STATEMENT-
On the other hand, the profit and loss account give assistance in identifying the income of
the business unit along with the expenses of the company. Furthermore, the organization can
consider the account in process of reducing the risk of debt and expenses of the company. It
provides the audience in increasing the earning of the company in Ashworth period.
Apart from that on the basis of the p&l account the organization take major steps for the
further growth. With the assistance of this account the company is able to squire the information
about the operation of the company as it includes the performance of the company. Moreover,
the company can determine the tax obligation by auto analysis profit and loss account.
The use of profit and loss statement is not restricted up to just knowing financial
performance if an entity but it is also helpful in drafting future plans and controlling operations
of an organization like cash management is also possible. Further it suggests that what changes
can be made in assets and liability components so it is also related with balance sheet as well. In
modern business entities are price takers they can't decide the price of their products so the only
way through profit can be maximized is cost reduction, which is next to impossible without well-
articulated profit and loss statement.

IMPORTANCE OF CASH FLOW STATEMENT-
Cash flow statement is the document which reflects that how the cash has been flowed in
the organization between two time points. Generally, it is prepared for the financial year to know
the flows and their pattern. There are three activities taken into consideration while making it.
Operational, financial, investment are those three areas. This statement is very prominent in
managing cash or cash equivalent of an organization. Over the time one of the toughest thing to
manage in any entity is cash after human being.
For managing cash, it is essential to know the pattern it is being flowing in an
organization. Cash flow statement not only shows the flows but also depict the entire picture how
it has been in two time points. This present utter picture to the management, and they can
manage their cash in more efficient way.
CFS enables the management in managing different sets of activities individually in term
of their cash management. Since it provides a broad picture in which all the activities and their
performance is taken into focus in this case it becomes simpler for the management to plan
differently for all the activities and if in certain activities they are underperforming then can
augment their performance by strong cash management.
Cash flows show bigger picture of both profit and loss and balance sheet. Since it the
variability in its components is higher than it would be impacting potential implication for both
the final statements. Further financial cash flows are directly related to financial cost in P&L and
financial components in balance sheet so it can be said that these all statements are mutually
related.
INCOME STATEMENT OF THE COMPANY AND COMMENTS
PROFIT OR LOSS STATEMENT-
Particulars Amount

Sales Revenue 3,95,000
Cost of sales (3,23,800)
Wages (35,000)
Gross Profit 36,200
Rent (5,500)
Telephone expenses (1,220)
Van running costs (200)
Motor expense (180)
Lightening and Heating expense (4,000)
General Expense (6,000)
Indirect expenses (17,100)
Operating profit 19,100
COMMENTS ON PROFIT AND LOSS STATEMENT-
Company has generated gross profit of rupee 36,200, Which is around 9.16% of the total
sales revenue. It is clear evidence that the margin of gross profit on sales is very less. There may
be so many causes but the most general or potential reasons are as- the high cost of sales refers
poor operational performance of the entity. It shows that cost of direct material and direct labour
have been substantially higher which caused such high cost of production which ultimately
reduced the gross profit of the company. GPR of the company is less than 10% it is not a good
sign.
Labour cost or wages are also sharing a big proportion of production cost. It is around
8.86% of sales revenue. Gross profit is a leading factor which ultimately leads to higher net
profit, entities who are engaged in manufacturing or production related business are vastly

depended on their gross profit since in such business other income generating resources have
been less and entire profitability factor gets inclined to gross profit of the organization.
Indirect expenses of the company are showing an interesting picture, As it can be easily
observed that indirect cost of the company is having a high amount of lightening and electricity
cost which may be due to use of conventional machinery or may be misuse here attention must
be paid to control it. Telephone expenses are accounting more than even van charges which
reflects the company is having vast use of telephone may be for making contacts with outsiders.
The net profit of the company is quite low since it is around 19,100 which is a bit more
than the gross profit of the entity, which also reflects that the entity is occurring low profit
compares to its gross revenue.
FINANCIAL ASPECTS OF THE COMPANY
As per the given balance sheet of Grenco PLC it can be reflected that there has been a
few variations in the financial position of the company in two consecutive years. By the way, the
changes in the components of statement of financial position are not bigger yet there are a few
areas which have shown their attendance of being shifted.
If just fixed assets of the organization are taken into consideration, then it can be seen
that there has been a small shift in the amount. But the rate of depreciation in 2015 was 9.8% but
it was 9.47% in 2016 which is a bit higher.

If just see the current asset factors of the entity, then the volume of stock got higher in
following year compares to previous year which depicts poor stock management and may be the
entity got failed in selling out their products in time. The debtors of the company are also lower
in 2016. There may be two possible reason, perhaps the company had sold fewer products on
credit, or they had recovered the amount on time or before time.
If in 2016 the liquidity factor of the company is seen then it got lower, earlier it was 3500
million and in 2016 it was nil. Which is not a healthy sign for the entity. It shows that the
company is having problem in term of cash or liquidity which may cause them severe damages
in regulating their operations on daily basis. At the same time, it is not a good sign for working
capital point of view too.
If the current liability factor of the company is seen, then there was a little jump in trade
creditors in 2016 which imposes outsider short term liability on the company. The capital
account balance is also showing its hike in the following year the most logical reason is the
additional capital introduced.
The net profit factor of the company got a significant boom in 2016. In the following year
the entity has generated higher profit than the previous year it is showing positive performance.
Despite having some unfavourable factors in the asset side of the balance sheet the overall
performance has been good for the company in the following year.
The amount of drawings is more than two times in 2016, which may be considered a
negative figure since the additional capital which has been introduced in 2016 was just 5000
million euros but the drawings are even bigger than that amount. That can't be ignored specially
in such circumstances where company is already having problem of liquidity. Their bank column
of balance sheet is showing nothing.
It may lead some extra burden on the organization since in the phase of liquidity problem
it is not a good thing hiking the amount of drawings in the organization. In different words it can
also be elaborated as mismanagement of finance in the entity. It is strictly duty of finance

manager to ensure sufficient amount of cash or liquidity in the entity but the statements are
showing imperfection in doing so.
CONCLUSION
From the report above it can be concluded that the all three discussed financial statements
be is profit and loss statement, balance sheet and cash flow statement are having their significant
role in accounting practices of an organization. The report also discussed how these three are
internally correlated with each other, and they are internally linked in term of the set of
information they present. The report also prepared profit and loss statement for the company in
order to present comments on various components of the statement. Furthermore, the balance
sheets for two consecutive years were also evaluated and views on various financial components
presented to analyse the financial components and their implications on the performance of the
entity.

REFERENCES
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Artefact Heritage Document version: Final.
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