Accounts and Finance: Elements of Financial Statements, Auditor's Report, Qualitative Information
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This document provides an overview of the key aspects of accounts and finance, including the elements of financial statements, the functions of the auditor's report, and the objectives of qualitative information in annual reports. It covers topics such as assets, liabilities, equity, investments, revenue, expenses, and more.
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ACCOUNT AND FINANCE Contents
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INTRODUCTION The term accounts and finance both are key aspects. Accounts can be defined as measure, storing and interaction of monetary and anti-financial data on financial entities such as companies and corporations (Anandarajan, Anandarajan and Srinivasan, 2012). Accounting is often alluded to as "the business language". While the finance is value of monetary resources which are needed to completedifferentoperations.Thereportcoversinformationaboutdifferentelementsof financial statements, role of auditor’s report. In the further part of report various calculations are done as accordance of given data. MAIN BODY Task 1. (a)Element of financial statements. Financial statements- Financial statements are documents compiled by the company's management to show the financial results and role at a time. It has below mentioned elements which are as follows: Assets- Assets are the possessions or legal protections of a company for which value of fundcan be attached. In other terms, thisis a value object that is expected to produce benefits in the future. These assets can be classified into many types such as tangible, intangible, current and noncurrent assets. Liabilities- It can be defined as current responsibility of the company resulting from previous events, the resolution of which is expected to occur in the outflow from the corporation of assets reflecting economic benefits (Hillier, Westerfield, Jaffe and Jordan, 2013). There are various types of liabilities such as current and noncurrent liabilities. Equity- Equity is the financial interest of a corporation in the type of a portfolio. In financial terms, it is the contrast between the asset value and the expense of debt of anything owned. This is primarily the remaining sum balanced by the assets toward liabilities. Investment by owners- This indicates the gain in capital arising from the sale of assets in return for ownership stake (Czarniawska,2012). This describes the
commitment of any owner to the company. The issue of shareholdings by a company for money is expenditure by the owners. Distribution to owners- It reflects a reduction in capital arising from the sale to the owners. It shall assess the drawdown of the owner from the ownership stake of the firm. An example of payment to owners is the monetary dividends paid by a corporation to its investors. Revenue- Revenue is the money a company receives from its regular business operations. It is the inflow of capital, which results in an improvement in the equity of the shareholder. Tradeof goods and services for exchange of cash is an example of income. Gains-Gainisanimprovementintheassetsoftheownerofsecondary transactions that are sporadic and non-recurring in nature (Power, 2012). Expenses- Expenditures are the gross outflows of income generated by the business venture. The total expenditures are chargedto the profit and loss ledger. Losses- Loss is a reduction in owner's capital as a result of secondary transactions that are frequent and non-recurring in nature. Comprehensive income- Comprehensive income is a shift in the company's assets from non-owner origin transactions. That covers all adjustments in the company's capital, other than those arising from acquisitions by investors and transfers to owners (Chan, Tong and Zhang, 2012). (b)The functions of the auditor’s report in an annual report. The auditor's report expresses an opinion on the accuracy and quality of the firm's monetary results. Within the report, the auditor may express any concerns about the financial position of the business or any additional details related to it. There are basically four types of auditor’s report which are as: Thecleanorunqualified opinion-This report shows the auditor's view that all the documents released for the analysis show that the financial transactions and records of the company are accurate and appropriate (Byrne, Flood and Willis, 2012). Qualified opinion- This report is usually positive because it shows that the auditor has found no problems with the monetary documentation.
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Adverseopinion-Theunfavourablejudgmentmeansthecompanyhasnot complied with the standards by the UK GAAP and that the auditor has found a gap in the firm's statements. Disclaimer of opinion- This implies that the auditor was not able to finish the audit due to a specific reason. It has below mentioned functions which are as follows: If any of the issues needed to be included in the audit report have been addressed in the adverse or eligible form, the auditor's report shall also state the explanations for them (Jones, 2014). The findings or remarks on business transactions or matters that have a negative effect on the ability to function of the firm referred to in the report of the auditor shall be perused by the auditor in the general assembly before the firm. It can be inspected by any representative of the firm. The auditor should have a comment on the following matters in his report on behalf of the businesses covered by that order: fixed assets, stock, fraud reporting etc. (c)Qualitative information in annual reports and its objectives. In the annual report, different types of qualitative information are included such as notes of financial statements, about company and many more (Van Hoepen, 2013). Herein, below objectives of these information is done below: Objective of notes of financial statements- The main purpose of the notes to the financial reports is to further explain the accounting processes used by firm and to reveal information that happened during and instantly after the end of the financial reporting period. Objective of information about company- Annual reports include details on the firm's mission and history and review the company's accomplishments over the past year (Hellmann, 2013). Due to which users can access information about industry in which company deals. Task 2. Consolidated statement of financial position of Simone Bhd. as at 31 December 2018.
RMRM Property, plant and equipment:571450 Freehold land, at cost714900 Plant, at net book value270000 Machinery and equipment60000 Goodwill50000 Investments in Peres Sdn. Bhd.: 150,000 ordinary shares700000 20,000 preference shares50000 Loans to Peres Sdn. Bhd. Current assets: Inventories172650 Trade receivables139600 Other receivables42500 Bank19578002312550 4728900 Ordinary shares of RM1 each1100000 8% preference shares of RM1 each120000 Share premium account520000 General reserves62000 Retained profits322400 Shareholders’ funds2124400
Loan from Simone Bhd.59000 Current liabilities: Trade payables151100 Other payables130000 Taxation140000421100 4728900 Task 3 (a) Common-size comparative statements of financial position: 20172018 Absolute change % change (+/- ) Sales 20,75,00 0 24,86,00 04,11,00020% Cost of goods sold122200015230003,01,00025% Gross profit8530009630001,10,00013% Operating expenses: Advertising10000014500045,00045% Staff salaries280000240000-40,000-14% Office salaries200000165000-35,000-18% Insurance4500010000055,000122% Supplies expense3500026000-9,000-26% Depreciation750008500010,00013% Miscellaneous15000170002,00013% Total operating expenses75000077800028,0004% Operating profit10300018500082,00080%
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Interest expense4600044000-2,000-4% Profit before tax5700014100084,000147% Income tax expense190004700028,000147% Net profit38,00094,00056,000147% Earnings per share0.990.9900% Precise Company Comparative Statements of Financial Position As at 31 December 2018 and 2017 Assets20172018Absolute change (+/-) change in % Current Assets: Cash42,00079,00037,00088% Short-term investments96,00065,000-31,000-32% Accounts receivable1,00,0001,20,00020,00020% Merchandise inventory2,65,0002,50,000-15,000-6% Total current assets5,03,0005,14,00011,0002% Property, plant and equipment Store equipment3,50,0004,00,00050,00014% Office equipment50,00045,000-5,000-10% Buildings6,75,0006,25,000-50,000-7%
Land1,00,0001,00,00000% Total property, plant and equipment11,75,00 0 11,70,00 0-5,0000% Total assets16,78,00 0 16,84,00 06,0000% Liabilities Current liabilities: Accounts payable1,90,0001,64,000-26,000-14% Short-term notes payable90,00075,000-15,000-17% Taxes payable12,00026,00014,000117% Total current liabilities2,92,0002,65,000-27,000-9% Long-term liabilities: Notes payable (secured by mortgage on buildings)4,20,0004,00,000-20,000-5% Total liabilities7,12,0006,65,000-47,000-7% Shareholders’ equity Share capital4,75,0004,75,00000% Retained earnings4,91,0005,44,00053,00011% Total shareholders’ equity9,66,00010,19,00 053,0005% Total liabilities and equity16,78,0016,84,006,0000%
00 (b) Calculations of ratios: (I) Current ratio = Current assets / current liabilities Year20172018 Current assets503000514000 Current liabilities292000265000 Calculation503000/292000514000/265000 Current ratio1.72 times1.94 times Current ratio 1.6 1.7 1.8 1.9 2 1.72 1.94 2017 2018 Analysis- On the basis of above calculated current ratio this can be find out that company is unable to meet the criteria of ideal ratio which is 2:1. In year 2017, value of current ratio is of 1.72 which increased in next year and became of 1.94 times in year 2018. This is indicating that company is improving its current ratio in year 2018. The reason of lower performance in year 2017 is the higher amount of current liabilities that is of RM 503000. So in comparative manner, above company's performance is better in year 2018. (ii) Acid test ratio = Quick assets / current liabilities Year20172018 Quick assets238000264000 Current liabilities292000265000
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Calculation238000/292000264000/265000 Acid test ratio0.81 times0.99 times Acid test ratio 0 0.2 0.4 0.6 0.8 1 1.2 0.81 0.99 2017 2018 Analysis- On the basis of above calculated acid test ratio this can be find out that company is unable to meet the criteria of ideal ratio which is 1.5:1. In year 2017, value of acid test ratio is of 0.81 times which increased in next year and became of 0.99 times in year 2018. This is indicating that company is improving its acid test ratio in year 2018. The reason of lower performance in year 2017 is the higher amount of current liabilities that is of RM 292000. So in comparative manner, above company's performance is better in year 2018. (iii) Accounts receivable turn over ratio = Net credit sales / Average accounts receivable Year20172018 Net credit sales20750002486000 Average accounts receivable100000120000 Calculation2075000/1000002486000/120000 Accounts receivable turn over ratio 20.7520.72
Analysis- The above presented graph indicates that accounts receivable turn over ratio of company is almost similar in both of years. Such as in year 2017, it was of 20.75 as well as in year 2018, its value was of 20.72. This is indicating that company's efficiency to manage their receivables is effective. Though, in year 2018 the value of sales is higher in compare to year 2017 as well as accounts receivables are also more. This is why, there is little difference in ratio. In comparative manner, company's performance is better in year 2017. (iv) Inventory turn over ratio = Cost of good sold / average inventory Year20172018 Cost of good sold12220001523000 Average inventory265000250000 Calculation1222000/2650001523000/250000 Inventory turn over ratio4.616.09 Inventory turn over ratio 0 1 2 3 4 5 6 7 4.61 6.09 2017 2018 Accounts receivable turn over ratio 20.705 20.71 20.715 20.72 20.725 20.73 20.735 20.74 20.745 20.75 20.75520.75 20.72 2017 2018
Analysis – On the basis of above presented graph, this can be find out that inventory turn over ratio is different in both of years. Such as in year 2017, it was of 4.61 and in year 2018, this was of 6.09. Basically, the ideal inventory turnover ratio is 4 to 6, but it can not be applicable in all kinds of companies. Though, the higher inventory turn over ratio indicates that company is able to sell its goods in quick manner. Hence, the above company's performance is better in year 2018 as compare to year 2017. This is so because its value is higher in year 2018. (v) Accounts payable turn over ratio = Total purchase / Average accounts payable Year20172018 Total purchase-50000 Average accounts payable-164000 Calculation-50000/164000 Accountspayableturnover ratio -0.3 Accounts payable turn over ratio 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0 0.3 2017 2018 Analysis- On the basis of above calculated ratio, this can be find out that in year 2017, value of accounts payable turn over ratio is nil. It is so because no purchasing in this year. While in year 2018, the value of this ratio is of 0.3. Basically, this ratio shows the efficiency of companies in order to make payment of their creditors. In the context of above company, this can be find out that their ability to make payment of their creditors is better. As well as there is no basis to make comparison because of nil value in year 2017.
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(vi)Days’ sales uncollected = Accounts receivable / net sales * 365 days Year20172018 Accounts receivables100000120000 Net credit sales20750002486000 Calculation100000/2075000*365120000/2486000*365 Days’ sales uncollected17.59 or 18 days17.61 or 18 days Days' sales uncollected 17.57 17.58 17.59 17.6 17.61 17.62 17.59 17.61 2017 2018 Analysis- On the basis of above calculated ratio, this can be find out that company's efficiency to make payment of their creditors is almost similar in both of years. It is indicating that company is taking similar time in order to receive debt amount from different debtors Such as in year 2017, the days’ sales uncollected ratio was of 17.59 days while in year 2018, it was of 17.61 days. Though, net sales and accounts receivable is different in both of years. Hence, in comparative manner this can be find out that in year 2017, this ratio is better. (vii) Total assets turnover ratio = Net sales / average total assets Year20172018 Net sales20750002486000 Average total assets16780001684000 Calculation2075000/16780002486000/1684000 Total assets turnover ratio1.241.48
Total assets turn over ratio 1.1 1.2 1.3 1.4 1.5 1.24 1.48 2017 2018 Analysis- On the basis of above presented graph, it can be find out that total assets turnover ratio is different in both of years. Such as in year 2017, it was of 1.24 that raised in next year and became of 1.48. It is so because of variation in value of total sales in both of years. Like in year 2017, the net sales were of RM 2075000 while in year 2018, it was of RM 2486000. In the comparative manner, the company’s performance was better in year 2018. It is so because in this year, there may be more number of transactions of selling and purchasing of assets that’s why the ratio is higher. (viii) Debt ratio = Total liabilities / total assets Year20172018 Total liabilities712000665000 Total assets16780001684000 Calculation712000/1678000665000/1684000 Debt ratio0.420.39 Debt ratio 0.37 0.38 0.39 0.4 0.41 0.42 0.430.42 0.392017 2018 Analysis - On the basis of above presented graph, it can be find out that debt ratio is different in both of years. Such as in year 2017, it was of 0.42 that reduced in next year and became of 0.39.
It is so because of variation in value of total liabilities in both of years. Like in year 2017, the net sales were of RM 712000 while in year 2018, it was of RM 665000. The ideal debt ratio is considered 0.4 or 40 %. Hence, company’s performance is better in year 2018 in compare to year 2017. (ix) Equity ratio = Total shareholders' equity / Total assets Year20172018 Total shareholders' equity9660001019000 Total assets16780001684000 Calculation966000/16780001019000/1684000 Equity ratio0.570.6 Equity ratio 0.55 0.56 0.57 0.58 0.59 0.6 0.61 0.57 0.6 2017 2018 Analysis - On the basis of above presented graph, it can be find out that equity ratio is different in both of years. Such as in year 2017, it was of 0.57 that increased in next year and became of 0.60. It is so because of variation in value of total shareholders’ equity value in both of years. Like in year 2017, it was of RM 966000 while in year 2018, it was of RM 1019000. The ideal equity ratio is considered 1 to 1.5. Hence, company’s performance is not better in both of years because they are unable to meet ideal ratio. In comparison manner, company’s performance is good in year 2018 because in this year, its value is higher.
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(x) Profit margin ratio = There are three types of ratio which are as followings: Gross profit ratio = Gross profit / net sales * 100 Year20172018 Gross profit853000963000 Net sales20750002486000 Calculation853000/2075000*100963000/2486000*100 Gross profit ratio41.11%38.74% GP ratio 37 38 39 40 41 4241.11 38.742017 2018 Analysis- The above presented graph shows the gross profit margin of two years 2017 and 2018. The value of gross profit margin is different in both years such in year 2017, it was of 41.11% which reduced in next year and became of 38.74%. It is so because of variation in values of gross profit and net sales. Hence, in comparative manner company’s performance is better in year 2017 due to higher margin of gross profit. Operating profit ratio = Operating profit / net sales *100 Year20172018 Operating profit103000185000 Net sales20750002486000
Calculation103000/2075000*100185000/2486000*100 Operating profit ratio4.96%7.44% Operating profit ratio 0 2 4 6 8 4.96 7.44 2017 2018 Analysis- The above presented graph shows the operating profit margin of two years 2017 and 2018. The value of operating profit margin is different in both years such in year 2017, it was of 4.96% which increased in next year and became of 7.44%. It is so because of variation in values of operating profit and net sales. Hence, in comparative manner company’s performance is better in year 2018 due to higher margin of operating profit. Net profit margin – Net profit/ net sales*100 Year20172018 Net profit3800094000 Net sales20750002486000 Calculation38000/2075000*10094000/2486000*100 Net profit ratio1.83%3.78%
Net profit ratio 0 1 2 3 4 1.83 3.78 2017 2018 Analysis- The above presented graph shows the net profit margin of two years 2017 and 2018. The value of operating profit margin is different in both years such in year 2017, it was of 1.83% which increased in next year and became of 3.78%. It is so because of variation in values of net profit and net sales. Hence, in comparative manner company’s performance is better in year 2018 due to higher margin of net profit. CONCLUSION On the basis of above project report this can be concluded that recording of financial transactions in systematic manner is essential. The report concludes detailed information about elements of financial statements such as assets, loss etc. As well as about role of auditor’s report and non financial information in annual report. In the further part of report, consolidated and common size statements are produced as accordance of given data. In the end of report two years ratios are calculated and interpreted which concludes that company’s performance is almost similar in both of years.
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REFERENCES Books and journals: Anandarajan, M., Anandarajan, A. and Srinivasan, C. A. eds., 2012.Business intelligence techniques: a perspective from accounting and finance. Springer Science & Business Media. Hillier, D., Ross, S., Westerfield, R., Jaffe, J. and Jordan, B., 2013.Corporate finance(No. 2nd Eu). McGraw Hill. Power, M., 2012. Accounting and finance. InThe Oxford Handbook of the Sociology of Finance. Byrne, M., Chughtai, A .A., Flood, B. and Willis, P., 2012. Job satisfaction among accounting andfinanceacademics:empiricalevidencefromIrishhighereducation institutions.Journal of Higher Education Policy and Management.34(2). pp.153-167. Jones, M. ed., 2014.Accounting for biodiversity. Routledge. Van Hoepen, M .A., 2013. Accounting in China: a case of vanishing cultural influence. InPerspectives on Accounting and Finance in China (RLE Accounting)(pp. 361-380). Routledge. Hellmann, A., 2013.Behavioral accounting. Nova Science Publishers. Chan, K. C., Tong, J. Y. and Zhang, F .F., 2012. Accounting journal rankings, authorship patterns and the author affiliation index.Australian Accounting Review.22(4).pp.407- 417. Czarniawska, B., 2012. New plots are badly needed in finance: accounting for the financial crisis of 2007-2010.Accounting, Auditing & Accountability Journal.25(5). pp.756-775.