Application of financial statements in business management and everyday life

¶ … Financial Statements

The income statement and the balance sheet are some of the most commonly used financial statements, both at a personal and corporate level. In this text, I concern myself with how I can utilize the balance sheet in my day-to-day life. Further, I look at how a business manager could benefit by having a comprehensive understanding of this crucial financial statement. Lastly, I discuss how I may apply both the income statement and the balance sheet in a future position.

The Balance Sheet and its Application in My Day to Day Life

According to Eisen (2007), a balance sheet is basically a financial statement that charts an entity's financial position at a specific point in time. It is mainly made up of three sections namely the assets section, the liabilities section and lastly the owner's equity section. In my own opinion, the balance sheet could come in handy in terms of application to quite a number of issues in my life. To begin with, it is possible to determine my net worth using a balance sheet. This can be achieved by first coming up with a personal balance sheet with a list of all my liabilities and assets. My net worth in this case is the difference between my total assets and my total liabilities. Knowing my net worth is critical for purposes of determining whether my emergency funds are adequate etc. Secondly, a balance sheet could help me to determine my level of debt. Knowing my debt level is important as I can be able to tell when acquisition of additional debt is inappropriate.

The Balance Sheet and How its Understanding Could Benefit a Business Manager

To begin with, a manager's comprehensive understanding of this financial statement is important for comparative purposes. Here, the business manager could make an assessment of both the strength and the performance of the business going forward through carrying out a comparison of the business' balance sheets over time (say over a period of 5 years). Further, a business manager can chart the performance of his or her business by comparing its balance sheets with those of competitors in the same industry. Secondly, a business manger could utilize balance sheet accounting ratios to determine the viability of other firms for investment purposes. An example of a ratio in this case is the current ratio which according to Stickney, Weil and Schipper (2009) demonstrates the ability of an entity to settle its obligations (short-term) as they fall due.

The Income Statement and the Balances Sheet: Future Application

When it comes to the balance sheet, I may use the financial statement in future to chart the sources as well as uses of funds in an organizational setting. This would be critical for the effective management of the organization i.e. As a way of maintaining safe or appropriate liquidity levels. Further, I may in future use the balance sheet to identify those to whom we should advance debt. According to Juan (2007), creditors may be interested in their debtors' ability to pay for the goods and services advanced to them. This is where financial ratios like the current ratio may come in handy.