Understanding Financial Statements

This assignment delves into the fundamental aspects of financial statements, providing detailed explanations of each component – income statement, balance sheet, and statement of cash flows. It outlines key elements within each statement, such as assets, liabilities, equity, revenue, expenses, and cash flow activities. The assignment also emphasizes the importance of notes to financial statements, which offer supplementary information for a comprehensive understanding.

MANAGING FINANCIAL
RESOURCES & DECISIONS

TABLE OF CONTENTS
1.3 Evaluating the appropriate sources of finance......................................................................1
2.3 Assessment of information required for decision on financial takeover through:................2
2.4 Impact on financial statements on basis of venture capitalist and finance broker................3
4.1 Key components of financial statements...............................................................................3
REFERENCES................................................................................................................................5

1.3 Evaluating the appropriate sources of finance
Bank loan
Advantages
 Loans could be tied for lifetime of equipment or with assets borrowing money to repay.
 It could be easily procure for medium and short term financing as well (Kraemer-Eis &
et.al. 2018).
 The interest paid on bank loan is replicated as tax deductible expenditure.
Disadvantages
 There are various bank loans which carries prepayment penalty.
 Too much borrowing as bank could lead to reduced cash flow. With context to various cases, bank does not disburse entire amount of applied loan for
paying lower cash comparatively to demanded loan.
Angel investors
Advantages
 These provides required startup funds and helps for filling equity gap.
 Angles makes various flexible business agreements along with contributing experience
and knowledge.
 They are capable for undertaking high risk and even they do not need any monthly fees.
Disadvantages
 They rarely offer additional investment.
 With context to exchange for investment, they might require certain percentage of equity
or stake as they could be expensive (Kliestik & et.al. 2018). The interference of angel might lead to problems.
Venture capital
Advantages
 The innovative projects are funded via venture capital which provides huge profitability
for long run perspective.
 It offers valuable information, technical assistance, resources etc. for attaining success.
Disadvantages
 Its benefit from funding could be realized for only for long term not for short term.
 It is uncertain form of financing.
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2.3 Assessment of information required for decision on financial takeover through:
The objective of financial statements is to give information related to financial position,
performance and alteration in financial position of enterprise which is highly useful for broad
range of users to make economic decisions.
The partners: These are major users for financial statements as they provide information
on distribution of net income among partners. On basis of decision making, information could be
combined with profit and loss statement and balance sheet (Osadchy & et.al. 2018). As per
desire, it could be separated and even alteration could be extracted in statement of owner's equity
and shows income distribution and investment withdrawal as well.
Venture capitalist: In the above scenario, venture capitalist are funding the business as
financial statements helps in providing information for assessing financial strength of
organization as it this would lead to undertake logical investment decisions. In the similar aspect,
they monitor investments along with appropriate evaluation of performance of management.
They also assess risk and return of their investment decisions and to assess viability to finance
that company. They might use financial information to predict future dividends on basis of
profits disclosed and risk gauged with it. Lastly, prospective venture capital performs investment
analysis for valuing its financial; strength and power.
Finance broker: These are considered as vital users of financial information as they
evaluate financial health and earnings potential of organization. On basis of giving
comprehensive view of organization's financial position, financial analysis is performed with
supplied information in financial statements. It is used for formulating contractual terms among
other business and company itself. There is presence of variable in financial statement such as
debt to equity ratio which is highly significant for taking decision about amount of capital for
long term perspective which is mandatory to raised. In the same series, it also provides
investment solutions to other companies as it is very difficult to decide right field where financial
resources might be channelized. With context of this situation, appropriate guidelines are framed
relate to financial statements of other companies. Furthermore, financial report are of immense
application for making agreements of collective bargaining and even they help business with
reference to working capital along with issuance of debt security.
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2.4 Impact on financial statements on basis of venture capitalist and finance broker
Venture capitalist: These are highly contributing to business and they are impacting
financial statements whereas assets of companies are on one side of sheet and then liabilities and
capital are entered on other. Further, the exact set of line items listed on statement of financial
position highly depends on business transaction of company. Capital investments are replicated
as aggregate of money put in business for producing margin (Lin & et.al. 2018). In simple words,
it could be elaborated that its capital would be raised in balance sheet and even reported as
capital expenditure as investment activities on cash flow statement.
Finance broker: In the above scenario, broker has charged 1% fee on secured amount
along with interest on loan would be 2% APR payable over 10 years. It is recorded as expense as
an offsetting liability and debit in expense account. With context for paying it, it is directly
acceptable for classifying as part of expense in profit and loss account which is not good for
organization. In the similar aspect, it will give impact on balance sheet as brokerage account.
4.1 Key components of financial statements
c) Statement of changes in equity and gains
The main components of this statement are:
Opening balance: It represents balance of reserves of shareholder's equity at initial
phase of comparative reporting period reflected in previous period of statement of financial
position. This balance is unadjusted with context to correction of previous error modified in
current period.
Effect of changes in accounting policies: Adjustments in reserves of stakeholder and
restating opening equity to amount arrived with application of new accounting policy.
Restated balance: It shows equity attributable to stockholders of comparative period
with alterations in accounting policies and errors state above.
Changes in share capital: Issue of share capital during period must be aggregated in this
statement where shares redemption should be deducted therefrom.
Dividends: This payment of dividend issued or announced with period should be
deducted through shareholder equity reflects distribution of wealth attributable for stockholders.
Income/ Loss for period: It reflects profit or loss directly attributable to shareholders
within period as stated in income statement.
d) Statement of financial position
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This statement comprises key elements which are stated below:
Assets: It is something that any business controls and own in order for deriving economic
benefits from its application. This is also categorised with reference to nature such as tangible
and intangible, inventories balance, trade receivables and cash and cash equivalents.
Liabilities: It is an obligation where business owes to someone along with involvement
of cash transfer with other resources as well. It is classified in balance sheet as non current and
current liabilities depends on duration over entity which intends for settling liability. In the
similar aspect, it is categorised on basis of nature such as trade and other payables, short term
borrowings, current tax payable and long term borrowings.
Equity: It is replicated as what is owed by business to its owners whereas equity is
derived through deducting total liabilities from its aggregate of assets (Campbell, Khan& Pierce,
2018). In simple words, it reflects residual interest in business which directly belongs to owners.
 Notes to financial statement
It reflects about important disclosure of items which accompany financial statements
such as profit and loss, balance sheet and statement of cash flows. In order to this, business while
preparing explanatory notes it shows:
Basis of presentation
Significant accounting policies
Depreciating assets
Inventory valuation
Disclosure of subsequent events
Intangibles explanation
Consolidate financial statements
Spell out Employee benefits
Reveal contingencies
Debt reporting
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REFERENCES
Books and Journals
Campbell, J. L., Khan, U., & Pierce, S. (2018). The effect of mandatory disclosure on market
inefficiencies: Evidence from Statement of Financial Accounting Standard Number
161. Columbia Business School Research Paper. (17-94).
Kliestik, T. & et.al. (2018). Searching for key sources of goodwill creation as new global
managerial challenge. Polish Journal of Management Studies. 17.
Kraemer-Eis, H. & et.al. (2018). European Small Business Finance Outlook: June 2018 (No.
2018/50). EIF Working Paper.
Lin, S. & et.al. (2018). Is other comprehensive income reported in the income statement more
value relevant? The role of financial statement presentation. Journal of Accounting,
Auditing & Finance. 33(4). 624-646.
Osadchy, E. A. & et.al. (2018). Financial statements of a company as an information base for
decision-making in a transforming economy. European Research Studies Journal. 21(2).
339-350.
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