Capital Structure, Redemption of Preference Shares, and Cash Flow Management

Financial Reporting

TABLE OF CONTENTSIntroduction..........................................................................................................................................3Task 1...................................................................................................................................................31. Need of distinction between debt and equity...........................................................................3Task 2...................................................................................................................................................71. Objectives of cash flow statement...........................................................................................7Conclusion..........................................................................................................................................10References..........................................................................................................................................122

INTRODUCTIONFinancial reporting is the process of recording financial transactions of business in amanner disclosing financial performance of company over a period of time to lenders andvarious stakeholders. It helps in forming effective decisions by considering company’s strategiesand objectives. In the present study, financial figures of Pondland are considered for betterunderstanding of the subject matter. Current study focuses on the need for distinction betweendebt and equity, importance and use of gearing ratios and guidelines given by accountingstandards for classifying debt and equity (Sachs, 2007). It also covers the importance ofclassification of funds into debt and equity for stakeholders. Objectives of cash flow statementsand the way in which it contributes to user's understanding in evaluating profits of companythrough cash flow statement is also covered by this project.TASK 11. Need of distinction between debt and equityCompany’s capital structure consists of two main elements i.e. debt and equity thatencompass an organisation to fund its assets. Optimum capital structure should be planned bycompany for the real growth and survival in a long run. Debt-equity structure should be designedby keeping in mind the shareholder’s interest as well as the financial requirements of company.Organization can analyse its capital structure through a technique called capital gearing ratiosand proper decisions can be formed on the basis of gearing ratios (Dabrowski and Rostowski,2012).Capital gearing ratio states the proportion of equity against debt of company. Gearingratios are calculated to know company’s viability to pay its long term debt from existing equity.In situation where firm’s capital consists of large portion of equity as compared to debt thencompany is said to be a low geared firm and in vice versa situation, company will be called ashigh geared firm (Thomsett, 2009). Business entity should maintain an optimal gearing ratio byhaving correct proportion of debt and equity in capital ratio because too much debt will increaselong term obligation of company and too much equity will increase the amount of dividend to bedistributed. Capital gearing ratio is calculated as:Gearing Ratio = Stockholder's equity3

Fixed interest bearing securitiesPoundland had a gearing ratio of 6.21% for the year ended 31st March 2014 whichrepresents greater financial stability of company. Firm had less interest bearing securities ascompared to owner's equity. Thus, Poundland is said to be a low geared company for this year. Forming a strong capital structure is a necessity for company as it forms the basis for alldecisions that are undertaken by company whether financial, growth related or any otherpurpose. Gearing ratios are calculated to analyse the capital structure of company which is ofgreat significance to all the stakeholders including investors, lenders and creditors. On the basisof gearing ratios, stakeholders analyse the growth, financial strength, effect of financial cost onprofitability and various other factors of company (Lee, 2014). These ratios are useful to variousstakeholders in the following ways:Investors: Investors means shareholders who had invested their money in company in theform of equity capital and company in return distributes the dividend to them. Shareholders usegearing ratios for evaluating the ways in which many earnings are available for their distributionafter meeting debt finance cost. They analyse the financial strength of company through gearingratios (Madura, 2007).Poundland had less fixed income bearing securities as compared to owner’s equity i.e.less finance cost are borne by company resulting in increase in profits of the firm. Due toincrease in profit, shareholder’s expectations for dividend also raised, thus, dividend yield ofcompany had increased to 1.09%.Lenders: Lenders include individuals or any institutions that provide funds to companywhich are required to be repaid by the firm over a certain period of time on the payment offinance cost. These are categorised as debt funds as company is obliged to pay the interest cost.Lenders need clear distinction between debt and equity in financial statement to analyse thecapital structure of company as they will hesitate and are unwilling to provide funds to a highlygeared company (LLP and E., 2008). Poundland position from the viewpoint of lenders is good because company is currentlyhaving less fixed income bearing securities i.e. having fewer obligations to pay finance charges.4

CURRENT ISSUES IN FINANCIAL REPORTING ASSIGNMENT

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By student name
Professor
University
Date: 25 April 2018.
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Table of Contents
Background and Abstract............................................................................................................................3
Question 1: Outstanding issues in Dynamics Co. Ltd financial statements..................................................3
Question 2: International framework for financial reporting......................................................................5
References...................................................................................................................................................8
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Background and Abstract
In the given assignment, various accounting issues being faced by Dynamics Co. Ltd., one of the listed
companies manufacturing and distributing premium security equipment has been mentioned. Though
the company has prepared its annual financial statements in accordance with the International Financial
Reporting Standards (IFRSs) but there are some outstanding issues relating to revenue recognition and
the measurement and recognition of the intangible assets in the books of accounts, all of which has
been discussed and analysed along with the calculations1. Furthermore, in the second section of the
assignment, it has been highlighted as to how the international framework for financial accounting and
reporting helps in resolving the current accounting issues being faced by regulators and practitioners.
Question 1: Outstanding issues in Dynamics Co. Ltd financial statements
a. In the given case, the company has introduced a special promotion strategy named as
“Something for free” as per which free maintenance services will be provided to the customer
for the first 2 years. On 1st October 2017, the company sold goods to hypermart chain for an
amount of $4.4 million whereas the list price would have been $5 million normally2. A two-year
maintenance contract normally is sold for $0.5 million. The case is governed by IFRS 15 on
revenue recognition for the companies. As per the standard, there can be multiple elements in a
single contract of sales and each of them needs to be recognised separately. Since the
maintenance contract has been agreed off only for 24 months out of which only 3 months have
passed, therefore revenue to the extent of 3/24th portion of the maintenance should only be
recognised as revenue in the year ending on 31st December, 2017. The remainder of the
amount should be treated as a part of deferred revenue and should be shown in the
consolidated statement of financial position as the services will be provided gradually over the
period of time3. On the other hand, the revenue from the sales of goods should be recognised as
revenue in the income statement immediately as the risk and reward of ownership of the goods
passes to the buyer on delivering the goods.
Here, in the given case the fair value of the sales contract exceeds the overall price of the
contract when the elements of contract are being seen individually and hence it can be
concluded that the discount has been given. Since it is not known that what percentage of
discount has been offered on each of the elements of the contract, it would be reasonable to
apply the same percentage of the discount on both the elements of the contracts4. The
calculation for the same has been shown below:
1 DeZoort, F., & Harrison, P. (2016). Understanding Auditors sense of Responsibility for detecting
fraud within organization. Journal of Business Ethics, 1-18.
2 Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education,
71(4), 411-431.
3 Sithole, S., Chandler, P., Abeysekera, I., & Paas, F. (2017). Benefits of guided self-management
of attention on learning accounting. Journal of Educational Psychology, 109(2), 220. Retrieved
from http://psycnet.apa.org/buy/2016-21263-001
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