Accounting and Finance: Financial Statements, Ratios, and Cash Flow Management

This article discusses the general purpose of financial statements, concern areas for financial performances, financial health ratios, and cash flow management. It also provides insights into Home Range Ltd's financial performance and recommendations to maximize business value. The subject is Accounting and Finance, and the course code, course name, and college/university are not mentioned.

Running head: ACCOUNTING AND FINANCE
Accounting and finance
Name of the student
Name of the university
Author note

1ACCOUNTING AND FINANCE
Table of Contents
Part 1..........................................................................................................................................2
Question 1..................................................................................................................................2
General purpose of financial statements................................................................................2
Question 2..................................................................................................................................3
i. Concern areas for financial performances – income statement......................................3
ii. Concern areas for financial health – Ratios....................................................................3
iii. Concern areas for cash flow management – Cash flow statement..................................4
Question 3..................................................................................................................................5
Reference....................................................................................................................................7

2ACCOUNTING AND FINANCE
Part 1
Question 1
General purpose of financial statements
The income statement – it shows the way in which the business earns profit or makes losses
over the specific financial period, generally a financial year. Home Range Ltd. can use the
income statement to summarize the transactions associated with –
 Expenses – the income statement reveals the summarised list of cost expensed for
generating the income (Nobes 2014)
 Income – it shows the income that is shown through different terms by different
businesses like revenue, sales, earnings, fees and gross profits.
Balance sheet – to assess the status of the business at particular time, user can look into the
information included in the balance sheet. The balance sheet assist is finding various answers
like the worth of the business, the way business can pay its bills and how the owners can be
benefitted from the earned profits. The balance sheet reveals the list of the financial resources
generally called as assets and the financial obligations generally called as liabilities. The net
worth can also be found from the balance sheet through deducting the liabilities from the
assets (Henderson et al. 2015).
Cash flow statement – like income statement, the cash flow statement also covers the
particular period of time and acts as the bridge among 2 balance sheets. The cash flow
statement states the changes in the resources of cash from the business through revealing the
way cash is generated and utilised under various activities like operating activities,
investment activities and financing activities (Baker and Haslem 2015).

3ACCOUNTING AND FINANCE
Question 2
i. Concern areas for financial performances – income statement
Issue Impact on the
business
Comments
Cost of goods sold increased
from £ 39,548 to £ 58,710
that is increased by 48.53%
Bad An upward change in the cost is
generally considered as an issue and
requires urgent explanation and
investigation
Sales revenue increased from
£ 88,476 to £ 106,872 that is
by 20.79%
Good Any increase in sales revenue is
considered as good for the company.
However, there may be other cost
involved for increasing the sales that
shall be investigated (Boyas and Teeter
2017).
Profit after tax reduced from
£ 24,802 to £ 22,811 that is
by 8.03%
Bad It is a serious concern that the net profit
after tax of Home Range Ltd has been
reduced instead of increase in the sales.
The issues may be increase in expenses
that is the prices paid from the amount
of sales may be increased.
ii. Concern areas for financial health – Ratios
Ratio Formula 2017 2016

4ACCOUNTING AND FINANCE
Current ratio Current asset/current liabilities 6.58 5.49
Gross profit margin Gross profit/net sales * 100 45.07 55.30
Net profit margin Net profit/net sales *100 21.34 28.03
Return on asset Net income/total assets * 100 2.76 5.58
Return on equity Net income/Shareholder's equity 0.21 0.29
It can be seen from the above table that though the current ratio of the company is in
increasing trend and is stating that the company is in a comfortable position to pay off their
short term obligation, as the current ratio of the company for both the years are very high it is
indicating that the company is not utilising their working capital efficiently. Further, the
reduction in the gross profit as well as the net profit of the company is indicating that the
company is not able to manage its expenses and therefore, in spite of increase in the sales
revenue, the company was not able to increase their profit level (Heikal, Khaddafi and
Ummah 2014). Further, looking at the return on assets of the company it is found that the
return has been reduced from 5.58 to 2.76 over the years from 2016 to 2017 and further, the
return on the equity has been reduced from 0.29 to 0.21 from the year 2016 to 2017.
Therefore, the company’s efficiency with regard to generating revenue from the assets and
generating return to the shareholders has been reduced over the years.
iii. Concern areas for cash flow management – Cash flow statement
Issue Impact on the
business
Comments
Net cash flow from the
operating activities has been
reduced from £ 25,606 to £
18,530 that is by 27.63%
Bad The reason behind reduction in the cash
flow from the operating activities are the
large amount invested towards the
working capital and reduction in the
operating profit of the company
Bank loan borrowed Bad New borrowing may have a great impact

5ACCOUNTING AND FINANCE
amounting to £ 1200 on the company as it has to pay interest
on the borrowing and the capital
structure will also have an impact on the
shareholders as well as the potential
investors of the company (Lundholm and
Sloan 2013).
Question 3
It has been identified from the financial statement of Home Range Ltd that the
performance of the company with regard to the liquidity as well as profitability. The high
level of current ratio states that the company is not utilizing the working capital including the
cash efficiently. Further, the reduction in gross profit as well as net profit is stating that the
company’s efficiency with regard to earning profit is getting reduced. Moreover, the decrease
in return on equity is revealing that the company’s ability to generate return on the
shareholder’s equity is reducing (Ranford 2017). Therefore, the concern of Clare’s parents
that the Home Range Ltd has not spent the cash resources in the past year wisely is right.
Therefore, to maximise the business value to resale it in 3 years time the following
recommendations are provided –
 Business plan – the business plan will provide the framework to set the objectives for
the managers that are required to be achieved and to decide regarding the resources
that is plant, people, property and equipment. It will also assist the managers which
objectives are affordable and which are not.

6ACCOUNTING AND FINANCE
 The management shall convince the investors or the bank that business requires
financial support with regard to achieve the goals, increase the overall quality and
efficiency of the business.
 Increase the profit through increasing the number of employees who will be dedicated
to sales, closing the unprofitable units and reducing costs of various expenses.

7ACCOUNTING AND FINANCE
Reference
Baker, H.K. and Haslem, J.A., 2015. Information needs of individual investors.
Boyas, E. and Teeter, R., 2017. Teaching Financial Ratio Analysis using
XBRL. Developments in Business Simulation and Experiential Learning, 44(1).
Heikal, M., Khaddafi, M. and Ummah, A., 2014. Influence analysis of return on assets
(ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and
current ratio (CR), against corporate profit growth in automotive in Indonesia stock
exchange. International Journal of Academic Research in Business and Social
Sciences, 4(12), p.101.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial
accounting. Pearson Higher Education AU.
Lundholm, R.J. and Sloan, R.G., 2013. Equity valuation and analysis with eVal. McGraw-
Hill Irwin.
Nobes, C., 2014. International Classification of Financial Reporting 3e. Routledge.
Ranford, P., 2017. An introduction to business and management. 2nd ed. United Kingdom:
The Open University, Walton Hall, Milton Keynes MK7 6AA, pp.31 to 93.