Financial Analysis and Performance of ABC: A Comparative Study
Added on 2020-01-06
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FINANCIALACCOUNTING
TABLE OF CONTENTSIntroduction .....................................................................................................................................3TASK 1............................................................................................................................................31.1 Different users of financial statements and their needs.........................................................31.2, 1.3 Legal and regulatory influences on financial statements and assessing the implicationsfor users........................................................................................................................................51.4 Ways in which different laws/ regulation are dealt with by accounting and reportingstandards......................................................................................................................................73.1 Varied information needs of different users group................................................................83.2 Fundamental principles towards preparation of financial statements of different types offirms and preparing financial statements for EL Ltd...................................................................8TASK 2..........................................................................................................................................112.1 Preparation of financial statements from trial balance with necessary adjustments............112.2 Preparation of financial statements from incomplete records..............................................162.3 Preparation of consolidated balance sheet and profit and loss account ..............................18TASK 3..........................................................................................................................................204.1 Calculating accounting ratios for assessing performance and position of ABC Ltd...........204.2 Incorporation and interpretation of financial performance by means of comparativeanalysis.......................................................................................................................................21CONCLUSION .............................................................................................................................22REFERENCES .............................................................................................................................232
INTRODUCTION Financial accounting is regarded as the area of accounting that is concerned with thesummary, analysis as well as reporting of financial transactions that pertain to a particularorganization. This includes preparing financial statements that are available for publicconsumption. Stockholders, suppliers, bank, employees as well as government agencies are theindividuals who possess interest in gaining information for the purpose of decision making.Financial accountancy is being governed by both the local as well as international standards ofaccounting. It is being used for the preparation of accounting information for the individualsoutside the firm or the one who are not engaged in running day-day activities of the firm (Delen,Kuzey and Uyar, 2013). Every business needs to make preparation of essential accounts for thedetermination of organizational performance. The role of financial accounting is very crucial asit keeps a track on the financial transaction of business by making use of accounting principles,guidelines as well as regulations. Thus, it is regarded as the procedure of recording, classifyingas well as summarizing the financial transaction through preparation of financial accounts andinterpretation of their performance. The present study entails to gain insight to the importance of financial accounts thatincludes profitability statement as well as balance sheet. Such is to make assessment of financialposition of the organization. Further, the report covers various kinds of internal and externalusers who need unique information from the business accounts for the development of effectivedecision by analyzing it. It also covers preparation of financial statements from complete orincomplete records. The report includes presentation of monetary information in acceptedformations for publication. Lastly, it contains interpretation of financial statements. TASK 11.1 Different users of financial statements and their needsIn accordance with the scenario, EL Ltd. is the firm that has been established since 10years and offers different kinds of domestic electrical work to households and firms in London.They are conducting different electrical work by the means of NICEIC-accredited electricians aswell as team of experienced personnel. The firm is providing support to home as well as businesscustomer’s need in an effective manner through its division that includes EL-home as well as3
EL-business. There are different users of financial accounting who possess different informationneeds. Such have been enumerated in the manner stated as under: Manager: They possess responsibility towards managing the entire functioning of EL.Thus, they require information with respect to profitability, efficiency, solvency, abilityto generate cash as well as liquidity position of the firm. Employees: They are engaged in offering services to the clients and need informationwith respect to profitability position of organization (Fraser and Ormiston, 2015). This isdue to the reason that their higher monetary salary can be satisfied by possessing highermargin of profits. Owners: They require information regarding performance of EL as they have an objectivethat relates with maximizing revenues, profitability as well as financial strength. Theypossess intention to build stronger position in order to compete in an effective mannerand attain sustainable growth. Investors: They are engaged in making evaluation of profit margin, solvency, ability togenerate cash as well as shareholders earning in form of dividend (Hu, 2013). This is toanalyze risk and return which are attached with funds that are being invested as well astake decision regarding strategic investment. Lenders: They need information about profits, financial risk, debt burden capacity of EL,cash inflow ability as well as potential to make payment of long term debts in an effectivemanner and on time. In turn, lenders will be able to make selection of organization that isperforming in an effective manner. Further, it acts as an aid in taking better decisionregarding lending. Suppliers: They offer credit facility to EL and thus, they need information regarding thecash management strategy as well as credit worthiness by the means of liquidity position.It acts as an aid in making determination of ability of EL towards satisfying their shortterm obligations with greater effectiveness (Scott, 2014). Government: Regulatory authority of UK makes determination of information relating toprofitability by the means of profit and loss account. This is to make determination of taxobligation of EL that is required to be paid. Further, in situation of default, penalties willbe charged for the individual who is liable. 4
1.2, 1.3 Legal and regulatory influences on financial statements and assessing the implicationsfor usersThere is presence of several legal as well as regulatory influences on the financialstatements. Such have been enumerated in the manner as under:Companies Act 2006: The particular act is comprised of several provisions for thepreparation of financial report of EL firm. In accordance with the legislation, it becomesessential for EL to keep updated as well as detailed records relating with the historicalaffairs. Such has obligation on EL that is regarding summarizing all the transactions likerevenue, expenses, liabilities and assets in the financial statements. It has been exhibitedby CA, 2006 that EL needs to make preparation of profit and loss account as well asbalance sheet in an accurate manner (Xia, Fei and Liu, 2015). Moreover, auditing iscompulsory as it represents true and fair profitability and financial position of EL'saccounts. Along with this, there is duty of manager to give approval to such statementsby their sign as it is the director’s obligation. UK Generally Accepted Accounting Principles (GAAP):UK GAAP is regarded as theguidelines and principles that needs to be kept in mind by EL's while making draft ofessential accounts. This is categorized into accounting rules, regulations, conventions aswell standards that needs to be complied with EL for recording, classifying as well assummarizing the affairs of business. This is for the sake of reporting each and everytransaction of the organization's accounts and demonstrate true and fair position. International Accounting Standards: The role of IAS is effective in recording transactionby different firms through application of single set out accounting standards atinternational level. Since the time, 41 IAS is required to be issued by IASC for recordingseveral business transactions within the financial statements. International financial reporting standards: These are regarded as the global standardsthat harmonizes the practices of accounting across the globe. By issuing IFRS all theinternational firms are complying with particular set of reporting standards with IFRS. Inthe present era of globalization transactions at international level are increasing to agreater extent. Thus it becomes difficult for the investors to gain insight to all the nationalaccounting standards. Therefore IFRS makes elimination of such needs through5
application global as well as higher qualitative standards for the entire firms. Thismajorly assist in increasing consistency, comparability and reliability of financialstandards. Based upon the legal and regulatory requirements discussed above it can be stated thatsuch assist in representing true and fair profitability as well as financial performance. As such thedifferent users who are making use of financial information can ensure better decision making. Managers: Within EL manager makes formulation of policies, rules and regulations formanaging business functions for enhancing growth and development. They make analysisof the financial statements and takes decision for improving the performance of future.Thus misleading or incorrect information can lead to taking harmful decision and viceversa. In accordance with legislation EL would record all the revenues as well asexpenses by following several standards and regulation in order to gain knowledgeregarding reliable and accurate amount of profitability (Overton, 2007). Further theymake analysis of the financial strengths by collecting information from SOFP, balancesheet that is being developed by complying with global standards. It assist the manager inmaking collection of prominent information in order to take suitable decisions. Forexample, IAS for recognizing financial cost, depreciation, income tax, PPE, currentliabilities, intangible assets that would assist in demonstrating valid data. Employees: Standards for gathering income and expenses acts as an aid in representationof true profitability thus they can demand for higher salary. In addition to this otherobjectives like job security, bonus, incentives and appraisal can also be satisfied. Inrelation to international standards as per IAS 16, EL has to make recording of all thepersonnel benefits in the statements of financials. Investors: In accordance with the legislation preparation of all the statements as well asauditing obligations acts as an aid in offering authentic information. Further it assist insatisfying their need for information. They can make assessment of the accurateinformation that relates with profitability, solvency, ability to generate cash as well asinvestors return for analyzing relationship between risk and return and take suitabledecisions. IFRS assist the investors in making comparison of organizational performanceat international level and gain their interest in the foreign investment. In addition to this6
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