PART A: Objectives of financial statements

Financial statement
analysis

Table of Contents
PART A......................................................................................................................................1
(1) Objectives of financial statements...............................................................................1
(2) Conceptual Framework 2010......................................................................................1
(3) Dupont analysis...........................................................................................................1
(4) Changes in working capital.........................................................................................1
(5) Earning quality............................................................................................................2
PART B......................................................................................................................................2
(6) Ratio calculations........................................................................................................2
(7) Interpretations..............................................................................................................2
(8) Recommendation.........................................................................................................2
(9) Cash flow and profit....................................................................................................2
REFERENCE.............................................................................................................................3
APPENDIX................................................................................................................................1

PART A
(1) Objectives of financial statements
Equity investors have the objectives to know the business future earning capacity,
growth potential and security of their holdings. All the investors are very much interested to
get higher amount of returns. Therefore, they make risk and return analysis associated with
their invested funds. Lenders such as bond investors have the objectives to know the short
term as well as long term solvency of the business (Bushman and Smith, 2001). They
determine the security of their funds. Further, they require timely the interest and principal
payments. Their expectations about return are highly depend upon the amount, timing and the
uncertainty of the business future cash flows. Thus, they assess the business ability to get
higher the amount of profitability and its stability. They determine the Government and other
agencies are interested to know the business activities to ensure efficient allocation of
resources so as to improve their tax incomes.
(2) Conceptual Framework 2010
(a) Full disclosure principle says that all the required information for investors, lenders
and other users should be disclosed in the financial statements. Going concern principle
assumes that company will operate for a longer time period (Scott, 2014). Further, Business
entity principle says that all the business is separate from the entity. Therefore, financial
statement shows only the business transaction not the owner's personal transaction.
The principles are more effective than regulating accounting practices and laws. For
instance, generally accepted accounting principles (GAAP) mainly aims at good reporting of
the financial statements. These are the guidelines that help managers to prepare the
company's financial statements. In the absence of these guidelines, managers cannot provide
reliable and consistent information to various stakeholders. However, rules based accounting
only states the rules that must be followed for preparing the financial statements. Rules based
accounting may includes complex set of rules hence, cannot be understandable easily by the
managers. For instance, accounting laws required that financial statements do not include
any incorrect information. It requires that the financial statements do not includes any
fraudulent behaviour without indicating that how it can be eliminated. In case of not
following the rules, business can be levied lawsuits or penalties. However, principles indicate
the way for preparation of the statements. Preparing the statements by following the
accounting principles, business can eliminate the errors and reduce the fraudulent activities.
Thus, it can be concluded that principles are more effective than set rules and laws.
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