Victoria Babies Financial Analysis and Stakeholder Interests

The assignment provided is about analyzing the financial performance of Victoria Babies, a business entity. It involves extracting different sets of information from the financial statements for various stakeholders, including suppliers, lenders, employees, and Her Majesty Revenue and Tax. The analysis includes assessing the company's solvency position, profitability, credit rating, cash management, and ability to bear financial burden. The assignment also recommends converting the existing structure of general partnership to Limited Liability Partnership (LLP) for Victoria Babies.

MANAGING FINANCIAL
RESOURCES

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Different kind of business structure and their differences...........................................................1
TASK 2............................................................................................................................................2
Explain management and financial accounting...........................................................................2
Key difference between management and financial accounting..................................................2
TASK 3............................................................................................................................................4
Financial statements.....................................................................................................................4
Illustration of annual accounts.....................................................................................................5
Income statement......................................................................................................................5
Balance sheet............................................................................................................................5
Statement of cash flow.............................................................................................................6
TASK 4............................................................................................................................................7
Identify 5 stakeholders and their information requirement..........................................................7
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................9

INTRODUCTION
Financial management is about making solid plans and strategies for acquiring required
funds and assure its right utilization. It involves planning, organizing, allocation, monitoring as
well as controlling the money. Victoria Babies is a small sized manufacturing concern which is
specializes in producing innovative “Non Spill Toddler Bowl”. The current paper will investigate
different form of business structures and highlight key difference to select the best one.
Moreover, the report will clearly present three key statements and differentiate financial
accounting from managerial accounting. Lastly, important stakeholders and their information
requirement will be examined.
TASK 1
Different kind of business structure and their differences
According to the given case, Victoria Babies was set up as an Ordinary Partnership in
which her parents joined as partners with a total turnover of GBP400,000 in 2015. With the
immense growth, a venture capitalist keen to invest GBP 700,000 in its business which will help
the business to meet its capital requirement for expansion program. Thus, it need business to
change their structure either to Limited Liability Partnership or set up business as a Private
Limited Liability Company.
General or Ordinary Partnership: Partnership is simply a combination of two or more
people who take responsibility to run a business with putting their combined efforts and share
profit in set ratio. In this form, all the partners have unlimited liability towards lenders and
creditors (Ahmed and Manab, 2016). Moreover, they are liability for each other’s acts and
omission. Under the legal requirement, to set partnership, there is no need of registration.
Limited Liability Partnership: It is a form of partnership, in which, some partners limit
their liabilities. It does not means that other partner will be obliged for the misconduct and
negligence of copartner. It is different from general partnership because in this, partners have
limited liability. In order to become LLP, Victoria Babies need to incorporate the entity and also
need to follow LLP Act. At the same times, its benefits includes separate legal status, tax
transparency and others.
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Private Limited Liability Company: It is small organization which cannot issue share to
public as these firms are not listed on any recognized stock exchange. They can offer and issue
share only to their friends, relatives and known members for fundraising (Garrison and et.al.,
2010). As its name, members have limited liability but it involves compliance with multiple of
laws, thus, it includes excessive legal formalities such as compliance with Company Act 2006
and registration. Still, there are number of benefits associated with this form of business structure
i.e. separate entity, tax benefits and full control.
Taking into account all the requirement, it is better to suggest Victoria Babies to convert
business into Limited Liability Partnership, because it involves comparatively less legal
requirement such as LLP Act and incorporation only. Moreover, it overcome the main drawback
of general partnership that is unlimited liability and also will be treated as a separate legal status
under the corporate law.
TASK 2
Explain management and financial accounting
Management accounting is concerned with preparation of internal business reports and
supply it to managers with the view to devise more effective and solid strategies which enable
the entity to achieve sustainable progress (Ahmed and Manab, 2016). Victoria Babies managers
will require sales, cost, inventory and other reports for business planning and decisions.
Unlike this, financial accounting is just aims at recording each and every financial
transaction of the undertaking in annual statements to know profitability and financial health of
the enterprise (Nam and Park, 2016). It includes recording, classifying, summarizing and
analyzing the final results.
Key difference between management and financial accounting
Basis of
difference
Financial accounting Management accounting
Purpose To know financial position and
operational performance of
Victoria Babies (Schipper, Francis
and Weil, 2017)
To devise better business plans,
decisive actions and make growth
strategies
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Statements Profit and loss statement
Balance sheet
Cash flow statement
Sales reports
Cost reports
Stock reports and others
Requirement It is legally mandatory because as
per Company Act, every private as
well as public company has to
create their accounts for every
financial year.
It is not a legal necessity, still, for
managerial requirement, all the
organizations are involved in it
(Ahmed and Manab, 2016).
Audience It includes external users i.e.
investors, lenders, suppliers, tax
agencies i.e. HMRC, government
and competitor as well.
Only internal audiences such as
managers, workforce, CEO, CFO,
departmental heads and others.
Regulations Victoria Babies accountant need to
use accounting principles (GAAP),
accounting and reporting standards
(IAS and IFRS) to record the
result of their monetary activities
(Nam and Park, 2016).
There is no regulations and standards
set for management accounting.
Frequency P&L can be prepared either
quarterly, semi-annually or
annually, but balance sheet must
be prepared at the closing date of
fiscal year.
It is an ongoing function and reports
are prepared as per managerial need
(Houtson, 2014).
Auditing Auditing the annual account is a
compulsion for Victoria Babies
It is not audited.
Focus It focuses on historical trading
functions, thus, it is a backward-
looking approach.
It focuses on analyzing existing
performance to predict future. Thus, it
is a forward looking method
(Macintosh and Quattrone, 2010).
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TASK 3
Financial statements
After change of the business structure of Victoria Babies to LLP, it is now legally
necessary for the enterprise to prepare and submit financial accounts. The three financial
statements that it will need to prepare to determine and assess their financial position are
discussed here as under:
Income statement: This is also called profitability or P&L statement which reveals
performance for a given reporting period. It incorporates two key elements that are revenues and
expenditures, first includes income received by entity whereas expenses are the payments,
spending or cost (Schipper, Francis and Weil, 2017). For instance, sales is recorded as income
which is subtracted from cost of sale along with the other direct expense to know gross profit,
excess of it over other indirect expenses i.e. staff salary, marketing and other is called net profit.
Victoria Babies need to prepare such statement following accrual basis of accounting, wherein,
transactions are recorded when they actually incurred. Thus, it only reports current year’s
expenditures and revenues to determine net return.
Balance sheet: It is also called statement of financial position because it presents
financial health of the entity. Assets, liabilities and equity are the three components or key
elements of balance sheet. Assets are the resources which is owned by Victoria Babies, liability
indicates business obligation towards others such as borrowings, lease, overdraft, payables etc.
whereas equity is the total money injected by owner (Zimmerman and Yahya-Zadeh, 2011). It needs
to be prepared at the closing date of financial year.
Accounting equation: Assets=Liabilities+equity
Equity= Assets – liabilities
Liabilities= Assets – equity
Statement of cash flow: This is another account which presents details about cash
movement only thus, it reports both increase and decrease in cash/bank balance of Victoria
Babies in a given period. In other words, it can be said that SOCF is based cash accounting
concept which records and incorporate all the details or transactions that either injected cash into
or results in outflow of cash and its equivalent (Garrison and et.al., 2010). Thus, it does not
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record non-cash elements i.e. depreciation, profit/loss of sales or revaluation, provisions and
others. Unlike P&L that record only the results of operating events, SOCF records cash incoming
and its usage from investing, operating as well as financing activities that are explained here as
under:
1. Operating activities: It represent details about the primary activities of Victoria Babies
such as sales, material purchase, labor’s wages payment and others (Simons, 2013)
2. Investing activities: It shows information about purchase as well as disposal of
fixed/long-term assets i.e. property, plant and equipment, furniture, building and others.
3. Financing activities: It incorporate fund raise through debt and equity as cash incoming,
in contrast, repayment of bank borrowing with interest and equity with dividend is
reflected as cash outflow (DRURY, 2013).
Illustration of annual accounts
Income statement
Particular Amount
Sales revenues 120,000
Less: Cost of goods sold 40,000
Gross profit 80,000
Add: operational revenues 35,000
115,000
Less: operational expenditures 35,000
Earnings before interest and tax 80,000
Less: Financing cost (Interest) 20,000
Earnings before taxes 60,000
Taxes 20,000
Net return 40,000
Balance sheet
Particular Amount
Short-term assets
Trade receivables 25,000
Inventory 15,000
Cash and its equivalents 120,000
Total current assets 160,000
Non-current assets
Property, plant and equipment 220,000
Furniture 50,000
Equipment 30,000
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Total non-current assets 300,000
Total assets 460,000
Current liabilities
Trade payables 15,000
Overdraft 22,000
Provision 3,000
Total current liabilities 40,000
Non-current liabilities
Long-term borrowings 200,000
Lease payable 80,000
Total non-current liabilities 280,000
Total liabilities 320,000
Net assets 140,000
Financed by
Owner’s equity 100,000
Add: retained earnings 40,000
Total shareholder’s equity 140,000
Statement of cash flow
Particular Amount
Cash inflow from operating activities
Net profit as per P&L a/c 40000
Add: Non-cash expense
Depreciation 2000
Provision and reserves 3000
Loss on sale of assets 5000
Less: Non-cash revenues
Profit on assets revaluation (20000)
Profit on sale of assets (10000)
NCF from operating activities (A) 20000
Cash flow from investing activities
Proceed through assets disposal 25000
Less: Payment to purchase long-term assets (45000)
NCF from investing activities (B) (20000)
Cash flow from financing activities
Loan receipts 20000
Issuance of share 80000
Less: loan repayment (25000)
Less: Share buy-back (30000)
Less: dividend (2500)
Less: interest (2500)
NCF from financing activities (C) 40000
Net cash flow (A+B+C) 40,000
Add: Opening cash 80,000
Closing cash balance (80,000+40,000) 120,000
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TASK 4
Identify 5 stakeholders and their information requirement
Stakeholder theory presents that companies have multiple of stakeholders who either directly or
indirectly interested in business success and progress. With reference to Victoria Babies, some of the
important stakeholders are presented here underneath:
Investors: Investors are the most important stakeholder who invest their money in an undertaking
with the objective to get something in return i.e. dividend, share value appreciation (Ahmed and Manab,
2016). Thus, they analyze Victoria Babies’s stock performance, profitability, dividend policy, rate of
dividend and earnings as well.
Suppliers: Victoria Babies produces “Non Spill Toddler Bowl”, thus, it will require material
for the purpose of manufacturing. Suppliers are those who gave their acceptance to supply
material on credit and thereby facilitate entity to pay later (Bhimani and et.al., 2013). They
evaluate that whether company had maintained a right balance between their current assets and
current liabilities or have enough liquid funds or not to satisfy deferred short-term obligations.
Lenders: In order to raise fund, company often contact banks and other financial
institution for borrowing. Lenders are the people who lend money to the organization and charge
either fixed or floating interest (Macintosh and Quattrone, 2010). They use Victoria Babies annual
reports to know solvency position, profitability, credit rating, cash management and ability to
bear financial burden which indicates its interest payment capability.
Employees: Workers are the most important assets of the firm because without their
presence, efforts and cooperation, Victoria Babies would not be able to grow in such a
competitive world. They are interested in business growth so as to get good salary, monetary
benefits i.e. incentive, bonus, reward and non-monetary advantage i.e. promotion, praise and
others.
Her Majesty Revenue and Tax: It is an independent tax collection agency who collects
corporate tax from the business unit. They use audited P&L to charge tax on net profitability to
collect right amount of tax.
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CONCLUSION
From the research, it can be concluded that Victoria Babies should convert or change
their existing structure of general partnership to LLP which involves less legal requirements in
comparison to Private Limited Liability Company. Moreover, there were three statements of
financial statements found that is income statement, cash flow statement and balance sheets
which is prepared following principles, accounting and reporting standards under financial
accounting. At the end, it is found that each of the stakeholders have different interest in the
business, therefore, they extract different set of information from the financial statements for the
purpose of decisions making.
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REFERENCES
Books and Journals
Ahmed, I. and Manab, N.A., 2016. Influence of Enterprise Risk Management Success Factors on
Firm Financial and Non-Financial Performance: A Proposed Model. International
Journal of Economics and Financial Issues. 6(3). pp.18-63.
Bhimani, A. and et.al., 2013. Introduction to Management Accounting. Pearson Higher Ed.
DRURY, C.M., 2013. Management and cost accounting. Springer.
Garrison, R.H. and et.al., 2010. Managerial accounting. Issues in Accounting Education. 25(4).
pp.792-793.
Macintosh, N.B. and Quattrone, P., 2010. Management accounting and control systems: An
organizational and sociological approach. John Wiley & Sons.
Nam, G. and Park, J.W., 2016. A new approach to evaluating earnings management
models. International Journal of Managerial and Financial Accounting. 8(3-4). pp.247-
269.
Schipper, K., Francis, J. and Weil, R., 2017. Financial Accounting: Introduction to Concepts,
Methods and Uses. Cengage Learning.
Schipper, K., Francis, J. and Weil, R., 2017. Financial Accounting: Introduction to Concepts,
Methods and Uses. Cengage Learning.
Simons, R., 2013. Performance Measurement and Control Systems for Implementing Strategy
Text and Cases: Pearson New International Edition. Pearson Higher Ed.
Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and
control. Issues in Accounting Education. 26(1). pp.258-259.
Online
Houtson, G., 2014. Strategic Management Accounting. [Online]. Available through: <
http://smallbusiness.chron.com/examples-strategic-management-accounting-
18149.html>.
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