Financial Accounting: Analysis of Financial Statements, Ratios, and Business Bank

This document provides an introduction to financial accounting, including the preparation of financial statements such as the balance sheet, income statement, and cash flow statement. It discusses the importance of relevant and reliable information for users of financial statements and explores the calculation and interpretation of financial ratios. The document also covers the management of business bank accounts and the depreciation of machinery using different methods. It is a comprehensive guide to financial accounting for students and professionals.

Financial Accounting

Contents
INTRODUCTION.......................................................................................................................................3
QUESTION 1..............................................................................................................................................3
(A) Financial statement of Bob’s account................................................................................................3
(b) Three main features of information for users of financial statements.................................................4
QUESTION 2..............................................................................................................................................6
(2a) Calculation of ratio and interpretation..............................................................................................6
(2b) Business bank..................................................................................................................................8
(2c) Depreciation of machinery account..................................................................................................8
CONCLUSION.........................................................................................................................................10
REFERENCES..........................................................................................................................................11

INTRODUCTION
Financial accounting is a broad concept with a range of tasks consisting of tracking,
analyzing and resubmitting the effects of these reports to consumers. The activities affected are
material to the financial statements. It’s used to prepare financial statements such as the balance
sheet, income statement and cash flow statement for the purpose of revealing the market
reputation and performance over a specific period of time that is usually yearly. Accurately,
financial accounting concerns the creation of such documents, which are centered on reliable
information and obey "Generally Accepted Accounting Principles" (anything else recognized as
GAAP). GAAP sets knowledge management on even a broad variety of subjects in the United
States, namely financial statement analysis (Anantharaman, 2017). The main aim is to present
these reports to the shareholders as their money is invested in the organization. In this report
consist of year end accounts, main features of information which are beneficial for the users.
Along with, calculate different types of financial ratio and interpret them to analysis the financial
position of business and write up bank account in each month. Moreover, apply different method
of depreciation and know different accounting concepts.
QUESTION 1
(A) Financial statement of Bob’s account
Trading Account: Trading account is extremely detailed to recognize the productivity of the
'goods' purchased or produced and sold either by entrepreneurs. The gross product is the contrast
here between sale price and the production value of the products. The word 'products' implies the
products which were purchased for reselling. If the money from the sale are higher than the
benefit of the sold goods, the gross money is generated. If the money raised of sale are lower
than the cost of the sold goods, the gross loss is charged. Trading Account may be described as
accounts that reveal the outcome of purchase and sale of commodities. Trading account is an
account of register. This includes the outcomes of a time of activities (Aray, Pedauga and
Velázquez, 2017).
Trading Account of Bob’s for the year end 30 April 2019
Particular Debit Particular Credit
To Purchase 15700 By Sales 30000
To Opening stock 4700 By Closing stock 4400
To Shop wages 4420
To Gross Profit 9580
34400 34400

Profit & Loss account: Profit and loss statements are really a type of financial accounting
because they allow investors to gage which profitable it is to make a purchase mostly on
inventory of a specific position. It's because P&L reports are simply an overview on how the
company manages, and that therefore they can demonstrate not whether the company is
operating in a beneficial way. Using this knowledge an investor may elect to close and open a
place. Benefit and loss statements are typically looked at in accordance with a balance sheet of a
company – that lists assets , liabilities and equity of a minority employees – and cash flow
statement – indicating any adjustments in financial statement and revenues.
Bob’s profit & loss account for the year end of 30 April 2019
Particular Amount Particular Amount
To Shop fittings 13000 By Gross Profit 9580
To Light and heat 260 By Net Loss 8300
To Rent 4500
To Insurance 120
17880 17880
Financial Position Statement: A Financial position statement shows on the assets,
liabilities and equity of a shareholders of the company at a given place and time. It creates a
basis for estimating procedure for collecting and determining the financial position of the
company. This financial report gives a summary of what a firm owns and owing, and also the
sum that investors spend. The balance sheet displays the capital or assets of a corporation and it
also demonstrates why these money has been spent — whether by borrowing underneath
obligations or by raising capital as seen in the investor’ equity. The balance sheet includes an
overview of how efficiently company's management utilizes its capital, both to shareholders and
investors (Ionescu, 2017).
Bob’s financial position statement for the year end of 30 April 2019
Liabilities Amount Assets Amount
Capital 15000 Bank 610
Net loss 8300 Cash 100
Drawings 3500 3200 Debtors 120
Creditors 2030 Closing stock 4400
5230 5230

(b) Three main features of information for users of financial statements
Relevancy: For the reason for which they are written, the financial statements must be
appropriate. Unneeded and misleading releases should be discouraged, and the community ought
to be aware of all those important and content. The knowledge has to be important to consumers'
desires, which would be the situation whenever the knowledge impacts their financial decisions.
This may include disclosing especially important information, or details which absence or error
can affect users' financial choices. This feature important for financial statement because user
can get all the relevant information in regard of the business and analysis the business
performance. It is beneficial for the user because it helps t take all the strategic decision at the
right time.
Reliable: The details must be secure, not deceptive, from content error and prejudice.
Therefore the documentation should accurately reflect payments and other activities, depict the
nature of the study of activities, and by achieve results responsibly reflect assumptions and
uncertainty. They will communicate correct and comprehensive details about with an
organization's results, role, development and opportunities. It is also critical that even those who
plan and report the financial reports do not enable manipulation of the truth by their political
prejudices. It is essential feature that provides all the reliable information in regard of all the
accounts which is beneficial for the corporation to take reliable decision in certain period of time.
The user gets the benefits of reliability and knows the business efficiency (Johnston and
Petacchi, 2017).
Comparable: The data needs to be consistent with the financial reports provided for
other financial years, so that consumers can recognize patterns in the accounting individual's
results and financial condition. These should be readily consistent with prior comments, or
related issues or business comments. Comparison makes financial reports more useful. With the
help of comparison users can compare their financial statements with other organisation take
right decision for the business transparency.
Importance to management: Increasing the size and scope of factors that influence employee
investment institutions a quantitative and creative thinking to contemporary business enterprise
leadership. For the reasons the manager must be able up-to - date, reliable and comprehensive
account statements. Financial reports help in understanding businesses' status, success and
opportunities vis-à-vis the market.
Importance to shareholders: In the scenario of corporations planning is segregated from
property. The owners cannot actually engage then anyway-to-day business operations. Even so,
the results of those operations should be documented in the form of income accounts to
stockholders at the annual session of the general assembly. Such statistics allow the stakeholders
to learn about the manager's efficiency and achievement, as well as the corporation's sustainable
level and financial power (Wells, 2018).

Importance to creditors: The annual statements act as a reliable reference for a corporation's
current and potential vendors and probably creditors. It is via a careful analysis of the financial
statements that such classes will become acquainted with a firm's cash, productivity and long-
term solvency status. It will help them determine what their potential way to proceed would be.
Importance to labor: Staffs are eligible to bonuses as reported by evaluated profit and loss
report, based on the scale of the income. Thus P & L a / c is to the staff of major importance. The
scale of income and productivity obtained are also of considerable importance in salary
negotiations (Jordão, 2017).
Financial statements benefits to users:
Financial reporting has many advantages that are why a corporation would want to
maintain credible and accurate financial statements. For example, because the business is a
public ownership corporation with shareholders and creditors, financial reporting standards
apply. For another, if you charge the internal revenue code fees, you'll have to share wealth of
knowledge regarding your wages, expenditures, liabilities and other details about your financial
assets. A few other studies suggest that by evaluating financial statements, management can
make better informed choices about how to operate the institution and improve the availability of
advertising by up to 20%.
QUESTION 2
(2a) Calculation of ratio and interpretation
Ratio analysis: Ratio analysis is a method that people bring into action to take out an
analytic review of facts in a company's balance sheet. Such ratios are measured on the basis of
present year’s numbers and then compared with previous years, certain businesses, sector and
also the sector to determine the company's results. In comparison, the ratio approach is primarily
used among responsibility of company’s adherents (Okoli, 2018).
Gross profit margin:
Year 1 Year 2
Gross Profit 1920 2200
Revenues 4940 6850
Gross Profit Margin (%) 38.86 % 32.11 %
Interpretation: As per the above calculation it has been analyzed that in the year one the company
generate profitability 38.86% and in second year generate 32.11%. As a comparison in year
second company generate low profitability as compare of sales.

Return on capital employed
Year 1 Year 2
Operating Profit 460 350
Capital Employed 3810 4760
Return on capital employed
(%) 12.07 % 7.35 %
Interpretation: This ratio use by the business to analysis the efficiency of the business and
generating profit from capital. The capital employed decrease in second year as comparison of
year one. It is not good for the business because it impact in negative manner.
Capital employed working notes
Total assets – Total current liabilities
Year 1 = 4370 – 560 = 3810
Year 2 = 5600 – 840 = 4760
Current ratio:
Year 1 Year 2
Current Assets 1770 2390
Current Liabilities 560 840
Current ratio 3.16 2.84
Interpretation: As per the above calculation it is getting that in the year first company meet with
the ideal ratio which is 2:1 and also in the tear second. In first year generate 3.16 and in second
year 2.84. In both years match with the ideal ratio.
Trade payable period in days:
Year 1 Year 2
Trade Payable 560 840
Cost of sales 3020 4650
Trade payable period in days 67.68 days 65.93 days

Interpretation: As per the above table it understands that the organisation can pay amount in the
67.78 days in first year but in second year it decrease and reach on 65.93 days that is not good
for the business entity.
Trade receivable period
Year 1 Year 2
Trade receivable 820 1230
Total sales 4940 6850
Trade receivable period 60.59 days 65.54 days
Interpretation: From the above computation it is analyzing that in first year company receive
mount from the debtors in 60.59 days but in second year it increase and reach on 65.54 days
which is not good for the business and impact on the liquidity position.
(2b) Business bank
Write up other accounts
(1) March account
Date Particulars Debit Credit Balance
March, 1 Opening balance 500 500
March, 1 Bought goods for
sale
150 350
March, 5 Paid rent 50 300
March, 10 Business taking
to date
290 590
March, 22 Paid for
advertising
25 565
March, 26 Thompson
drawings
100 465
March, 27 Business takings 240 705
705
April account
Date Particulars Debit Credit Balance
April, 1 Opening balance 705 705
April, 2 Bought goods for
resale
100 605
April, 5 Paid rent 50 555

April, 14 Received a loan 450 1005
April 16 Business takings 330 1335
April, 23 Thompson
drawings
75 1260
April, 26 Business takings 180 1440
April, 29 Paid for
advertising
30 1410
(c) Extract a trial balance
Particulars Debit Credit
Rent 100
Bank 500
Received loan 450
Advertising 55
Drawings 175
Purchase 250
suspense 370
950 950
(2c) Depreciation of machinery account
(1) Straight line method (12.5%)
For 2017 = Cost of machinery*12.5%
= 16000 * 12.5%
= 2000
For 2018 = 16000 * 12.5%
= 2000
For 2019 = 16000 * 12.5%
= 2000
(2) Reduce balance method (15%)
For 2017 = Cost of machinery*15%
= 16000 * 15%
= 2400
For 2018 = (16000-2400) * 15%

= 13600*15%
= 2040
For 2019 = (13600-2040) * 15%
= 11560 * 15%
= 1734
(3) Accounting concepts
Going concern: Going concern is an accounting concept for a business that has the
capital necessary to begin to function continuously before verification of the opposite is given.
The word also applies to the willingness of an organization to raise enough profit to remain alive
or escape default. If a company is not a company, it means it has declared bankruptcy, and its
resources have been forced to liquidate. Accounting professionals use the standards of going
concern to assess which forms of disclosure will surface on the financial statements.
Organizations that are an ongoing concern can delay recording of long-term assets at original
cost or liquidation price, however at cost more. A business retains an ongoing problem unless the
disposal of property does not hinder its strength to conduct operating, such as the closing of a
small branch manager that due to complete staff to many other business units (Sledgianowski,
Gomaa and Tan, 2017).
Materiality: Exchanges should be reported as failure to do so could change a reader's
financial reports judgments. It thought to occur in extremely small expenditures becoming
reported, such that a firm's financial performance, financial condition, and cash flows are
accurately reported in the financial reports. The definition or principle of materiality is an
accounting law that specifies all payments or products that have a major material effect on the
financial should be compensated for solely utilizing GAAP. In other terms, if a payment or
incident occurs for the year that might impact how the business will be perceived by a
shareholder it must be reported for using GAAP on the income statement (Tinoco, Holmes and
Wilson, 2018).
Business entity concept: The business entity property implies that the payments relevant
to a company must be finding a variety from that of its shareholders or other entities. To do so
includes the use in the company of different financial statements which fully exempt some other
organization or landlord's income and expenses. Under this definition, numerous entities' records
will be mixed, making it very difficult to distinguish the economic or taxation performance of a
particular enterprise (Umar, 2017). The company entity definition has a variety of explanations
such as:
Each commercial entity is exempted from tax

The financial results and economic position of the organization must be calculated
It is important to assess the sums of payments to the multiple managers whenever an entity is
repossessed
It is important from the point of view of responsibility to determine the money available against
even a commercial enterprise in the case of a carefully considered
Documents of a company cannot be audited because the documents have been merged with those
of other companies and/or persons (Wang and Zhang, 2017)
CONCLUSION
As per the above report it has been concluded that financial accounting use by the
different types of organizations to analysis the financial performance of the business. In this
accounting company prepares various types of statements that present actual financial
performance and help to top executives to take right decision. There are making trading, profit
and loss statement to analysis the financial performance. For this also calculate ratio analysis and
user information features with the benefits.

REFERENCES
Books and Journal
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Accounting in Federal Colleges of Education, North-East Geo-Political Zone,
Nigeria. KIU Journal of Social Sciences. 3(1). pp.257-262.
Wang, H. and Zhang, J., 2017. Fair value accounting and corporate debt structure. Advances in
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Wells, P. K., 2018. How well do our introductory accounting text books reflect current
accounting practice?. Journal of Accounting Education. 42. pp.40-48.