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Following are the uses of earnings information:
- Accomplishments: Profit is an important indicator
of the accomplishment of business. Other things remaining
same, higher the profits greater are the accomplishments.
- Appropriation Decision: An important question with
which owners of a business are often confronted is How much
money can be withdrawn without impairing its current level
of operations? This question in fact is concerned with appropriation
decision. A prudent management would not only like to maintain
the capital or the present capability of the enterprise
intact but would also plan for future growth. The maximum
amount that the owners can withdraw from business for their
personal expenses should be limited to the amount of earnings,
which remain after making good all the resources that have
been used in the process of generating those earnings.
- Problem Identification Using Earning Data: From
the earnings data several problem areas can be identified.
This is best done by computing ratios i.e., by examining
the relationship of one item of earnings statement with
another item. This will be taken up in detail in a subsequent
unit. At this stage it may only be stated that the lower
earnings my be on account of excessive cost of inputs, excessive
expenditure on overheads or low margin of profit on sales
of excessive pilling of inventories or other unanticipated
losses.
- Determining the Market Value of a Firm: The economic
value of the firm is determined by the size and reliability
of the stream of earnings (cash flow) produced by the business.
Q. Explain uses of earnings information. |
Accounts
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