Chapter 12. Analysis of an Enterprise

Through 11 chapters, we have looked at income statements, balance sheets, budget preparation, and budget reports, as well as the ingredients of these reports such as sales, cost of goods sold, expenses, assets, liabilities, and equity. We have looked a little more deeply into components such as depreciation, manufacturing cost, and long-term contract cost. We’ve talked about how to use the information in the reports, prepare budgets, and justify equipment purchases.

Time now to discuss one of the most important reasons for all the records and reports: Answering the question, “How is the enterprise doing?” (“Will it survive and will it prosper?”) Obviously, a business that is going to survive will have to make a profit (net income), but how much profit does it need to make? If it extends credit to its customers, how much can it afford to lose in bad debts? How much inventory should it have on hand? What guidelines as to the amount of profit, bad debts, inventory, and other elements of finance should there be?