Financial Analysis and Interpretation

This assignment provides a detailed financial analysis report that examines the financial statements of a company from 2015 to 2016. The report includes an income statement, balance sheet, and cash flow statement, as well as various ratios such as liquidity, gearing, and profitability. The analysis reveals that the company's net profit has decreased, returns on investments have decreased, but returns on sales have increased. The liquidity ratios show growth in current assets and short-term investments, while the gearing ratio indicates an increase in long-term loans with a corresponding increase in share capital.

MANAGING FINANCIAL
RESOURCES

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
LO1.............................................................................................................................................1
1 Difference between financial and management accounting.....................................................1
2 Purpose of various financial statements...................................................................................3
3 Different group of stakeholders and their information needs..................................................5
LO21 Calculation of the different profitability and liquidity ratios of Stratford Yachts Ltd..........6
2. Report on overall performance ...............................................................................................8
CONCLUSION ...............................................................................................................................9
REFERENCES..............................................................................................................................11

INTRODUCTION
Financial resources available to a business are in the form of cash, liquid securities and
credits lines. These are important for operations of a business. The sufficiency of resources is
also essential for effective and efficient operations. Financial management is an effective and
efficient management of funds of an organisation. It is done to achieve all objectives of an
organisation.
The management of financial resources involves planning, organising, controlling and
monitoring. In the present assignment, detailed discussion about financial position of Stratford
Yachts Ltd is done. A report on profitability and liquidity is presented which is measured
through different ratios. The same is also compared with the industry average ratios.
LO1
1 Difference between financial and management accounting
Financial accounting- Financial accounting is a procedure of summarizing, recording
and reporting of financial transaction of business operations. These transactions are recorded to
prepare the financial statements of business which includes profit and loss account, balance sheet
and cash flow statement (Chiaramonte and Casu, 2017). This accounting is done to provide
information to management and people outside the organisation such as investors, lenders,
suppliers, tax authorities and other stakeholders.
It is a means of measuring economic performance of a business. This comprises a system
of monitoring and controlling of money, its inflow and outflow. This analyse the operating
performance of the company. For accounting different financial transactions, a business uses
accounting principles (Beatty and Liao, 2014). Financial accounting can be done on accrual basis
and cash basis or a combination of two. Generally, it is done on accrual basis that is transections
are recorded as money accrues/earned not when it is actually received.
Management Accounting- Management accounting is a process of providing periodical
financial and statistical information to the business managers so they can make day-to-day and
short-term management decisions (Del, Negro and Sims, 2015). This provides reports and
information to the internal stakeholders of an organisation such as employees, directors,
managers. The report of management accounting includes cash availability with company,
generation of sales revenue, fund available for accounts payable and status of accounts
receivables. This is a forward looking and aconfidential reports. There are no principles and basis
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to formulate this. This analyses operating performance of a company. For accounting different
financial transactions, a business uses accounting principles. These are prepared and based on
decisions of the management (Garven, 2015). The management accounting involves decision-
making, systematic planning and performance of management systems, making available expert
knowledge for financial reporting. it also assist the management in formulating and
implementing the organisational strategy.
Difference between Financial and Management Accounting
Financial accounting is different from management accounting and are as follows
1. Requirement- For a business, financial accounting is mandatory while management
accounting is optional but it is generally done to evaluate and enhance organisational
performance.
2. Focus on reporting- Financial accounting focuses on creation of financial statements of
business from monetary transactions (Financial statement of non-profit organisation.
2018). Managerial accounting is focused on operational reports available within an
organisation only.
3. Standards- For financial accounting to comply with GAAP and other standards are
compulsory. For management accounting, there are no such standard, so they are made
by management on their discretion.
4. System- Financial accounting does not consider the overall system of an organisation; it
only has one criteria of generating profits (Kim and et.al., 2016). Conversely,
management accounting takes into consideration overall aspects of the business and is
interested in enhancing profits of company.
5. Time period- Financial accounting has a historical orientation as it is concerned with
transactions already done. Management accounting addresses budgets and forecast the
future for the growth and development of a company.
6. Valuation- Financial accounting addresses proper valuation of the assets and liabilities
so it involves impairment and revaluation of the same. Management accounting is only
concerned with productivity of the business and its enhancement.
7. Timing- Financial accounting requires presenting financial statements at the end of
accounting period (The difference between financial and managerial accounting. 2018).
Management accounting may issue as many reports as it deems fit
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8. Aggregation- Financial accounting reports on financial and monetary results of a firm.
Management accounting always presents more detailed reports, resulting from all the
operations of the firm.
9. Maintaining records - The records and reports made under financial accounting has to
be maintained with the organisation for certain period. The reports of the management
accounting can be kept for the time period, as management thiks fit.
10. Information- The records taken and considered in the making of financial statements
shall be proven correct.. Management accounting deals with estimates and variable facts
so they need not to prove correct.
2 Purpose of various financial statements
Financial statements in a profitable organisation are explained below:
Profit and loss account: It is also called as income statement. This is a statement that
presents and summarizes costs, expenses and revenue of an organisation. The P&L statement
shows the actual income earned by business after taking into consideration all revenue and
capitalised expenses. This provides information about the ability of a business to generate profits
by increasing revenue and decreasing costs and expenditures.
Balance sheet: This is a statement which shows assets owned, liabilities and
shareholder's equity of the firm. This provides a base to calculate the rates of return and
evaluation of its capital structure (Mestry, 2017). This statement is a picture of, what company
owns and owes.
Assets= Liabilities+ shareholder's equity.
The assets can be current or fixed assets. Liabilities can be long-term, deferred tax and
pension fund liabilities. Shareholder's equity includes retained earnings and preferred stock.
Cash flow statement: This statement reflects the effect of changes in balance sheet and
profit and loss account on cash and cash equivalents. This measures position of the company for
generation of cash and has an ability to pay its debts and working capital. The statement is all
about where the money is coming from and where it is being spent. The statement breaks down
the analysis in three activities- operating, investing and financial.
Statement of shareholder's Equity: shareholder equity is also referred as the owner's
fund. This shows that how shares, total equity and w\ownership has changed in an accounting or
financial year. The change in the shareholdings represents profit and loss of a company and
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issues related to dividends and/or shares. The changes in equity can be in the form of ownership,
stocks, and preferred stocks, paid up capital, increase or decrease in capital of the firm.
Financial statements in a Non-profitable organisation are:
*Statement of Financial Position
*Statement of Activities
*Statement of Cash Flows
*Statement of Functional expenses
Statement of Financial Position: This is similar to a balance sheet of a profit
organisation. The equity section of the balance sheet is replaced by net assets section. This
section includes unrestricted net assets, temporarily restricted net assets and permanently
restricted net assets. The amounts are shown at the end of a month, quarter or year.
Assets= Net assets+ liabilities
Statement of Activities: This statement quantifies revenue and expenses of a non-profit
organisation for a reporting period. This includes revenues, gain, other support and releases from
donor restriction, expenses and losses (Tantalo and Priem, 2016). Revenues are contributions,
membership dues, program fees, grants, investment income, and fundraising events, gain on sale
of investments. Expenses and losses can be program function and support function.
Statement of Cash Flow: It reports change in cash and cash equivalents of a non-profit
organisation during an accounting period. The statement of cash flow contains information
about cash inflows and outflows from non-profit organisation. This reveals extent of those non-
profit activities that generated cash and use of same. This is a statement which shows the actual
money earned and actual place where this money is invested or expended. This shows how
grants and fund raised are used and it has adequate cash to pay for operations, necessary but are
restricted for a particular fund.
Statement of functional expenses: This statement is about how expenses are incurred
for each functional area of non-profit business. The functional areas of a non-profit business
include management, administration, fund raising, and programs. The amount and the degree of
expenditure in all the functional areas are shown separately.
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3 Different group of stakeholders and their information needs
Stakeholder- A stakeholder can be any person, or group, or an organisation, or a society
at large or a social group with stake in a business. A stake means vital interest in business or its
activities. The holding of stakes gives ownership and property interests, legal interest,
obligations and moral interests. The stakeholder can affect and can also be affected by the
business.
Different groups of stakeholders: They can be divided into two groups- internal and external
stakeholders.
Internal stakeholders: This is a group of stakeholders whose interest lies directly within
an organisation or who work there such as employees, directors, managers, owners. The internal
stakeholders are affected by the decision of the business as stakeholders as well as the employee
of the organisation. The business decisions are generally taken by these people only. Therefore,
to protect the interest of the external stakeholders, the people at the higher level of management
must be very cautious so that the interest of external stakeholders cannot be prejudice.
External stakeholders: These are the stakeholders who do not directly work with the
organisation but are affected in some way or another, such as government, suppliers, unions,
social groups, creditors. They don't have an active participation in day-to-day operations and
activities of business, so they are not involved into small or low level decision at operational
level (Tantalo and Priem, 2016). However, they are included in the major decisions of the
business as they are partial owner of the organisation.
Need of information to stakeholders:
The stakeholders are important part of an organisation as they are the owners of business.
Either they have invested either directly or indirectly, so they have an active interest in
operations and well-being of an organisation. They all need relevant information regarding their
specific interests. Therefore, the information need of the stakeholders can be divided into two
sections- information related to common interests and information related to specific interest.
Information of common interests: The common interest that the entire stakeholder
holds is return on their investments. The information regarding the corporate social responsibility
of the organisation towards the society. The investments and new acquisitions made by the
company affect its financial position which is of high interest of the stakeholders. Whenever the
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company wants to expand its capital it has to first inform its current stakeholder then it can
offer the share capital to the public for subscription.
Information of specific interest: The information of specific needs can be determined as
follows-
Economics: The employment training programs can improve the living standard of low-
income people. So information regarding such can be rewired to internal stakeholders,
government and interested social group.
Safety and security: This includes both safeties that is safety of the personnel of the
organisation and of funds and revenue. Therefore, proper and particular information is
important.
Decisions: Operational decisions can be taken by the management but decisions affecting
the stakeholders require the information communications to the affecting stakeholders.
Social change: An effort to improve harmony in the organisation can improve the work
culture and job satisfaction.
Compliance with law and policies: the government and top management of a company
are interest in the information regarding the compliance with the government laws, rules -
regulations and policies.
Credit policies: these policies of a firm affect the creditors that are what is the payment
cycle of the company to the creditors. Moreover, what is debtor’s cycle as this both together fills
the gaps of working capital requirement.
Environment: Nowadays, awareness about protection of environment is increasing. So
the company shall provide its compliance with such responsibility and will increase the faith of
stakeholders to gain a boost in its image in the industry.
LO2
1 Calculation of the different profitability and liquidity ratios of Stratford Yachts Ltd
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Ratio Formulas 2015 2016 Industry
Average
% ROCE Operating Profit * 100
Capital Employed
27.9 22.5 26%
Asset turnover (times) Sales *
Average Total Assets
1.70 1.90 1.79 times
NP margin (%) Net Profit * 100
Net Sales
16.4 11.8 14.5%
Current ratio Current Assets
Current Liabilities
1.22:1 1.3:1 1.5:1
Acid test ratio (Cash+ Accounts
Receivables+ Short Term
Investments)
Current Liabilities
0.87:1 0.99:1 1.03:1
Debtors collection period
(days)
Average Debtors * 365
Total Credit Sales
91 102 83 days
Gearing ratio (%) Long Term Liability * 100
Capital Employed
70.8% 63.7% 32%
Labour costs as % of sales
turnover
Labour Cost *100
Sales Turnover
18.5 18.9 18.1%
Operating costs as % of
sales turnover
Operating Cost *100
Sales Turnover
83.6 88.2 85.5%
Distribution costs as % of
sales turnover
Distribution Cost *100
Sales Turnover
9.24 9.24 9.5%
Administration costs as %
of sales turnover
Administrative Cost *100 4.15 4.09 4.5%
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Sales Turnover
2. Report on overall performance
To: Allen Paul, Director
From: Business Planning Assistant
Subject: Reports on the liquidity and profitability of Stratford Yacht Ltd
Sir,
As required a calculation of different liquidity and profitability ratios is done by taking
the information provideded in the financial statements of the company. The results are as
follows:
Return on capital employed ratio: This ratio measures the profitability of the company. It
reflects the earneing per share on tshares held by shareholders of company. The returns of
capital employed is the earinings off the company afrer deducting fixed and variable cost but
before deducting tax payable by company.
It is calculated by taking Earnings before interest, tax, and dividing it by capital
employed. The returns of company are 27.9% as compared to 26% of average industry in the
year 2015, While it dropped to 22.5% in 2016.
Asset Turnover Ratio: It is a ratio of sales over average total assets of the company. This
compares sales turnover the avrerege total assets of compnay. The ratio was 1.70 times in the
year 2015 as compared to 1.79 times of industry average. Moreover, it increased to 1.90 times
in year 2016.
Net Profit Margin: It is a ratio of net profit over net sales of a company. This shows the net
profits after deducting all capital and revenue expenses from gross profit. The ratio was 16.4 %
in 2015 while for industry it was 14.5%. In the year 2016, the ratio fell to 11.8%.
Current Ratio: This ratio is calculated to see the availabilty of current assets over current
liabilities of company. The standard current ratio is 2:1, means company has current assets
twice the amount of current liabilities. The ratio of a company was increased from 1.22:1 to
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1.3:1 from 2015 to 2016 as compare to the average industry ratio of 1.5:1.
Acid Test Ratio: This shows the availability of liquid assets to pay its current liabilities. The
company have a ratio of 0.87:1 in 2015 and 0.99:1 in 2016 while average industry ratio is
1.03:1. Company have a good liquidity position as compared to the industry but it’s on margin
to equalise to its current liabilities.
Debtors Collection Period: It is the time given to the debtor to make the payments of their
dues. The company has a higher debtor collection period of 91 days and 102 days in year 2015
and 2016 respectively in comparison to average industry collection period 83 days.
Gearing Ratio: It reflects the proportion of a company's long term borrowed funds to its equity.
The company does not enjoy good gearing position as compared to the industry average. The
industry ratio is 32% while company’s ratio was 70.8% in 2015 which reduced to 63.7% in
2016. This shows that company raised its equity by 35-pound sterling.
Labour cost as % of sales: this shows cost of labour over sales of a company. With an increase
in the sales, the labour cost has also increased. There were no major changes in this ratio from
year 2015 to 2016 and the industry average ratio was also same.
Operating cost as % of sales: Ratio of operating cost as a percentage of sales turnover. This
cost is incurred for carrying on day to day operations related to production department of the
business. With increase in sales, the cost also increased and its ratio also increased from 83.6%
to 88.2% from 2015 to 2016. The average industry ration is 85.5%.
Distribution cost as % of sale: The distribution cost as percentage of sales turnover. This a
cost is incurred for sales nad distribution of the product. With increase in sales turnover and
distribution cost, the ratio remained same in both years that are 9.24%. The average industry
ration is 9.5%.
Administrative cost as % of sale: This is the ratio of administrative cost as a percentage of
sales turnovers. This cost is incurred for operating adminitrative operations of company. Both
sales and administrative cost was increased from 2015 to 2016 while this ratio fell down to 4.09
from 4.15. In addition, the industry ratio is similar to the company that is 4.5%.
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CONCLUSION
With the above report, we can conclude that the net profit of the company reduced from
2015 to 2016. The returns on the investments had decreased, the net profits had also decreased
but returns on the sales were increased. This shows that profitability of the firm has gone down.
The liquidity ratios of the firm have increased which shows that the current assets and the short-
term investment have also had seen growth. In addition, the gearing ratio of a firm had increased
while keeping long-term loan; company increased its share capital by issuing new equity. This
indicates that company is trying to enter in a good liquidity states which provide the company
state of instant availability of cash equivalents. There are no major changes in the disputation,
administration and operational ratio means that with an increase in sales all this cost have also
increased with marginal changes in their respective ratios. The company have achieved a good
liquidity position though there is downfall in the profits.
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REFERENCES
Books and Journals
Beatty, A. and Liao, S., 2014. Financial accounting in the banking industry: A review of the
empirical literature. Journal of Accounting and Economics. 58(2-3). pp.339-383.
Chiaramonte, L. and Casu, B., 2017. Capital and liquidity ratios and financial distress. Evidence
from the European banking industry. The British Accounting Review. 49(2). pp.138-161.
Del Negro, M. and Sims, C. A., 2015. When does a central bank׳ s balance sheet require fiscal
support?. Journal of Monetary Economics. 73. pp.1-19.
Garven, S., 2015. The Basics about Nonprofits. The CPA Journal.85(6). p.18.
Kim, J. B. and et.al., 2016. Financial statement comparability and expected crash risk. Journal
of Accounting and Economics. 61(2-3). pp.294-312.
Mestry, R., 2017. The role of governing bodies in the management of financial resources in
South African no-fee public schools. Educational Management Administration &
Leadership. p.1741143216665838.
Tantalo, C. and Priem, R. L., 2016. Value creation through stakeholder synergy. Strategic
Management Journal. 37(2). pp.314-329.
Online
Financial statement of non-profit organisation. 2018. [Online]. Available through
:<https://www.accountingtools.com/articles/financial-statements-of-nonprofits.html>.
The difference between financial and managerial accounting. 2018. [Online].Available through:
<https://www.accountingtools.com/articles/what-is-the-difference-between-financial-and-
managerial-acco.html>.
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