Managerial Accounting

This document provides an overview of the key financial statements required for analysis in managerial accounting. It explains the purpose and elements of the income statement, cash flow statement, and balance sheet. It also discusses how these statements can be used for investment decision-making. Additionally, it explores the qualitative factors that investors should consider, such as corporate culture, corporate governance, code of ethics, and internal control system. The document concludes with a list of references for further reading.

Running head: MANAGERIAL ACCOUNTING
Managerial accounting
Name of the student
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Table of Contents
Answer to part A........................................................................................................................2
Answer to part B........................................................................................................................4
References..................................................................................................................................6

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Answer to part A.
The key financial statements that are required for the analysis are income statement,
cash flow statement and finally, the balance sheet.
As per the views of Kim, Kraft and Ryan (2013), the income statement provides idea
on the income or loss of the company. This helps in identifying the income at every level
such as EBIT has been recognized to identify the income after incurring operating expenses
and for identifying the income at the next stage where the interest and tax have been paid the
PAT has been identified. The cash flow statement helps the analysis to identify cash available
from cash inflow and cash out flow after a certain period. Lastly, the balance sheet helps in
identify the company’s current position in the market as from the balance sheet the idea of the
assets and liability can be identified.
The elements that are included in this financial statement has been mentioned below:
Income statement: This includes the revenue of the company followed by the cost of goods
sold. This allows to understand Alan’s business’s gross profit. The EBIT has been derived
from the inclusion of the operating income and exclusion of the operating expenses from the
company gross profit. This helps in identifying the operating income or operating loss.
Further,the operating profit subtracts the interest and tax from the EBIT so that the
company’s net profit or the PAT can be identified. In addition, the income statement includes
the value of EPS which shows the basic and diluted EPS (Turktas et al., 2013).
Cash flow statement: The cash flow statement includes the activities such as operating
activities, financing activities and investing activities. The operating activity includes the
operational activities that are undertaken by the company through buying and selling,
providing services. This focuses on the cash inflow and out flow from the company’s main
business activities(Call, Chen& Tong, 2013). Financing activity helps in identifying the

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company’s cash inflow from capital raise through some external activities. The financing
activities includes the sale of stocks, repurchase of the company stocks, issuance of debt,
repayment of debt. Payment of dividend, repayment of investors. The investing activities
shows company’s income capability through involving some internal and external investment
activities. This shows the changes into the company’s cash position resulting from the
investment gains and losses. The investing activities includes such activities due to which
changes in company structure or size can be recognized.
Balance sheet: The balance sheet helps to analyse by generating idea on the company’s
current position into the market as this shows the company’s available liquidity in hand to
meet the company’s short term liability. The balance sheet represents the company’s fixed
assets and current asset for assessing the total assets and on the other side the current and
non-current liability represents the company’s total debt or liability. Any changes into the
company’s cash flows statement puts affects in liquidity position of the balance sheet (Kapan
& Minoiu, 2013).
For the investment decision, the income statement provides idea on the company’s
capability to earn profit at the each stage. The investors can evaluate the company’s EPS
through which the investment return on per share basis have been identified. Per share value
can be evaluated here. The cash flow statement helps in taking decision through
understanding the company’s capability to generate liquidity from their activities. The
liquidity position can be judged by the investors as the over liquidity position generates
possibility of losing company’s valuation. If the fixed assets get reduced compared to current
assets this reduces the company’s valuation into the market. Through a balanced liquidity
position this gives idea of effective payment to the debt holders and creates opportunity to
reduce risk. The positive cash and cash equivalent balance helps in identifying the company’s
enhanced investment opportunity (Martínez-Sola, García-Teruel & Martínez-Solano, 2013).

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Identifying the company’s financial statement helps the investor to formulate different
ratios. Efficiency ratios, where the company’s capacity to earn from employing assets and
inventoriescan be judged. On the other hand, the profitable ratios derived from the income
statement helps in identifying how profitable the company is, as this gives implication on the
profit on investment. The leverage ratio can be calculated to understand the company capital
structure. Information derived from the balance sheet, this ratio helps the investors to
evaluate the risk associated with the company
Answer to part B.
The qualitative approach for the decision making requires identifying the corporate
culture, corporate governance, code of ethics and internal control system of the organisation.
Corporate culture: The investor needs to identify the relation between the company
management and employees. This denotes the identification of the values of the organisation
and its measures taken to maintain corporate culture (Guiso, Sapienza & Zingales, 2015).
Corporate governance: While making the investment decision the investor needs to identify
the principles that the company has undertaken. This includes the identification of the
company’s working policy and the capital structure. Through this any misconduct can be
identified (Claessens &Yurtoglu, 2013). The corporate governance includes the identification
of the management style where the audit process also can be evaluated.
Code of ethics: Identifying the code of ethics can help the investors to understand the mission
and vision of the company. This helps in identify the company’s objective. Code of ethics
refers the analysis of the possible ethical dilemma running into the company. This helps to
identify the company’s responsibility towards maintain good faith in management and into
the work process. Material misstatement can be evaluated through this analysis.

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Internal control system: Analysing the internal control system Alan’s business can help the
investor to identify the internal working process. This helps in identifying the company’s
strength and weakness towards accomplishing business objective. Through this process the
effectiveness of the internal control system can be judged.
Analysing the above mentioned qualitative information helps in evaluate the Alan’s
business sustainability. The sustainability report helps the investors to understand the
business responsibility towards the society. Analysing the sustainability report helps the
investor to understand the long term policy that the company has undertaken (Dyllick &
Muff, 2016). Since this has been identified that analysing above mentioned three financial
statements are much effective towards making any investment decision into the Anan’s
business.

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References
Call, A. C., Chen, S., & Tong, Y. H. (2013). Are analysts' cash flow forecasts naïve
extensions of their own earnings forecasts?. Contemporary Accounting
Research, 30(2), 438-465.
Claessens, S., &Yurtoglu, B. B. (2013). Corporate governance in emerging markets: A
survey. Emerging markets review, 15, 1-33.
Dyllick, T., & Muff, K. (2016). Clarifying the meaning of sustainable business: Introducing a
typology from business-as-usual to true business sustainability. Organization &
Environment, 29(2), 156-174.
Guiso, L., Sapienza, P., &Zingales, L. (2015). The value of corporate culture. Journal of
Financial Economics, 117(1), 60-76.
Kapan, M. T., &Minoiu, C. (2013). Balance sheet strength and bank lending during the
global financial crisis (No. 13-102). International Monetary Fund.
Kim, S., Kraft, P., & Ryan, S. G. (2013). Financial statement comparability and credit
risk. Review of Accounting Studies, 18(3), 783-823.
Martínez-Sola, C., García-Teruel, P. J., & Martínez-Solano, P. (2013). Corporate cash
holding and firm value. Applied Economics, 45(2), 161-170.
Turktas, B., Georgakopoulos, G., Sotiropoulos, I., & Vasileiou, K.Z. (2013). Reporting
comprehensive income: Reasons for reporting choices and investor
reactions. International Journal of Economics and Finance, 5(4), 1-20.