Sample Finance Paper on Why is it important for companies to prepare profit and loss statements?

Sample Finance Paper on Why is it important for companies to prepare profit and loss statements?


The profit & loss account provides information about an enterprise’s income and expenses which result in net profit or net loss. It helps a businessman to evaluate the performance of an enterprise and provides a basis for forecasting future performance. It also provides valuable information required by a banker while sanctioning a loan. The Profit & Loss account describes different business activities such as revenues and expenses, particularly useful in assessing the risk of not achieving certain level of income in the future. It also provides information required to determine tax obligations.


Profit and loss statements provide an ongoing record of a company’s financial condition and are used by creditors, market analysts and investors to evaluate a company’s financial soundness and growth potential.


Comment on the trends of performance for the business over the last 3 years? What are possible explanations for the trend depicted above?


Despite an increase of inflation between the years, Real Hardware recorded profits in the 3 years. The Net variation in surplus for the years increased through the years. The capital expenditure for the last 2 years are increasing.


The possible explanation for the trend depicted is Real Hardware has increase profits by reducing costs and expenses and increasing sales.


Mention briefly the key financial ratios, with the formula, that could be tested in the income statement above?


Current ratio= current assets/ current liabilities(liquidity ratios used to measure the company’s ability to repay short term and long term obligations.)



Debt to equity ratio=Total liabilities/ shareholders’ equity(leverage ratios used to measure amount of capital that comes from debts)


Asset turnover ratio= net sales/ average total sales (efficiency ratios are used to measure how well a company is utilizing its assets and resources.)

Why do businesses prepare balance sheets for their business? What are some of the items in a Balance sheet?

Balance sheets help businesses in filing taxes. Items in a balance sheet include assets: cash, marketable securities, prepaid expenses, accounts receivable, inventory and fixed assets.

Liabilities: accounts payable, accrued liabilities, customer prepayments, taxes payable, short term debt and long term debts.

Comment on the simple trends identified in the balance sheet above? What are possible explanations for the trends mentioned?

The company’s financial position is improving based on the percentage change in the balance sheet accounts over the years. The possible explanation is that the company is not facing any type of financial stress through the years.

Identify 4 key financial ratios, with formula, relating to a balance sheet in the business?

They include:

Net working capital=current assets- current liabilities

Current ratio and quick ratio Quick ratio= (current assets-inventory)/ current liabilities

Debt to asset ratio=total debts/ total assets

Solvency ratio =net profit after tax + depreciation/short-term liability + long term liability