Financial Statements and Budgetary Control

This report covers the purpose of accounting function, ethical rules and regulations, financial statements, financial ratios, cash budget and advantages and disadvantages of budgets and budgetary planning for an organization. It includes a detailed analysis of 'Moore Kingston Smith' and Village Wide Catering Company.

FINANCIAL
STATEMENTS AND
BUDGETARY
CONTROL

Table of Contents
INTRODUCTION...........................................................................................................................3
P1. Examine the purpose of the accounting function of an organisation ...................................3
P2. Describe the various functions of accounting established inside the company which is
related to its various ethical rules and regulations. ....................................................................4
P3. Compose the financial statements with the help of the provided trial balance for sole
traders, partnerships and not-for-profit organisations, to join the accounting principles,
conventions and standards..........................................................................................................6
P4. Calculate the different types of financial ratios using final accounts of Village – Wide
Catering Company......................................................................................................................8
P5. Perform a Comparison of the presentation of the company over time while using the
financial ratios...........................................................................................................................10
P6. Prepare a cash budget from given data for an organisation using a spreadsheet................12
P7. The advantages and disadvantages of budgets and budgetary planning and control for an
organisation...............................................................................................................................12
CONCLUSION .............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
The primary purpose of the financial statements is to provide the financial information to
the user of those informations in making financial decision. They do not provide non-financial
information to the user whether they are relevant for making economic decision. Financial
statements are prepared on the basis of going concern assumption. Financial statements contain
Balance sheet, Profit and loss and cash flow statement. All the elements of the financial
statements are related each other because they show various aspects of same transaction.
Budgetary control is managing income and expenditure. It is prepared for future on the basis of
past data. It is a control technique where budgeted results are compared with actual results. In
this report, a detailed analysis has been performed on the accounting function of 'Moore
Kingston Smith' which is a leading UK based firm. Further in this report preparation of financial
statements of Village Wide Catering Company and also calculated of financial ratios and
comparison of the organisation performance using financial ratio. Further in this report
preparation of cash budget and discuss the benefits and limitation of budgets and budgetary
planning (Cannizzaro and et.al, 2018).
MAIN BODY
P1. Examine the purpose of the accounting function of an organisation
Accounting functions means the tracking, recording, storing and summarising of a
company's financial transactions. The company maintains a systematic record of transaction so
that they can make accessible for audits. These financial statements help management in
decision-making. The company can use financial statements to identify the weakness and
strength of the organisation.
The main objective of the accounting is to providing the information to the owners and
management so that they will take better decision of the business entity. The entity can use
reports, budget and cost data for increased profits and reducing cost (Bruno, and Lapsley, 2018).
The basic function of the accounting they are as follow-
1. To keeping records- It is the basic of the accounting. The accounting is helped to
maintain day to day transaction such as sales, purchase, receipts and payments.

2. Preparing budgets- The company prepares the budget to determine the difference
between actual results and budgeted results.
3. Complying rules and regulation- Accounting helps that the company follows proper rules
and regulations which is related to taxation and financial reporting.
4. To deduct fraud and error- The accountant helps to deduct fraud and error and
determined no wastage of money occur in the company.
5. Performance reviewing- Accounting reviews daily financial performance and reducing
wastage and increase overall performance of an organisation (Aobdia, 2019).
'Moore Kingston Smith' which is leading in UK, the accounting team provides a full details
of business, rules and regulation to their customers so that they can take better in the business.
The main function of this organisation to providing valuable services, the customers can change
the world. It is used two forms of accounting:
1. Managerial Accounting- This accounting is used for the purpose of controlling the
internal function of the organisation. To use of managerial accounting, the owner can
save the future and take the better decision.
2. Financial Accounting- To analysis the past data with the objective of determining the
organisation value. Shareholders use this information and determined the value of an
organisation.
P2. Describe the various functions of accounting established inside the company which is related
to its various ethical rules and regulations.
Accounting ethics includes the following particular rules and guidelines fixed by the
governing institutions which must be followed by each and every individual who is associated
with accounting as a subject to prevent and preclude the misuse of the financial data, information
or the administrative or managerial position. There are various ethical rules and regulations
established in accounting to prevent any misuse of the authority and managerial positions or any
unethical constraints that may occur in the normal working of the society (Abdullayev and et.al,
2019). Access to Data and Privacy Issues: An accountant has very high access to a lot of
information and subject matters that are heavily confidential to the respective parties,
which is very necessary to be protected at all costs. Failing to protect such necessary
informations and not keeping such data confidential for the purpose of taking benefit of

any future development or drop in the company's valueis among the major issues faced in
accounting. Communicating and distributing any such information which is related to the
company to any outsider or making it realizable for the competitors to steal or purchase
company's data or confidential information through neglect is also an ethical issues
(Elghaish and et.al, 2020).
 Conflicts of Interests : This is a very prevalent and common ethical issue in almost all
the organisations in today's times. For example: if the higher authorities of the
organisation receive their appraisals based on the stock prices of the company that prevail
in the market, it is very possible that all the stock decisions that are made by the higher
authorities are dependent on the base to favour those decisions which increase the value
of company's stocks. They will favour and try for this situation even if the increase in
these stock prices is not good or not in favour of the company and its financial health.
This clearly builds for the biases that keep building in the culture of the company and it
creates a bulk of problem that keep occurring with time (Jia and et.al, 2020).

P3. Compose the financial statements with the help of the provided trial balance for sole traders,
partnerships and not-for-profit organisations, to join the accounting principles, conventions
and standards.

P4. Calculate the different types of financial ratios using final accounts of Village – Wide
Catering Company.
Financial ratios- Ratio is a mathematical expression of the relationship between two
accounting figures. It is used by managers, investors and creditors of an organisation. Ratio helps
to determine the fair price of share. To use of ratio, the financial analysts determine the strength
and weakness of an organisation (Kallio and et.al, 2020). The various types of ratios are as
follow:
Profitability ratio- It measures the operational efficiency of the firm. These ratios are used to
maximize the firm's value.
 Gross profit ratio- It measures the percentage of each sale in rupees remaining after
payment for the goods sold. It determines the relationship between sales price, volume
and cost. It is favourable sign of good management.
 Net profit- It helps to create the relationship between net profit and sales of the firm. It
finds the profit after meeting all expenses. A high net profit ratio indicates positive
returns from the business (Mnif Sellami and et.al, 2019).
Liquidity ratio- It is known as short term solvency ratio. It determines the ability of the business
to pay its short term liabilities. It includes -
 Current ratio- It is the best ratio for calculate short term solvency. It determines the
businesses have current assets to pay its current liabilities with a margin of safety.

 Quick ratio- It is also called acid test ratio. It is a much more conservative measure of
short term liquidity than the current ratio. Quick ratio determines if all the sales revenue
should disappear then business could meet current obligations with the convertible quick
funds (Montes and et.al, 2019).
Solvency Ratios: Also called financial leverage ratios, these ratios help in comparing an
organisation's level of debt and liabilities in concern to its assets, equity, and incomes, to
measure the probability of an organisation remaining without an aim or an objective in the long
run in the course of making payments for both long-term debt as well as the interest on it.
Examples of solvency ratios are: Debt-equity ratios, interest coverage ratios.
 Debt equity ratio: This ratio is a computation of the combined involvement of the
creditors and the shareholders or owners of the business in the capital employed in
business.
Assets Usage- It is also known as turnover ratio. It measures of how effectively a company
converts its assets into sales. It includes-
 Asset turnover ratio- It is inversely related to net profit margin. To use of these ratio the
investors can determine which is more attractive business (Nuti and et.al, 2018).

 Inventory turnover ratio: It helps to calculate how many number of times the stock is
sold or utilised in a fixed time period. It is computed to assess and check the amount of
excessive inventory that is present in the company as compared to its sales level (Payne
and et.al, 2018).
P5. Perform a Comparison of the presentation of the company over time while using the financial
ratios.
1. Current ratio Interpretation- The ideal current ratio for organisations is 2:1. From the
ratio calculations made above, it can be concluded that the current ratio of the company
for year 2020 is 2.11 which shows excess of current assets over the current liabilities. In
2021 it is 1.5 which shows that in this year, the amount of current assets with the
company reduced with a significant number and it needs to work on increasing the
current assets with the company so that there is no shortages of such cash and cash
equivalents with the company in the future period (Roussy and et.al, 2018).
2. Quick ratio Interpretation- From the above computation of quick ratio for the two years
in comparison to the ideal ratio of 1:1, it can be seen that in 2020 the company had
better positioning with respect to its liquid assets. Although in 2021 the company fell
short of the liquid assets and the current liabilities also increased and the ratio fell down
as compared to the ideal ratio.

3. Gross profit ratio Interpretation- A gross profit margin between 50-70 percent is
termed to be healthy for company. The business has the gross margin of 44% and 53%
in the two years as 2020 and 2021 respectively. A high gross profit margin points out
that the business is able to make healthy amount of profit on the company revenues
when the cost of overheads is under control of the business. This shows that the business
retains 44% and 53% portion of each dollar that the company retains (Schick, A., 2018).
4. Debt equity ratio Interpretation- The ideal debt to equity ratio is between 1.5 to 2 in
some financial and capital intensive companies. In this organization, ratio is 0.45 in
2020 and 0.51 in 2021. in both the years the ratio is lesser as compared to the ideal ratio
which concludes that the company has $0.45 of debt for every $1 of the equity invested.
In 2021 it is $0.51 for every $1 invested. This low ratio states that the company heads
strong with its shareholders invested amount as the equity of the company's shareholders
is higher, and there occurs no requirement of any amount to be financed from the outer
sources in the form of debt to fund the business and operations for growth.
5. Asset turnover ratio Interpretation- The higher the asset turnover ratio is, the better is
the situation of the company. Ratio which is higher than 1 is good for the organization.
The asset turnover ratio for both the years 2020 and 2021 is greater than 1 with 2.9 and
2.66 for the two years respectively. This tells that the business is able to generate
enough revenue for its working (Shahab and et.al, 2020).
6. Inventory turnover ratio Interpretation- This ratio is ideal when the turnover is around
4 to 6 generally. A low turnover connotes weak sales and perhaps excess and redundant
inventory which can also referred as overstocking. The company turnover for 2020 and
2021 is 22.73, 18.66 respectively. This number is way too high than the ideal or the
required amount of ratio. This tells that the company has invested very high amount in
its inventory stock which is much high than what is required to meet the demands.

P6. Prepare a cash budget from given data for an organisation using a spreadsheet.
P7. The advantages and disadvantages of budgets and budgetary planning and control for an
organisation.
Budgets- Budgets play an important role in the organisation. It is prepared for the future
on the basis of past data. Different types of budgets are prepared in according to business
requirement. It is a detailed plan of all the economic activities of a business. Budgeted results are
compare with actual results if any variance come out then budget should have revised. It is
continuous activities in the organisation. The main objective of preparing budget is to achieve
the business objective.
Budgetary Planning- Planning is a beginning activities of an organisation. It is deciding
the objectives of an organisation and how to achieve it. It is a statement of what should be done,
how it should be done and when it should be done. The process of budget starts with the
planning and ending with to achieve such desire goals.
Budgetary control- It is the process of controlling monitoring and evaluating the firm's
goals. It is the system of management control and accounting in which all the operations are
forecasted and planned in advanced. To providing a basis for revision of current and future

policies. Budgetary control ensures to optimum use of available resources to maximise of profit
or production. It provides the yardstick the actual results are compared with budgeted results.
Advantages: The advantages of budgets, budgetary planning and controlling are as follows:
 It ensures the business activities in an efficient and effective manner.
 It is a strong instrument which is used by business to control the expenditure.
 To evaluate the performance of the organisation by using budgetary control.
 It reveals the deviation of the actual from the budgeted figures after making a comparison
and communicating the deviation to management.
 Budgets helps in the review of current trends and framing of future policies.
Disadvantages: The Disadvantages of budgets, budgetary planning and controlling are as
follows:
 It is based on past data so it cannot provide accurate and correct information.
 It cannot be executed automatically. Some basic steps are to follow before preparing
budget.
 It is not suitable for small organisation because it is costly and time taken process. It
starts from the collection of information and end with performance analysis.
 Budget is managerial tool and it applies for management to get benefited but it is not a
technique for good management.
 The external and internal factors affect the budget so it is very rigid document.
CONCLUSION
From the above report it can be concluded that accounting functions are an essential part
of every business enterprise as it helps to store, record, maintain all the valuable information and
maintain its confidentiality. It also briefly explains the ethical rules, regulations and constraints
that appear in the normal functioning of the company. The report contains calculation and
interpretation of various financial ratios and the cash budgets that help the company in its
working to maintain the accounts and reports of the company.

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