Financial Report: Analysis of Financial Statements and Ratios

This financial report provides an overview of financial statement preparation, analysis, and ratio interpretation. It covers the difference between financial and management accounting and explores the importance of various ratios such as current ratio, quick ratio, gross profit ratio, and net profit ratio. The report also includes a case study on Lucky House Limited and its financial performance.

Financial Report

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY ..................................................................................................................................1
TASK 1............................................................................................................................................1
A) Two branches of accounting and explain the difference between the financial and
management ................................................................................................................................1
Journal entry and prepare of trial balance ...................................................................................3
Task 2...............................................................................................................................................8
A. Statement of Profit and Loss and Statement of Financial Position.........................................8
Ratio analysis and interpretation ...............................................................................................10
CONCLUSION..............................................................................................................................11
REFERENCES .............................................................................................................................12
Books and Journals ...................................................................................................................12

INTRODUCTION
Financial report means report made for the preparation of the financial statements which
is very important for the analysing of the organization performance, through this they determine
the position in the market place through the use of the decision which is make by the manager
after analysing all the balance sheet and income statements. It is the formal records of the
financial activities and position of the business, person and entities. It is made in the structured
way which ids very easy to understand for the investors and analyst. This report is based on the
making of the income statement, making journals and balance sheet (Burkhanov, 2020). There is
the analysis of the ratio for determine the comparison of the two company regarding their
position and performance to convey the financial activities for giving the financial affairs. In this
there is the requirement of the financial statement analysis of the company to determine the
analysis of the company.
MAIN BODY
TASK 1
A) Two branches of accounting and explain the difference between the financial and
management
In the accounting, there is the internal auditor and chief financial officer for evaluate the
positions of the company in the working business. It is used for all branch public sector, non
profit sector and technological developments. There are different types of branch is there-
 Financial accounting- it is the systematic method used for recording the business
transactions for the recording of the accounting principles for calculation of the profit and
loss and accurate picture of the balance sheet during the period which is benefit for the
calculation of the trail balance, balance sheet which is based on the financial accounting
principles. It is useful for the creditors, banks and financial status. It involves recording f
the transactions in a day which is remain in the historical for generating the past, it
involves in generating financial statements which is prepared according to the generally
accepted accounting principles (GAAP) for the calculation of the various tax which is
based on the various bank balances and tax based records. This the external regulations
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for the internal employees to make analyse and make financial decisions for used in the
purpose.
 Cost accounting- Cost accounting refers to the branch of Accounting in which the
estimation of overall level of costs can be done highly effectively and efficiently. Thus in
this way the use of different types of methods can be made so that the costs are reduced
which will help in achieving financial goals and objectives (Farre-Mensa and Ljungqvist,
2016).
Difference between Financial accounting and Management accounting
 Basis  Financial accounting  Management
accounting
 Usage  Financial accounting
puts its focus on
making the use of
financial facts, data and
information so that the
financial goals and
objectives can be
attained.
 Management
accounting ensures that
the use of techniques
and methods can be
made so that the
problems can be
solved.
 Time Period  Financial accounting is
used to examine the
result of the
transactions which
have been done so that
a proper analysis and
interpretation can be
done.
 Management
accounting is used in
order to forecast the
results of the future in
the right manner.
User groups of Financial accounting-
 Shareholders- The shareholders are the users of the information which is provided by
the Financial accounting. Thus in this way they can make sure that they get valuable
insights into the operations and functioning of the organization in the right manner. This
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ensures that they are getting a proper Dividend for investing their money in the company.
Also by making the use of this information they can take appropriate decisions without
facing problems and issues.
 Customers- The customers can become the users of the information provided by the
Financial accounting. Therefore in this manner they can ensure that they are able to get
appropriate information related to accounts of the company which can be used by them
effectively and efficiently (Flannery, 2017.Leuz and Wysocki, 2016).
User groups of Cost accounting-
 Investors- The investors can be the users of information provided by Cost accounting.
This is so because they need to analyse the overall costs and the expenses of the
organization. Thus in this way they will be able to ensure that the business is in profits
before deciding to invest their money in it.
 Suppliers- The suppliers can become the users of information which is provided by Cost
accounting. This is so because they have to assess the overall costs properly. Therefore in
this way they will be able to ensure that they can assess the cost information of the
business before they provide the supply of goods to it.
Journal entry and prepare of trial balance
Journal Entries
S. NO Date Particulars L.F £(Debit)
£
(Credit)
1 01/01/20 Bank A/c Dr. 100000
To Capital A/c 100000
( Being started the business with the bank
money)
2 02/01/20 Purchase A/c Dr. 10000
To S. keys A/c 10000
(Being purchase from the S.keys )
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3 03/01/20 Motor van A/c Dr. 8000
To Bank A/c 8000
( being purchase of motor van through bank)
4 04/01/20 Stationery A/c Dr. 150
To Bank A/c........ 150
( Being stationary purchase through the amount
by the bank)
5 08/01/20 Bank A/c Dr. 15000
TO Sales A/c 15000
( Being goods sold for cash than transfer to
bank)
6 31/01/20 Drawing A/c Dr. 150
To Bank A/c 150
( Being took the cash from the bank from the
bank)
Ledger accounts
Ledger Accounts
(Amounts in GBP)
Capital Account
Date Particulars Amt. Date Particulars Amt.
01/01/20 By Bank A/c 100000
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31/01/20 To Balance c/d 100000 100000
Total 100000 Total 100000
Bank Account
Date Particulars Amt. Date Particulars Amt.
01/01/20 To capital 100000 03/01/20 By motor van A/c 8000
08/01/20 to sales 15000 04/01/20 By stationary A/c 150
31/01/20 By drawing A/c 150
31/01/20 By balance c/d 106700
total 115000 Total 115000
Purchase A/c
Date Particulars Amt. Date Particulars Amt.
02/01/20
To Green
Limited 10000
31/01/20 By balance c/d 10000
Total 10000 Total 10000
Green Limited
Date Particulars Amt. Date Particulars Amt.
02/01/20 By purchase 10000
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A/c
31/01/20 To balance c/d 10000
Total 10000 Total 10000
Motor van A/c
Date Particulars Amt. Date Particulars Amt.
03/01/20
To bank
A/C 8000
31/01/20 By balance c/d 8000
Total 8000 Total 8000
Stationery A/c
Date
Particular
s Amt. Date Particulars Amt.
03/01/20
To bank
A/C 150
31/01/20 By balance c/d 150
Total 150 Total 150
sales A/c
Date Particulars Amt. Date Particulars Amt.
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08/01/20 By bank A/c 15000
31/01/20
To balance
C/d 15000
Total 15000 Total 15000
drawings A/c
Date
Particular
s Amt. Date Particulars Amt.
31/01/12
To bank
A/C 150
31/01/20 By balance c/d 150
Total 150 Total 150
Trial Balance
(in the month ending 31/01/2020)
(Amounts in GBP)
Particulars Debit Credit
Capital Account 100000
Bank Account 106700
purchase A/c 10000
Green Limited A/C 10000
Motor van A/c
Dr. 8000
sales A/c 15000
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Stationery A/c 150
drawings A/c 150
Suspense A/c 20000
Total 135000 135000
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Task 2
A. Statement of Profit and Loss and Statement of Financial Position
Lucky House Limited
Income Statement
For the year ending 30th Sept 2020
Particulars Amount
Sales 17550
Less: Cost of goods sold 11345
Gross Profit 6205
Operating expenses
Stationary 250
Business Insurance 38
Prepayments 1362
Rent 950
Telephone 45
Raw materials 2655
Total operating expenses 5300
Income from Operations 905
Net Income 905
Lucky House Limited
Statement of financial Position
At 30th Sept 2020
Particulars Amount
ASSETS
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Non-current Assets:
Machine 8100
Current Assets:
Cash at bank 5850
Accounts Receivable 4500
Total Assets 18450
LIABILITIES
Non-current Liabilities:
Current Liabilities:
Accounts Payable 6545
Total Liabilities 6545
Net Assets 11905
EQUITY
Capital Account 15000
Less: Drawings -4000
Add: Profit 905
Total Equity 11905
B. Statement of Cash Flow
Cash Flow Statement
Lucky House Limited
For the year ended September, 2020
Particulars Amount
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Opening Cash balance
Net Income 905
Cash Flow From Operations:
Cash receipts from sales 17550
Less:
Paid for raw material 2655
Paid for stationary 250
Paid for rent 950
Paid for prepayments 1362
Paid for business insurance 38
Paid for telephone 45 5300
Net cash flow from operations 12250
Closing Cash balance 5850
Ratio analysis and interpretation
Basics Formulas Results for 2019 Results for 2020
Current ratio Current assets / current liabilities 85000/30000 82000/40000
2.833 2.05
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Liquid / quick
ratio Quick assets / current liabilities 65000/30000 60000/40000
2.16 1.5
Gross profit Ratio Gross profit / total sales 515000/975000 495000/950000
52.82% 52.10%
Net profit Ratio Net profit/ total sales 205000/975000 175000/950000
21.02% 18.42%
Average inventory
turnover period Net sales / average inventory 975000/20000 950000/22000
49 days 44 days
Trade receivables
days
Total receivable/ Credit sales *
365 days
10000/975000*3
65 15000/950000*365
4 days 6 days
Trade payable days
Trade payable/ Cost of sales*
365
30000/460000*3
65 40000/455000*365
23 days 32 days
From the above calculation it has been analysed that in the current ratio in 2018 is 2.05
which is important for the entity because through this ratio company is able to know their current
assets and liabilities for the payment of the debt which is pay through the help of the cash, it is
benefit for the organization that they maintain their current ratio for the performance, in 2019 it
is increasing to 2.833 which is very good for the company to maintain their efficiency position.
In the Quick ratio it has been analysed that in 2019 the ratio of the Nuneaton Limited is
2.16 which represent the liquidity position of the company in the market for showing the better
performance in the market. This ratio describe the ability of the entity to pay the bills in the
timely manner, it is important for the lenders and creditors of the company to provide the credit
to the customers in the form of loan. In 2020 it is 1.5 it means it is decreasing which is harmful
for the company to manage the liabilities (Lusardi and Mitchell, 2017).
In gross profit ratio it has been analysed that in 2019 it is 51.82 which means they have
ideal gross profit ratio which explain the profitability position of the company. It is decreasing in
2020 which is 52.10 which represent that their gross profit is reducing which result in decrease in
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the sales of the company. Through this investor invest less amount in the company because their
profit is low.
In the Net profit ratio it has been interpreted that in 2019 it is 21.02% which represent
that it determine the profitability position of the company in the market, through this
organization is able to use this ratio for increase the sales, in 2020 it is reduce to 18.42% which
harm the entity because there is reduction in the ratio of the profit which also reduce the
profitability position in the market (Talbot and Boiral, 2018).
In the Average inventory turnover period, it has been interpreted that in 2019 it is 49 days
which show the management of the inventory for the organization which is important for
maintaining the raw materials and finished goods which is their essential part for their regular
activities, in 2020 it is 44 days which means there is the decrease in the inventory turnover
period which mean they are not able to maintain their inventory in the proper way.
In the trade receivables period, it has been analysed that in 2019 it is 4 days which means
there debtor ratio is good they can collect the money from the debtor in the fastest rate which is
very important for the proper management. In the 2020 it is 6 days which means they are not
able to collect money from the debtor in the efficient way in the fastest way which decrease their
cash management in the proper way.
In the trade payable period, it has been interpreted that in 2019 it is 23 days which means
company is able to pay the debt in short period of time but in 2020 it is increasing to 32 days
which means entity is not able to pay to creditors in the fastest way which effect the performance
of their in terms of liquidity and efficiency. It also effect the profitability of the company in the
productive manner (Smets, 2018).
CONCLUSION
From the above report it has been concluded that financial report refers to the analysis of
the financial statements and position of the company in the market. In this report there is the
analysis of the ratio and branch of the accounting and users for the management accounting.
REFERENCES
Books and Journals
Burkhanov, A., 2020. Indicators to assess financial security of the banks.Архив научных
исследований. (27).
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Farre-Mensa, J. and Ljungqvist, A., 2016. Do measures of financial constraints measure financial
constraints?.The Review of Financial Studies. 29(2). pp.271-308.
Flannery, M. J., 2017. Stabilizing large financial institutions with contingent capital certificates.
InThe Most Important Concepts in Finance. Edward Elgar Publishing.
Leuz, C. and Wysocki, P. D., 2016. The economics of disclosure and financial reporting
regulation: Evidence and suggestions for future research.Journal of accounting
research. 54(2). pp.525-622.
Lusardi, A. and Mitchell, O.S., 2017. How ordinary consumers make complex economic
decisions: Financial literacy and retirement readiness.Quarterly Journal of Finance.
7(03). p.1750008.
Smets, F., 2018. Financial stability and monetary policy: How closely interlinked?.35th issue
(June 2014) of the International Journal of Central Banking.
Talbot, D. and Boiral, O., 2018. GHG reporting and impression management: An assessment of
sustainability reports from the energy sector.Journal of Business Ethics.147(2). pp.367-
383.
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