Marginal costing is used by managers to make decisions in the short-term when costs are fixed and variable. In the long-run, all costs are variable and hence no application of marginal costing. Variable costs are those that change proportionately with change in production. They include costs like electricity, labor and raw materials. Fixed costs are those that remain constant irrespective of the level of production. An example of fixed cost is rental charges. Marginal costing is very useful in managerial decision making process as it is used to ascertain the level of sales, costs and profits in the business. This is because marginal costing affects all these aspects of the business from costs to sales and to profits. Therefore, marginal costing is used as a method of control in cost accounting (Khan& Jain 2000).
A cash budget is a financial statement that is usually used in making management decisions with regard to either the cash position or cash reserve of a given business. The process of cash budgeting is used to have a forecasting on the receipts (cash flows) and payments (cash outflows) expected by the business in order to meet future obligations. A cash budget is now the written statement of all the cash inflows and cash outflows. It enables the business to observe its future movements with regard to cash position. This statement is very essential in every business as it is used to monitor the entire budgeting process during the year. There is always a tendency to forget or overlook the cash cycle during business operations. At the end of the year, this becomes quite difficult to ascertain the cash flow of the business without periodic records of reference.
The cash budget is used to show how much cash comes into the company and how it is used. Seasonal fluctuations during the year will be clearer when using cash budget. This will enable management make strategic decisions on how to improve the performance of the company so as to have maximum profits. The cash budget is used to assess whether the business is able to sustain regular operations. It is also used to know whether cash is left for unproductive activities. This is especially important as the business needs to put its cash into productive use in order to generate much profit. A cash budget is very important for small businesses like this one has it enable the business to know how much profit it can extend to customers (Moyer, McGuigan, & Kretlow 2009).
Income statement is a financial tool which is used to reflect revenues and expenses of a business over a given period of time. This important statement is used to show the profitability of a given business over the specified period of time. Income statement is used to solely record revenues, expenses and the net profit for a particular period. As is the case with every business, profitability is the main reason for its existence. There is always need to maximize profitability as it is shareholder’s main area of interest. When a business does not perform well, the profits will decrease. This is an indicator that in future the company might be declared bankrupt. It is the responsibility of the management to ensure that the right strategies are employed to achieve this main objective of the business. Therefore, the income statement will give the stakeholders of the business, including investors, a quick glimpse into the state of affairs in the company. The investor is able to make wise investment decisions after interpreting the net profits presented in the income statement. The net income or profit is calculated by subtracting the summation of all expenses from total revenues (Fridson & Alvarez 2011).
A balance sheet is one of the most important financial statements for a business. This statement is used to show the financial position of a business as at a given point of time. The balance sheet can be used as a summary of all the other financial statements. By analyzing the balance sheet, a business stakeholder is able to ascertain with much clearity the position of the business. The management use balance sheet to make decisions regarding improving the business. These decisions include investments and operations. By thorough analysis of this statement, the management is able to have business forecasts so as to help improve the performance of the whole organization. A balance sheet show the total assets in the organization, depreciation levels and current liabilities like accounts payable and bank overdrafts. The balance sheet also shows the total amount of capital contributed by shareholders, the amount of profits ploughed back into the business and long term sources of finances like loans. Therefore, investors will be able to have a clear account of what their funds were used for and whether they were profitable ventures.
In light with the above, it is clear that financial statements are very important to business stakeholders including investors. These statements are used to make management decisions by the business. For other stakeholders like investors, they will be able to know the financial position of the business and thus make wise decisions with regard to the organization. It is therefore important for all stakeholders of the business to take a keen interest on these statements.
List of References
MOYER, R. C., MCGUIGAN, J. R., & KRETLOW, W. J. (2009). Contemporary financial management. Mason, OH, South-Western/Cengage Learning.
FRIDSON, M. S., & ALVAREZ, F. (2011). Financial statement analysis a practitioner's guide. Hoboken, N.J., Wiley. http://site.ebrary.com/id/10484839.
DRURY, C. (2007). Management and cost accounting. London, Thomson Learning.
KHAN, M. Y., & JAIN, P. K. (2000). Cost accounting. New Delhi, Tata McGraw-Hill Pub. Co. Ltd.