Financial Statement Analysis and Reporting

The assignment delves into the world of financial statements, examining their various components (income statement, balance sheet, cash flow statement) and how they are structured. It emphasizes the importance of accurate financial reporting and analysis for understanding a company's performance and financial health. The text includes references to diverse sources like academic journals and textbooks, demonstrating a comprehensive approach to the subject.

MFRD

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1................................................................................................................................................1
1.2................................................................................................................................................2
.....................................................................................................................................................4
1.3................................................................................................................................................4
TASK 2............................................................................................................................................5
2.1................................................................................................................................................5
2.2................................................................................................................................................6
2.3................................................................................................................................................7
3.1................................................................................................................................................8
3.2................................................................................................................................................9
3.3..............................................................................................................................................12
4.1..............................................................................................................................................15
2.4 And 4.2................................................................................................................................15
4.3..............................................................................................................................................17
Conclusion.....................................................................................................................................18
References........................................................................................................................................1

INTRODUCTION
The Financial management is the base of an organizational growth, survival and
sustainability. The decisions taken in an organization are directly affected by the financial
management. With the help of financial statements the current position of the company can be
analyzed, and the resources available can be evaluated with the company's performance.
Financial management is a broad term which includes financial resources such as balance sheet,
profit and loss statement, cash flow statement and budgetary control statement. The financial
statement is prepared at the end of every year so that the financial position of the company
during the year can be analysed and the new plans to improve them can be made.
TASK 1
1.1
A company needs various sources to finance its new business or existing business or for the
expansion of the existing one. The sources of finance for different types of organisation are
different. Presenting here sources of finance for different businesses. New Business: A company for starting up a new business needs some sources of finance,
so that it can establish its business in the market. The company while starting a new
business can use its own saving (Booker, 2006). Other option is to have an equity finance
and debt finance.
1. Equity Finance: The Company can finance its business with equity. The company
can make an initial public offer (IPO). It can sell its share to the public at large and to
the major market holders.
2. Debt Finance: The Company can take loan from banks to finance its business. The
loan can be short or long term and can be secured or unsecured.
 Existing Business: The Company also take on lease or hire purchase, the assets which
are used in the business, for recovering the amount due from the creditors it can take the
services of factor (Broadbent and Cullen, 2012). Retained earnings can also be used as
this option will be available easily for the existing business.
 Expansion of an existing business: The Company needs external and internal sources of
finance in case of expansion. It depends on the area in which the company is expanding
its business. Internal sources of funds will include options such as retained earnings,
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dividends, sale of assets. On the other side external sources of funds will include sources
such as bank, investors, venture capitalist etc.
 Large Business: To finance its business the company can take help of international
financing by way of euro issue, foreign currency loan, ADR and GDR etc.
 Small business: To Finance small and medium sized business the company can take bank
loans, issue equity shares and retained earnings etc. (Goldman and Carrier, 2010).
1.2
SOURCES
OF
FINANCE
ADVANTAGES DISADVANTAGES
1. Share Capital The company can finance by using
its own capital without any cost to be
paid by it. It can obtain large amount
of funds by issuing its own shares to
the public and other investors
(Keller, 2013).
The company has a burden of repaying
the amount taken for issuance of shares
to the shareholders in the case of
liquidation. The company has to share
its profits and losses with the
shareholders and give them control
power in the company.
2. Retained
Earnings
The company can use its own profits
earned in current as well as past
years to finance.
The company uses its profits to finance
its business, the company lefts with
less balance of profits which can be
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useful in the case company suffers
heavy losses (Kitchen and Confetto,
2010).
3. Bank Loans Banks gives loans to the company
without taking any controlling
position in it.
Banks charges huge interest as per
their convenience and the rules made
by Banking Regulatory Act, 1949,
which imposes burden on the
company.
4. Debt Finance With the help of debt finance funds
can be obtained at lesser costs than
the interest chargeable by the banks.
The debts can be secured or unsecured.
In case of unsecured debts the c
collateral security is not taken by the
lender which places the company in a
less secured position.
5. Government
Grants
Government of UK provides a huge
amount of funds to finance the
specific business of the company
(Drake and Fabozzi, 2012).
The company needs to refund the
grand in case the conditions attached to
it are not fulfilled.
6.Lease and
Hire purchase
A company can take assets on lease
and H.P. By paying the lease rentals
during a fixed interval.
The company has to return the asset
back to the lessor on expiry of lease
term. In case of hire purchase the
purchaser will get the ownership on the
day when all the installments have
been paid.
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1.3
Case study examples for three different businesses are as follows:
Small business start-up
 A person named Ryan having interest in making food products, planned to set up a
proprietary business with a low budget. The name he chose for the business is Ryan
Enterprises (Gibson, 2012). The business was settled up by investing owner’s capital.
The proprietor took bank loan to finance the business. The business was also financed by
the relatives of the owner.
A large business expansion
 A company named Wrist & Watch is formed at a large level by issue of equity shares to
the public. The company also issued preference shares and debentures to finance the
business. The company was provided government grant by the government of UK. The
said company also expanded in various countries other than UK. The creditors of the
company are also an external source of finance (Nobes, 2014).
Existing medium sized company
 A group of people having expertise in making crockery started a new venture by
contributing their own capital and by bank loans. They bought an existing medium sized
company named Marc-hell Crockery working in a same business of crockery. The
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company took assets on lease for a fixed time period.
TASK 2
2.1
The company in the seminar will discuss the different aspects of financial management relevant
to the business which is presented below:
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 Share capital: If the company is new in the market issues its shares by way of initial
public offer and if it is an existing can issue via FPO. The company has to transfer the
control of the shares acquired by the shareholders; this is cost to the company
(Vickerstaff and Johal, 2014).
 Bank loan: The Company gets finance from bank by way of loans but it has to pay
interest along with the installment at fixed intervals. The bank does not get any control
for the loan provided to the company. It only charges interest at the prevailing bank rate.
 Retained earnings: The Company earns profits and out of them some profits are
distributed to the shareholders by way of dividend and some are retained by the company
to meet its future requirements (Zoan, 2014). If the company utilizes the earnings there
remains no balance for future. It is the cost the company has to bear.
 Government Grants: The Company has to fulfill all the conditions attached to the grants.
The grants should be recognized only when there is a certainty to receive the grants.
2.2
Presenting here the reasons why financial planning is important for an organization.
1. Cash flow: Cash flows reflect the earnings and expenditures of the company. The
company has operating, financing and investing activities. The cash flows are the
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evidence of company's growth and profits. The company can take tax advantages on the
basis of cash flows (White, 2006).
2. Capital: The Company can evaluate its financial position by capital as well. If the cash
flows are increasing that means the capital is also increasing. The company can make
investments with high capital.
3. Income: The Company is running business only to earn more than its investments. The
financial planning helps earn profits by incurring expenditure. Earnings should be
managed in such a way that tax benefits can be obtained by the company.
4. Investment: The Company makes its financial plan in such manner that it can take right
decisions on investments (Ball, Jayaraman and Shivakumar, 2012). The investment in
the industry where possibility of earning income is high then suffering from losses,
benefits the company.
5. Assets: The main source of income for a company is its asset. Assets and liabilities goes
together. The company makes plan to settle up the liabilities in the manner that it does
not affect the assets. The assets are managed in such a way that they can last for many
years.
2.3
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Different types of information are required for the decision making. These includes as follows:
Costing - This information is produced from different types of costing within the business
(Bhowmik and Saha, 2013). It is related with different types of costs which include variable
costs, fixed costs, overhead etc.
Balance sheet – This reflects information about the assets and liabilities of the company. It shows
the position of the business in terms of liquidity, solvency, profitability etc.
Cash flow statement – It reflects the management of cash inflow and cash outflow. The cash
flow is shown from operating, investing and financing activities.
Income statement – It shows the position of income and expenses at the end of the financial
period (Brigham and Ehrhardt, 2011). The information is used to take decision related to
profitability.
Following stakeholders requires the financial information:
Employees – These people require information for the purpose of taking decisions related to their
career and opportunities.
Customers – These stakeholders always expect better products and services from the company.
Shareholders – They will require financial information for the purpose of taking decisions related
to investment in the shares of the firm.
Government – Government require financial information to make sure that company has not
indulged into any kind of wrong practices.
Creditors – These people expects that business must make timely payments to the creditors.
Tax authorities – These authorities also expect that firm is making timely payment of different
taxes.
3.1
1. Sales Budget Forecast: The sales budget of ABC Manufacturing Ltd. For the period of
six months beginning from July 2007 to December 2007 and the first six months of
which includes actual sales and variances between the budgeted and actual sales. The
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major issues are selling strategy, pricing strategy of the company (Efendi and Swanson,
2007).
2. After Analyzing the budget various issues have been noticed which are as follows :
 The actual and budgeted sales are higher in December so the variance is more in
December. The reason being selling strategy of the company is not appropriate.
 Analysis of the budget concludes that the pricing strategy of the company is not as
per the requirements of the company structure.
 The estimation of sales in the past six months is not correct.
3. Solution to the issues addressed: The Company should adopt the selling strategy in which
the actual sales do not deviate much from the budgeted sales. The company should adopt
the appropriate pricing policy for the products which will lead to favorable variances. The
estimation of budgeted figures should be based on past year figures and should not be
hypothetical (Evans and Porter, 2010).
4. Cash flow Forecast: The aforesaid company has presented the cash flow forecast for the
new business for the year ending 2008. The analysis of forecast draws the following
conclusion:
 The sales in August and December declined because of which the earned less or no
surplus.
 The purchases in the whole year are fluctuating which results in imbalance in the
production of the goods.
 Expenses are more than revenue in few months (Booker, 2006)
 Deficits represent non utilization of resources in few months.
3.2
Table 1 Marginal Cost Sheet
(Figures In UK Pound)
Selling Price 120
(Variable cost)
- Material 52.5
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- Lab our 35.75
- Var. Overheads 10.2
contribution per unit 21.55
No. Of units
Total contribution 161625
(Fixed Cost) 120000
Profit 41625
 Contribution Per Unit : Selling Price – Variable Cost = 21.55
 Break Even point (In Units): Fixed Cost / Contribution Per Unit
120000/21.55= 5568 units (approx.)
 Break Even point (In value): Fixed cost/ pv ratio
120000/17.96= 668213 pounds (approx.)
 Profit volume ratio : Contribution/ Sales
21.55/120*100 = 17.96
 Margin of safety (In value) : Total Sales – Break even Sale
900000-668213 = 231787 pounds
 Margin of safety (In units) : Total sales (in units) – Break even sales (In units)
7500 – 5568 = 1932 units
Table 2Calculation of profits at various sales levels
Sales level(In units) 5000 8000 10000
Total Contribution 107750 172400 215500
Fixed cost 120000 120000 120000
Profit/ (Loss) -12250 52400 95500
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Calculation of Break Even Point :
 When Selling price is increased by 5 pounds
Contribution per unit = 125-98.45=26.55 pounds per unit
Break Even Point = 120000/26.55 = 4520 units
 When Fixed cost is increased by 5000 pounds
BEP = 125000/21.55 = 5800 units
 When Material Cost is Increased by 5 pounds
Contribution per unit = 16.55 pounds per unit
Break Even Point = 120000/16.55 = 7251 Units
Table 3 Comparison of profits of the two customers for Machine X
CUSTOMERS South wood Electrical Westbrook
Engineering
Total Contribution 1755 -
Profit/ (Loss) 1755 -8450
Recommendation: Since the West Brook Engineering is showing loss and the South wood
Electrical is showing Profit therefore the company is recommended to give order for Machine X
to South wood Electrical.
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3.3
Presenting here the detailed analysis of the projects for investment appraisal by the company.
Accounting Rate of Return: Average return during the period/ Initial Investment
Table 4: Calculation of ARR
Project A Project B
Initial
investment 450000 450000
1 180000 60000
2 230000 120000
3 280000 250000
4 120000 250000
Total 810000 680000
Average 202500 170000
ARR 45 37.08
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Table 5 Calculation of Net Present Value
Project A Pv @6% Present value Project B PV @10%
Present
value
Initial
investment 450000 450000
1 180000 0.943 169740 60000 0.943 56580
2 230000 0.889 204470 120000 0.889 106680
3 280000 0.839 234920 250000 0.839 209750.0
4 120000 0.792 95040 250000 0.792 198000.0
Total 704170 571010
NPV 254170 121010
Payback Period: Initial Investment/ Cash flow per period
Table 6 Calculation of Payback Period
Year Project A Project B
Cash flow (£) Cumulativ e value Cash flow (£) Cumulative
value
Initial Cost 450000 450000
1 180000 180000 60000 60000
2 230000 410000 120000 180000
3 280000 690000 250000 430000
4 120000 810000 250000 680000
For uneven cash flows,
A = last year value with a negative cumulative cash flow
B = absolute value of cumulative cash flow at the end of the period A
C = total cash flow while the period after A
For project A = 2+
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= 2.05 years
For project B = 3+
= 3.02 years
Internal Rate of Return
Table 7 Calculation of IRR
Project A Project B
Initial
investment -450000 -450000
1 180000 60000
2 230000 120000
3 280000 250000
4 120000 250000
IRR 29.20% 15.02%
Recommendation: As per the calculations shown above the following should be recommended
to the company:
 Payback Period: The payback period of project B is more than project A, so project A is
recommended on the basis of Payback period.
 Internal Rate of return: IRR of project B is more than project A so Project B is more
Viable.
 Accounting rate of return: Since the ARR of project A is more so project A should be
accepted (Broadbent and Cullen, 2012)
 Net Present Value: On the basis of NPV method, NPV of project A is more, so Project A
should be accepted by the company.
4.1
The three financial statements are as follows:
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 Income statement – It shows the income and expenses for the business at the end of the
accounting period (Drake and Fabozzi, 2012).
 Cash flow statement – It shows the management of cash inflow and cash outflow within
the business (Statement of Cash Flows, 2000).
 Balance sheet – It shows the position of assets and liabilities at the end of the financial
period.
2.4 And 4.2
Income statement
Table 8 Format of Income Statement
PARTICULARS
Revenue:
Gross Sales
Less : Sales Returns / Allowance
Net Sales
Cost of Goods Sold:
Purchases
Delivery Charges
Cost of goods sold
Gross sales profit (Loss)
Expenses:
Expenses 1
Expenses 2
Expenses 3
Total Expenses:
Net Operating Income
Other Income:
Income 1 (Format of a Financial
Statement, 2013)
Income 2
Income 3
Total Other Income:
Net Income (Loss): *( Format of a Financial
Statement, 2013)
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
Balance Sheet
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Table 9: Format of Balance Sheet
Liabilities Amount Assets Amount
Current Liabilities
Creditors
Bills Payable
Bank Overdraft
Fixed Liabilities
Bank Loan
Secured Loan
Other long term Loan
Capital and Net Profit
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
Current Assets
Cash in bank
Accounts receivable
Inventory
Prepaid Expenses
Other Current Assets
Total Current Assets
Fixed Assets
Machinery &
Equipment’s
Furniture & Fixtures
Leasehold Improvements
Land & Buildings
Other Fixed Assets (Less
Accumulated
depreciation)
Total Fixed Assets
Other Assets
Intangibles
Deposits
Goodwill
Other
Total assets
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
The format used by different types of businesses are:
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Sole trader – It is essential for the sole traders to prepare all the financial statements. It depends
upon their requirement and willingness.
Partnership – It is essential for the partners to prepare individual capital accounts. The other two
statements are also prepared according to the Partnership Act.
Limited companies – It is important for public limited firms to prepare all the three financial
statements and to disclose them in front of the public.
Non-profit making – The purpose of these firm is not to make profits. It is not mandatory for
them to prepare all the financial statements.
4.3
Ratios Formula 1995 1996
Liquidity
Ratios
Current
Ratio = 3.33
Quick
Ratio
Activity
Ratios
Fixed
assets
turnover
Ratio
Total
assets
turnover
Ratio
Profitability
Ratios
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Gross
Profit
Ratio
Net Profit
Ratio
Ratio analysis
Liquidity Ratios – The liquid ratios are reflecting a declining trend. From this it can be
interpreted that company is facing issues in meeting its short term liabilities.
Activity Ratios – These ratios are showing a positive trend into the business. It reflects that firm
is capable of effectively utilizing its assets for profitability and returns
Profitability Ratios – The ratios are showing a declining trend. Gross profit ratio has decreased
which shows that company is not been able to manage its operational affairs. Net profit ratio has
also decreased which reflects that there is a need to focus on improving the sales and
profitability.
Conclusion
From the above study it can be concluded that finance is the backbone of the business. The
sources of finance are to be selected on the basis of size and scale of the business. The Company
is running business only to earn more than its investments
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References
Ball, R., Jayaraman, S. and Shivakumar, L., 2012. Audited financial reporting and voluntary
disclosure as complements: A test of the confirmation hypothesis. Journal of Accounting
and Economics. 53(1). pp. 136-166.
Bhowmik, K. S. and Saha, D., 2013. Sources of Finance. Financial Institution of the
Marginalized India Studies in Business and Economics. Pp. 61-71.
Booker, J., 2006. Financial Planning Fundamentals. CCH Canadian Limited.
Brigham, F. E. and Ehrhardt, C. M., 2011. Financial Management: Theory and Practice. 8th ed.
Cengage Learning.
Broadbent, M. and Cullen, J., 2012. Managing Financial Resources. Routledge.
Drake, P. and Fabozzi, F.J., 2012. Analysis of Financial Statements. John Wiley & Sons.
Efendi, J. and Swanson, E. P., 2007. Why do corporate managers misstate financial statements?
The role of option compensation and other factors. Journal of Financial Economics.85
(3).pp 667-708.
Evans, M. and Porter, R., 2010. Real estate financial reporting and accounting. Journal of
Property Investment & Finance. 28(5). Pp. 105-111.
Format of a Financial Statement, 2013. [Online]. Available through:
<http://smallbusiness.chron.com/format-financial-statement-3768.html>. [Accessed on
17th December 2015].
Gibson, C., 2012. Financial Reporting and Analysis. Cengage Learning.
Goldman, C. and Carrier, J., 2010. Joint Financing in the New NHS: Thinking to the Future.
Journal of Integrated Care.18(6).pp.27 – 34.
Keller, A., 2013. Finance & Financial Management. GRIN Verlag. Publication
Kitchen, J. P. and Confetto, G. M., 2010. Financial resources and corporate reputation: Toward
common management principles for managing corporate reputation. Corporate
Communications: An International Journal. 15(1). pp.68 – 82.
Nobes, C., 2014. International classification of financial reporting. Routledge.
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