Analyzing Financial Statements of a Firm

This assignment delves into the importance of financial statements for businesses. It examines the income statement, balance sheet, and statement of equity, explaining their roles in revealing a company's performance and financial condition. The text emphasizes the significance of these statements for managers making business decisions and highlights ratio analysis as a common technique for evaluating firm performance.

ASSESSMENT 2: AUDITED
FINANCIAL REPORT
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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Statement of Cash Flow...................................................................................................................3
Income statement.............................................................................................................................4
Balance sheet...................................................................................................................................5
Statement of equity..........................................................................................................................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9
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INTRODUCTION
Financial statements have great use for the firms because by using same its performance
is measured. In the present research study both income statement, balance sheet and cash flow
statements are prepared by using varied facts. All adjustments are taken in to account in order to
prepare financial statements and in this way entire research work is carried out.
Statement of Cash Flow
Cash flow statement is a statement that is prepared to identify amount of cash flow that happened
from operating, investing and financing activity. There is huge difference between all these activities as
operating activity reflect tasks that are related to production of goods and services at the workplace or
core business operations. On other hand, there are investing activity under which all tasks are listed that
are related to making investment in the business (Fraser, Ormiston and Fraser, 2010). These
investment activities cover all investments that are made in business or in any financial security. On other
hand, there are financing activity under which varied activities are taken in to account that are related to
raising funds through stock issue or bank loan and payments made in respect to them. Thus, it can be said
that scope of cash flow statement is wide in nature.
Statement of cash flows
Particulars Amount
Cash flow from operating activities
Net profit made during the year 61000
Add: Non-cash expenditures
Depreciation for the year 40000
Less: Profit on sales of non-current assets -10000
91000
Increase in inventory -9000
Increase in receivables -8000
Increase in trade payables 28000
Corporation Tax payable -10000
Cash flow from operating activities 92000
Cash flow from investing activities
Sales of non-current assets 30000
Purchase of non-current assets -195000
Cash flow from investing activities -165000
Cash flow from financing activities
Issue of ordinary shares including share premium 70000
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Dividends paid -16000
Cash flow from financing activities 54000
Net cash flow (A+B+C) -19000
Add: Initial cash flow 64000
Ending cash balance 45000
Non-current assets A/c
To balance b/d 410000 By depreciation 40000
To P&L (Profit on sale of assets) 10000 By bank a/c 30000
To Bank a/c ( Purchase) 195000 By balance c/d 545000
615000 615000
Income statement
Particulars Amount
Revenue $ 278,400.00
Add: Opening inventory $ 37,800.00
Less: Purchase $ 78,200.00
Add: Depreciation of building $ 5,000.00
Add: Depreciation on plant $ 19,500.00
Depreciation on Leased plant $ 18,400.00
Less: Closing stock $ 43,200.00
Cost of goods sold (COGS) $ 115,700.00
Gross profit $ 162,700.00
Less: Operating expenses $ 15,500.00
Earnings before interest and tax (EBIT) $ 147,200.00
Add: Income from investment properties $ 4,500.00
Profit on fair value of investment properties $ 6,300.00
$ 158,000.00
Interest on loan ( From 1 December to 30th June, 7 month) $ 2,333.33
Finance cost on lease $ 7,000.00
Earnings before tax $ 148,666.67
Provision for tax (28300+14,100-12,500) $ 29,900.00
Earnings after tax (EAT) $ 118,766.67
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Income statement is usually prepared by all sort of business firms because it is the
statement which reflect the amount that is earned in the business and amount that is spend in
same. After deducting all sort of expenses from the business from revenue amount that remain is
the net profit or retained earnings. Thus, it can be said that there is significant importance of the
income statement for the companies (Humpherys and et.al., 2011). In the income statement
expenses included can be classified in to multiple categories like direct and indirect. Direct
expenses are those that are related to the production process. On other hand, indirect expenses
are those that are not related to manufacturing of goods. From sales revenue amount production
expenses are subtracted first of all and then indirect expenses are deducted from same. In this
way, net profit is computed. All these things are done in above table in order to compute net
profit amount.
Balance sheet
Balance sheet Amount
Current assets
Receivables $ 53,200.00
Inventory $ 43,200.00 $ 96,400.00
Non-current assets
Land & Buildings $ 250,000.00
Plant $ 110,500.00
Leased Plant $ 73,600.00
Investment properties $ 96,300.00 $ 530,400.00
Total assets $ 626,800.00
Equity shares $ 150,000.00
Retained earnings $ 223,266.67
Revaluation reserve $ 45,000.00 $ 418,266.67
Current liabilities
Trade payables $ 33,400.00
Accrued loan interest $ 333.33
Bank overdraft $ 5,400.00
Accrued interest on lease $ 7,000.00
Lease obligation $ 15,000.00
Current tax payable $ 28,300.00 $ 89,433.33
Long-term liabilities
8% (Actual & effective) Loan note $ 50,000.00
Deferred tax $ 14,100.00
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Lease obligation $ 55,000.00 $ 119,100.00
Total Equity and liabilities $ 626,800.00
Working note: Land and Building
Costs 270000
Less: Accumulated depreciation (Building) 60000
Carrying amount 210000
Revalued land 80000
Revalued building 175000 255000
Depreciation till now 16000
Remaining life of building 35
Revalued Gain 45000
Depreciation for the year (175000/35) 5000
Carrying amount at 30th September 2016 250000
Plant
Costs 156000
Less: Accumulated depreciation (Building) 26000
Carrying amount 130000
Depreciation for the year 19500
Carrying amount 110500
Leased Plant
Carrying value 92000
Less: Depreciation (92000/5 year) 18400
Carrying amount 73600
Carrying amount of land & building, plant and leased plant 434100
Investment properties
Value 90000
Add: Increase in revaluation 6300
Revalued value 96300
Lease obligations
Rental payment 22000
Lease assets value 92000
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Rental paid in advance -22000
Balance 70000
Interest @ 10% 7000
Rental payment 22000
Lease obligation 55000
Depreciation (92000/5) 18400
Balance sheet is the one of the important statement that is used to measure firm financial
condition. In balance sheet, both assets and liabilities are listed. Further in, assets classification is
done in terms of fixed assets and current assets. On other hand, in liability classification is done
in terms of current and long-term liability (Stent, Bradbury and Hooks, 2010). Total of assets and
liability always remain equal to each other and in this way checking is done whether calculation
is correct or not. It can be said that by using balance sheet in easy way performance of the
company is measured and areas where actually work need to be done are identified. Hence, it can
be said that there is significant importance of balance sheet or statement of financial position for
the business firms. Ratio analysis is the common technique that is used to measure company
performance. There are wide variety of ratios like liquidity ratio, profitability ratio and capital
structure ratio etc. All these ratios reveal firms performance in different manner. Thus, there is
huge significance of balance sheet for the firms.
Statement of equity
Statement of equity is also one of the important method that is used to evaluate current
equity in the company. In this statement shareholder equity and retained earning amount is added
to identify overall amount of equity. Thus, it can be said that it is the one of important statement
that is usually prepared by the companies.
Particulars Equity shares
Revaluation
reserves
Retained
Earnings Total
Opening balance as on 1st
April 2005 $ 150,000.00 $ $ 119,500.00 $69,500.00
Profit for the current year
$
118,766.67 $ 18,766.67
Property revaluation $45,000.00 $ 45,000.00
Equity dividend paid $ (15,000.00) $(15,000.00)
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Closing Balance as on 1st
April 2006 $150,000.00 $45,000.00 $ 223,266.67 $418,266.67
CONCLUSION
On basis of above discussion it is concluded that there is significant importance of
income statement, balance sheet and cash flow statement for the firms. This is because these
statements reflect current company condition and assist managers in making business decisions.
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REFERENCES
Books and journals
Fraser, L.M., Ormiston, A. and Fraser, L.M., 2010. Understanding financial statements. Pearson.
Humpherys, S.L. and et.al., 2011. Identification of fraudulent financial statements using
linguistic credibility analysis. Decision Support Systems. 50(3). pp.585-594.
Stent, W., Bradbury, M. and Hooks, J., 2010. IFRS in New Zealand: effects on financial
statements and ratios. Pacific accounting review. 22(2). pp.92-107.
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