Analysis of Financial Statements and Stakeholder Engagement

The provided document is a collection of references to research papers, patents, and books related to the analysis of financial statements and stakeholder engagement. It covers various aspects, including financial statement comparability, expected crash risk, bank reconciliation, and more. The document appears to be a compilation of sources for academic or professional purposes, possibly for use in a course or research project.

Financial Accounting
Principles

Table of Contents
INTRODUCTION...........................................................................................................................4
Part A...............................................................................................................................................4
Define financial accounting and its purposes..............................................................................4
Two internal and four external stakeholders of a large organisation and the reason behind their
interest in the financial information of a company......................................................................6
Part B...............................................................................................................................................7
Client 1.............................................................................................................................................7
a.) Recording journal entries........................................................................................................7
b.) Preparation of Trial balance.................................................................................................15
Client 2...........................................................................................................................................16
a.) Profits and loss statement.....................................................................................................16
b.) Financial position statement.................................................................................................16
c.) Accounting concepts.............................................................................................................18
d.) Purpose of depreciation........................................................................................................18
e.) Distinguish between limited companies and Sole traders....................................................19
Client 3...........................................................................................................................................20
a.) Purpose of BRS....................................................................................................................20
b.) List of factors which vary the records..................................................................................20
c.) Assessment on term “Imprest”.............................................................................................21
d.) Cash book of Burcu Ltd.......................................................................................................21
Client 4...........................................................................................................................................23
a.) Preparation of control account..............................................................................................23
b.) Explanation on term Control account...................................................................................24
Client 5...........................................................................................................................................24
a.) Assessment on term “Suspense account”.............................................................................24
b.) Trial balance.........................................................................................................................25
c.) Rectification of errors in trial balance..................................................................................25
CONCLUSION..............................................................................................................................26
REFERENCES................................................................................................................................1

INTRODUCTION
Financial accounting is a branch of commerce basically concerned with recording,
summarizing and reporting the transactions that are resulted from the business operations over a
period of time. These transactions are used in the preparation of financial statements that include
income statement, balance sheet and cash flow analysis which are useful for both company as
well as outsiders. Double entry concept of book keeping states that every transaction or financial
entry has equal and opposite effects in two different accounts. All the transactions are recorded
in the terms of debit and credit in order to balance the books of accounts. As a junior accountant
of Haines Watts, a small accountancy firm in the United Kingdom that mainly deals with tax
matters and general business services, it is important to identify the rules, principles and
conventions related to accountancy. The current report will emphasize on the purpose of
financial accounting, its effect on stakeholders, preparation of financial statements for different
types of businesses, bank reconciliation and the process to reconcile control accounts.
Part A
Define financial accounting and its purposes.
Financial accounting is basically an organized process through which an organisation's
revenue and expenses are collected, measured, recorded and reported. It is also required by
shareholders, investors and creditors of the company in order to analyse their growth prospects
and overall profitability of the company.
The purpose and objectives of financial accounting are as follows:
 Recording: The main purpose of accounting is to keep a record of all the financial
transactions in order to evaluate the overall performance of the company. Systematic
recording helps a company in their growth by evaluating their short comings and working
on them.
 Planning: Financial accounting plays an important role in systematic planning regarding
the utilisation of resources. It helps in the preparation of budgets which further leads to
proper coordination within different resources of the company. Hence, it is another
important purpose of financial accounting.
In the view point of Robinson and et.al., (2015) accounting also helps in comparison of
current financial performance with the previous year's and then develop budget or trends

accordingly. Also, the budget acts as a roadmap for the achievement of organisational goals and
objectives efficiently and effectively.
 Decision: Another important purpose of financial accounting is that it helps the business
managers in decision-making regarding various aspects of the company. The decisions
can be related to financing, profit or sales maximization or some other business
operations.
According to Legrand, (2017) financial accounting not only helps the company but also
the investors, creditors and shareholders in taking various decisions. This is why financial
accounting is called the backbone of an organisation.
 Position: Accounting is concerned with the preparation of financial statements that help
in evaluating the overall performance of the company. It not only helps in inter-firm
comparison but also in intra-firm comparison which is beneficial for the business as it
helps them in identifying their key points and take necessary actions accordingly. In
accordance with Fusch, Hall and Fusch, (2018) the financial position of an organisation
also provides a clear view to its members regarding their actual performance and future
growth prospects.
 Financing: The major purpose of financial accounting and statements is to secure funds
for the company, Collison and et.al., (2016) has stated that that the most practical use of
financial statements is to secure finance from commercial banks, financial institutions
and creditors. Also, in order to secure funds from the shareholders and other investors it
is imperative for an organisation to showcase their history of financial performance.
 Legal: Financial accounting also serves its legal purpose by acting as an important
document for every business and it is the fundamental duty of a company to follow it
otherwise it may have to face legal consequences. Also Brumbaugh, (2016) has stated
that systematic reporting of financial statements minimizes government intervention and
ensures smooth working of an organisation in the long run. Liquidity: Improper management of cash is one of the most important reason for failure
of a business. Therefore, systematic recording of financial transactions helps an
organisation to keep a regular check on their cash inflows and outflows and manage them
adequately.
Difference between management accounting and financial accounting.

Financial accounting is a branch of commerce basically concerned with recording,
summarizing and reporting the transactions that are resulted from the business operations over a
period of time. It is very important in analysing the financial position of the organization for
strategic decision making. It complies with various accounting standards such as IAS, IFRS and
GAAP for smooth functioning and reliable information. Financial statements are to be prepared
at the end of every financial year. Financial statements are useful for both external as well as
internal stakeholders. On the contrary, management accounting is an effective process as it helps
in planning, organizing, monitoring and controlling the functioning of the company. It is not
necessary to prepare management reports every year and it does not have to comply with various
accounting standards. Management accounting reports are useful for internal stakeholders of the
company in order to take strategic decision.
Two internal and four external stakeholders of a large organisation and the reason behind their
interest in the financial information of a company.
A stakeholder is an individual or a party that has an interest in the operations of the
organisation and have the power to either affect or get affected by the working of the business.
Stakeholders can be internal as well as external. Internal stakeholders are usually directly
in touch with the company such as employees, investors and board of directors whereas external
stakeholders are not directly related with the company but can be affected by their actions or
changes in operations like suppliers, competitors and customers.
Every stakeholder has a separate reason behind their interest in the financial information
of the company.
Internal stakeholders Employees: Financial statement is the only source of information for the employees of
the company in order to identify the profitability and current position of their business.
Like, the management of the company employees are also interested in financial
information in order to get assurance that the organisation is financially stable to pay
them their salaries and other incentives. Moreover, employees and the workforce of any
organisation are always keen to know the future growth prospects of the company and
their expansion possibilities (Andriof and Waddock, 2017).
 Board of directors: Board of directors of the company includes its owners and other
permanent members that take decisions, make policies and control the overall working of

an organisation. Therefore, it is their fundamental right to know about the position of the
company and their overall performance. It also helps them to identify the returns
generated on their investment, growth rate and the profitability of the business.
According to Brem and Viardot, (2015) financial statements and other related
information also help the directors in determining the level of risk and uncertainty
associated with project which helps them to take other important decisions.
External stakeholders Suppliers: Suppliers are the parties that provide raw materials to the business and it is
essential for them to study the financial information in order to identify the position of
the business, their profitability and growth rate. All these factors further help them in
making decisions related to credit facility, discounts, quality and level of risk. It is
imperative for a supplier to ensure that the company has a healthy financial situation and
growth prospects. Government: It helps in determining and effectively evaluating the tax of the company. It
helps government in effectively tracking the progress of the economy. Financial
statement is useful for the government in evaluating whether the company is paying
appropriate amount of tax or not. Managers: Financial statements are very crucial for the owners and managers of the
company. It helps them in analysing the financial position of the company and make
strategic decision for long term sustainable growth and development of the business
(Purpose of Financial Statements, 2017). It helps in determining various factors of the
business and how profitable are they in the long run.
 Competitors: Competitors are interested in the financial statements of the company as it
helps them to analyse their performance and develop strategies to improve the
competitiveness.
Part B
Client 1
a.) Recording journal entries.

Cash Book

b.) Preparation of Trial balance.

Client 2
a.) Profits and loss statement.
Income statement of Munteanu Limited for 31st December 2018
Cost of Goods sold (w.n. 1)
Particulars Amount (in £)
Opening Inventory 15000
+Purchases 61000
-Closing Inventory -20000
-Return Outward -1500
54500
b.) Financial position statement.
Balance sheet of Munteanu Limited for 31st December 2018
Particulars Amount (in £)
Amount (in
£) Amount (in £)

Current assets
Debtors 26000
Pre-paid rent 3000
Closing inventory 20000
49000
Fixed assets
Land & Building 60000
Less: Accumulated Dep. charged on
Land and building 10800 49200
Plant & Mach. 60000
Less: Depreciation @ 20% 28000 32000
81200
Total assets 130200
Liabilities
Current liabilities
Creditors or bills payable 22000
Outstanding salaries 2000
BO 18000
Corp. tax 2000
Total Current liabilities 44000
Owners’ s fund 40000
Share premium 20000
Retained earnings 22000
Net profit 4200
Total shareholders’ Equity 86200
Total liabilities 130200

c.) Accounting concepts.
Accounting concepts are conditions or assumptions upon which accounting statements
and records are maintained.
Consistency: This concept of accounting states that when a certain accounting method is
adopted by the company then the same must be consistently applied in the future from one
accounting period to another (Sangster, 2015). This helps management in comparing data in a
reliable and efficient manner. It is very useful for investors and managers in order to compare the
various financial statements for strategic decision making in a systematic and accurate manner.
In case of any valid reason for change of accounting method, then the nature and reason for
change must be disclosed by business.
Prudency: This is also referred to as conservatism principle. This helps in determining
that the income and assets of the company are not overstated. It also helps in determining that the
assets of the company are not overstated and liabilities and expenses of the company are not
understated in order to give true and fair results about the financial performance and position of
the organization. Provision should be made properly for all the expenses and losses of the
company to meet desired goals and objectives. This concept is very useful for the company to
show true picture on the performance of the organization. Generally Accepted Accounting
Principle (GAAP) and International Accounting Standards (IAS's) integrate the concept of
prudence.
d.) Purpose of depreciation.
Depreciation is an impelling accounting method which helps in allocating the cost of the
tangible asset by reducing the cost of the asset over its useful life. It is referred to as the
reduction in the value of the asset until the value become zero.
Purpose of Depreciation
The key purpose of depreciation is to charge expenses over the useful life of the assets.
The main purpose is to attain the matching concept of accounting. It helps in determining the
revenue earned from the asset over its useful life. It helps in arriving at the true net profit/ loss
and working results of the company (Lessambo, 2018). It also focuses on showing the assets at
the accurate value.
Two methods for calculating depreciation

Straight line method: This method is evaluated by subtracting the cost of an asset with
the expected salvage value and diving the difference by the expected life of an asset. It is the
simplest form of depreciation method. Equal amount of depreciation is charged every accounting
year throughout the useful life of an asset. This method is useful where the useful life of an asset
can be effectively calculated. This method is most appropriate for less costly items.
Formula: (Cost of asset- Scrap value)/ Useful life of an asset
Written down value method:
This method is also referred to as diminishing balance method. It helps in reducing the
cost or value of an asset within the prescribed set of percentage every year. This in turn helps in
showing the current worth of the item owned by the company. The depreciation charged in the
yearly years of the asset is more as compared with the subsequent years. In this method the value
of an asset is not written off completely. This method is best suitable for the company which
requires high repair cost.
e.) Distinguish between limited companies and Sole traders.
Sole traders Limited companies
A sole trader is a self-employed individual
who is referred to as the sole owner of the
business (Lee, 2016). It is one of the simplest
business structure.
The limited company is a company where the
liability of the members is limited or
guaranteed to some extent. It limits the liability
of the shareholders undertaken by the.
The sole trader and the business is considered
the same legal entity.
The limited company has a separate legal entity
from its members.
It is very easy to set up the sole proprietor’s
business and it also requires less paperwork.
It has complex business structure as they have
to comply with all legal laws and standards.
It is not necessary to maintain all the
accounting statements and comply with
financial accounting principles.
It is important to maintain financial statement
every year within the prescribed rules and
regulations. It also has to comply with GAAP
and IAS.
The owner of the business is responsible for
the profit and loss related with the business.
The partners have to bear the loss and gain
profit according to the limited liability

guaranteed by the partners.
Client 3
a.) Purpose of BRS.
Bank reconciliation statement (BRS) is a process of accurately matching the balances of
the bank account statement with the financial records of the company. This statement helps in
effectively outlining the deposits, withdrawals and other activities which influences the records
for the specific accounting period (Kieso, Weygandt and Warfield, 2019). BRS is very useful in
checking the quality of the data by finding the reason for deviation. It is an effective financial
control tool which helps in determining the fraudulent activities. It helps in ensuring the accuracy
of the transaction in an efficient and systematic manner.
Purpose of BRS
The main purpose of BRS is that it helps in ascertaining the reason for difference in bank
as well as financial records of the company (Iyer and et.al., 2019). It is very useful in detecting
the discrepancies between bank and accounting records of the Burcu Ltd. It is very useful in
confirming the accuracy of the balances and entries made in both the books. It is very useful in
analysing the fraudulent activities within the Burcu Ltd (Sunarya, Nurhaeni and Haris, 2017). It
helps in reducing the errors and showing accurate matching results in both the books. The main
purpose of BRS is that it helps in receivable tracking, fraud detection, error detection, fee and
interest tracking, transaction status updates, etc.
b.) List of factors which vary the records.
Unrealized cheques: It happens when cheques are presented in the bank and is
immediately debited in the firm's account, but has not been realized yet.
Outstanding cheques: When the cheque has been issued to the creditors and it has not
been presented for payment. This results in disagreement in bank statement and company
statements.
Deposit in transit: When the cash has been recorded by the depositor, but the same has
not been entered by the bank. This results in variation in the books of accounts.
Error in recording: When wrong amount has been recorded in the books. This results in
difference in bank statement and company statements.

Direct debit: When direct debit has been made by bank and no information has been
communicated to the firm regarding this transaction (Blowers, 2016). This results in
disagreement in bank statement and company statements.
Time difference at the time of recording: This happens when the transaction has been
recorded in book, but the same has not been recorded in another book. This results in
disagreement in bank statement and company statements.
c.) Assessment on term “Imprest”.
Imprest is a type of financial accounting system which helps in reserving certain amount
of cash for a specific period of time. This accounting system helps in tracking how cash is spent
to pay off the day to day routine expenses in the business. This cash is used to carry out day to
day activities such as petrol, stationary and transportation. Imprest system reserves specific
amount of cash and also pay for small expenses by effectively maintaining proper records of the
transaction. It helps company to easily monitor the expenses for higher sustainable growth and
expenses. This system is useful in reviewing variances between actual and expected funds. The
petty cashier keeps a proper record of the petty payments for accurate results and outcomes.
Imprest system is useful as it helps in reducing burden on the cashier to record small expenses. It
also helps in reduction in error and fraudulent activities. This is a very labour saving and time
consuming process which makes work easier and attain better results and outcomes.

d.) Cash book of Burcu Ltd.
Bank Statement as on 30th sept' 2018
Date Particulars Receipt Payment Balance
1st sept' 2018 Opening Balance 515
8th sept' 2018 cash sales 64
11th sept. ' 2018 101202 251
13th sept. ' 2018 deposit 26
17th sept. ' 2018 101204 89
17th sept' 2018 debit rates 105
18th sept ' 2018 cash sales 171
26th sept '2018 cash sales 103
30th sept' 2018 bank charges 36
10th sept ' 2018 C. Lyons 87
20th sept' 2018 C. David 122

28th sept' 2018 S. Leeming 116
364 806
Balance as per cash
book 73
Client 4
a.) Preparation of control account.

b.) Explanation on term Control account.
Control account is also referred to as controlling account. It is a ledger statement that
contains small summary of subsidiary accounts. It is a summary account that helps in
systematically organizing the general ledger (Anderson and et.al., 2018). Control account is very
useful in identifying the errors for reliable data and results. It is very useful in providing the
check on the accuracy of the data for more accurate financial results and outcomes for the
company which in turn helps management in strategic decision making. Control account helps in
preventing the fraud and detecting the errors for specific results and outcomes. This account is
very useful in clearly specifying the ledger amount in a clear and systematic manner.
Client 5
a.) Assessment on term “Suspense account”.
Suspense account is an account which temporarily records the amount of transaction
whose general ledger cannot be determined. Suspense account refers to account of general
ledger that works as a holding account until the mistake in transactions are identified. It is also
known as temporary account. Suspense account of accounts payable is opened when fixed assets
are purchased by making payment but it will not receive the asset until the payment is fully paid
off. After making the payment and receiving the asset, suspense account will be closed and for
new asset new suspense account will be opened.
Suspense accounts have two types which are as follows:
Trial balance suspense accounts
The suspense account is listed on the trial balance under the other assets heading. It has
the main reason which is imbalance are discovered and corrected. For example: if the trial
balance credit side is larger than the debits, the difference is recorded in the suspense account in
the debits and do the opposite as per needed.
Received payment suspense account
The suspense account is opened when company receive payment and they cannot find
invoice customers wants paid or which customer made the payment. For example: if manager is
not known about the made payment and review the open invoices to try to match up the payment.
Features of suspense account:
 It is a temporary account and record those transactions whose account is uncertain.

 Suspense account helps the individual or business to record the amount paid without
assigning the payment to a particular machinery or equipment.
b.) Trial balance.
c.) Rectification of errors in trial balance.

CONCLUSION
From the above study it has been concluded that, financial accounting is an organized
process through which company's revenue and expenses are measured, collected, recorded and
reported. This study will effectively highlight the use of financial statements for both internal
and external stakeholders. This study also includes, double entry recording, profit and loss
statement and balance sheet statement. It will further examine, accounting concepts such as
prudency and consistency. Depreciation is an impelling accounting method which helps in
allocating the cost of the tangible asset by reducing the cost of the asset over its useful life. It
also concludes, difference between limited company and sole traders. This study also
summarizes, purpose of BRS, imprest system, control account and suspense account.

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