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Final Accounts

Extracts from this document...

Introduction

Task 1 Depreciation Depreciation is the term used when describing the decline in value of something. It also represents the ownership and consumption of something useful life. In accounting terms, this is limited to the value of a fixed asset during its useful life. Examples of fixed assets are fixtures & fittings, vehicles and equipment. The reasons for depreciation are: * New models - in today's modern world, there is new technology that compliment the new generation. This makes things more efficient. * Wear and Tear - equipment eventually gets worn out to an extent that it is no longer worth fixing and needs to be replaced (upgraded) in order to not be labelled as 'old fashioned'. Fixed assets are shown in the balance sheet and are valued as part of the business. To produce accurate accounts, a business must show that the value of fixed assets goes down over time. The purpose of depreciation is to match the cost of a fixed asset that has a life of more than a year to the revenues earned from using the asset. The reason why depreciation is used is to spread the initial price of the asset over its useful life. There are several methods that can be used when calculating depreciation. The calculations are normally based on either the amount of time passed or the amount of use of the asset. The first method is: Straight-line depreciation - this is the most simple and frequently used method in businesses. This is calculated by taking the purchase price of an asset and subtracting it from an estimated scrap value. The result is then divided by the business' estimate of the number of productive years the asset can be expected to benefit the company. The answer will give you the Net Book Value, which shows the annual depreciation amount (how much it will be worth every year. ...read more.

Middle

Dividends will only be paid if the company makes a profit, though, the company may draw on reserves from the past profits to pay dividends. Dividends will not appear on the balance sheet, as it is an expense to the business and will only appear in the profit and loss account. The dividend given by Arsenal Holdings PLC to its shareholders for this past year was �45.26 per share, a major decrease from last year's share dividend of �127.01 per share. Working capital measures a business' efficiency as well as short-term financial health and is found at the heart of the balance sheet. It is also the day-to day finance used for operating a business. This is used to pay bills, funds the credit for debtors when making a sale, buys stock and repays loans as well as pay for running costs. Working capital also gives investors an idea of the company's underlying operational efficiency. Arsenal may struggle to finance for certain things if there is minimal working capital available, therefore, stretching its liquidity. However, if Arsenal has excess capital tied up in the short term, it may be able to afford the things needed that could boost efficiency. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another. Slow collection may signal an underlying problem in the company's operations. The formula for working capital is: current assets - current liabilities = working capital Current assets Current assets are anything owned by a business that can be converted quickly into cash before the next balance sheet is drawn up, usually within a year. Current assets usually include stock, debtors, bank and cash. This is where business gains their working capital for the essential running of the business. ...read more.

Conclusion

Another limitation is that ratios do not explain why a company is located where it is and why it is located there. This is information that could be essential to anybody. Another limitation is that it does not show what kind of customers the business has or how frequent they come in. it also does not specify the amount of money they spend within the company. Another limitations of using ratios is that it does not show staff turnover over the year. It does not show how many employees are recruited or how many have left. This could be vital information to some people, as they may want to know how much is spent on recruitment. Another limitation is that ratios do not show the customer service provided by the business. This information could be important to some people because they may want to know the quality of the customer service provided and may judge whether customers will come back again or not. If the costumer service is poor, the business will lose their costumers, therefore, reducing sales within in a year. Another limitation is that ratios do now show the company's competitors. This could be vital information to people, as investors would be able to decide whether it is worth investing in or the business can find out what it has to do to steal a march on competitors. Another limitation is that the ratios also do not tell us how long the company has been in existence, though it could show when the business was established and how long it's been in existence. These show that ratios are limited in the information they can give, even though they may be useful to some extend n as much as they help judge the performance of the business but it does not tell us everything that we need to know about the business. The ratios prove that Jane Simpson's business is solvent because they have more time to pay off debts. ?? ?? ?? ?? Michael Osodi Unit 10: Final Accounts 1 ...read more.

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