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# How do financial statements help management make decisions

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How do the income statement and the balance sheet help management make sound decisions?

How can you find out, at any time, whether your firm can pay its bills as they become due?

If your firm's expenses equal or exceed its revenues, what actions might you or your managers take to change this situation?

In discussing the firm's latest financial statements, one of your managers says that it is the "results on the bottom line" that really count. What does the manager mean by this statement?

#### Solution Preview

How do the income statement and the balance sheet help management make sound decisions?

Studying the financial statements can provide a vast amount of information about the health of a company. From an overall standpoint, the statements will tell the reader how the company is doing in the current year as well as compared to the prior year. Then the statements can be analyzed more closely for comparisons of particular amounts; for example, how much did sales increase or decrease this year over last year, and how much did expenses increase or decrease this year over last year. Areas of concern can easily be spotted using this comparative procedure.

In viewing the balance sheet, the management can compare cash positions, amounts of accounts receivable, current liabilities, for example, to view the progress of the company, particularly in these tough times. There are many ...

#### Solution Summary

The 500+ word solution presents a full paragraph of explanation for each of the questions. the state of the current economy is clearly reflected in both the questions and the responses.

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## Accounting for Decision Making: CVP Graph

E5-4 Ewing Company estimates that variable costs will be 50% of sales, and fixed costs will total \$800,000. The selling price of the product is \$4.

Instructions
a. Prepare a CVP graph, assuming maximum sales of \$3,200,000. (Note: Use
\$400,000 increments for sales and costs and 100,000 increments for units.)
b. Compute the break-even point in (1) units and (2) dollars.
c. Compute the margin of safety in (1) dollars and (2) as a ratio, assuming actual
sales are \$2 million.
Hint:
Prepare a CVP graph and compute break‐even point and margin of safety.
( Study Objective 6 Study Objective 7).

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