36
CHAPTER 2
MEASURING AND REPORTING FINANCIAL POSITION
We can see from the financial statements in Example 2.1 that each statement provides part
of a picture of the financial performance and position of the business. We begin by showing
the cash movements. Cash is a vital resource that is needed for any business to function
effectively. It is used to meet debts that become due and to acquire other resources (such as
inventories). Cash has been described as the ‘lifeblood’ of a business.
Reporting cash movements alone, however, is not enough to portray the financial health
of the business. To find out how much profit was generated, we need an income statement.
It is important to recognise that cash and profits rarely move in unison. During Monday, for
example, the cash balance increased by £5, but the profit generated, as shown in the income
statement, was £15. The cash balance did not increase in line with profit because part of the
wealth (£10) was held in the form of inventories.
The statement of financial position that was drawn up as at the end of Monday’s trading pro-
vides an insight into the total wealth of the business. This wealth can be held in various forms.
For Paul’s business, wealth is held in the form of cash and inventories. This means that, when
drawing up the statement of financial position, both forms will be listed. For a large business,
many other forms of wealth may be held, such as property, equipment, motor vehicles and so on.
The statement of cash flows for Tuesday will be as follows:
The income statement for Tuesday will be as follows:
The statement of financial position as at Tuesday evening will be:
We can see that the total business wealth had increased to £73 by Tuesday evening.
This represents an increase of £18 (that is, £73
-
£55) over Monday’s figure – which, of
course, is the amount of profit made during Tuesday as shown on the income statement.
Dostları ilə paylaş: 
