Importance of Financial Statements

The provided assignment delves into the significance of financial statements for both companies and stakeholders. It outlines conceptual and regulatory frameworks that guide companies in preparing financial statements, which are essential for internal and external stakeholders to evaluate a company's financial performance. The assignment also emphasizes the importance of following international financial reporting standards (IFRS) set by IFRS and IAS to achieve better global performance.

Financial Reporting

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Context and purpose of financial reporting.............................................................................1
2. Purpose, requirement and key principles of conceptual and regulatory framework...............2
3. Stakeholders of an organisation and their benefits.................................................................3
4. Value of financial reporting for meeting organisational objectives and growth.....................4
5. Financial statement .................................................................................................................4
6. Interpretation of financial statement of Marks and Spencer...................................................6
7. Difference between IFRS and IAS..........................................................................................7
8. Evaluation of benefits of IFRS................................................................................................8
9. Ascertaining the varying degree of compliance with IFRS....................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10
APPENDIX....................................................................................................................................11
.......................................................................................................................................................15

INTRODUCTION
Financial reporting refers to revealing of company's financial outcomes and its related
information to the internal and external stakeholders of business. The reports shows authentic
and reliable financial information to business users which aid in decision making of business.
This helps the organisation to comply with different statues and regulatory needs. These reports
are backbone for financial planning, analysis, benchmarking and decision making. To better
understand this concept the Marks and Spencer, UK is being selected for this present report. This
report covers the purpose of financial reporting. Apart from this, conceptual framework, purpose
and key principles and how qualitative characteristics makes financial information more reliable.
As interpretation of financial statement is also being explained in this report. The benefits of IAS
and IFRS is also being explained in this present report.
MAIN BODY
1. Context and purpose of financial reporting
According to International Accounting Standard Board (IASB), the objective of
financial reporting is “to provide information about the financial position, performance and
changes in financial position of an enterprise that is useful to a wide range of users in making
economic decision”. The financial reporting is very important for making better decisions in
organisations as it enables managers to take strategic decisions effectively. According to the
IASB organisations need to prepare its financial statements in order to provide actual position of
company. As the Marks and Spencer should provide appropriate financial statements to its
stakeholders so that stakeholders can analyse its performance. This is very important to follow
all the principles and regulations which are related with accounting while preparing financial
statements. Transparency in financial statement is very helpful for the organisation in order to
achieve pre set goals (Kassem, 2012).
Purpose of Financial Reporting:
 To provide reliable financial information to management of organisation which can be
used for making strategic decision in organisation.
 To provide information to investors, promoters, debt provider and creditors which is used
to enable them to make investment decisions.
 To provide authentic information to public if it is listed company.
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 The another objective is to provide information to the statutory auditors for facilitating
audits.
 This assist to analyse market value, financial status and health of company so an effective
strategies can be prepared.
2. Purpose, requirement and key principles of conceptual and regulatory framework
Regulatory and conceptual framework:
The conceptual framework is considered as quantitative and analytical component with
some variable quantity and theoretical matters. To achieve overall performance and status of
business, these framework is being applied by organisations. The regulatory framework is a set
of laws and legislation which is determined by the authorities of UK for all organisation who are
performing their business operations there. There are some regulations or principles which are
set and impose by IFRS are discussed below:
IFRS:
This is International Financial Reporting Standard which introduced by IASB. The
principle of IFRS is explained below:
IFRS 1:
This is regarding to first time implementation or execution of international financial
reporting standard which is adopted by company for first time. As this principle guide
organisation to prepare all financial statements effectively and efficiently (Iyoha and Owolabi,
2012).
IFRS 3
The rules and regulations for merger and acquisition is described in this principle. This
assist an organisation to make combination of its all assets and liabilities so that debts of business
can be paid.
As apart from this, there is certain other principles like IFRS 9, IFRS 10 etc. which needs
to be followed by organisation like Marks and Spencer.
Main Purpose
 It help companies to prepare annual financial statements with the application of IFRS.
 These framework are useful in development of Future IFRS and set rule for existing one.
Qualitative characteristics of financial information:
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The qualitative characteristics of financial information which provides reliable and
relevance information, is described below:
Relevance:
To evaluate actual performance and financial status this is very crucial to record reliable
and relevant data in financial statements. Relevancy is very helpful for taking effective decision
in organisation. Unauthentic information can not determine actual performance and position of
business.
Faithful representation:
This feature is very helpful for getting faith of stakeholders of business. Investors will
show faith towards the organisation and invest money as to get higher returns on their
investment.These are followed by Marks and Spencer to make expansion of their business.
3. Stakeholders of an organisation and their benefits
Stakeholders are those who have interest in the organisation whether directly or
indirectly. The stakeholder can be internal or external for the company. Financial statements are
very useful for both stakeholders in order to analyse company's financial position. As Marks and
Spencer have both internal and external stakeholders and they are benefited by financial
information of company in various ways. These are discussed below:
Internal Stakeholders:
These are directly related with activities of company. Financial statements are evaluated
in order to make effective decisions (Ghosh and Tang, 2015).
Shareholders:
The shareholders are those who owns at least one share of company's stock. They use
financial reporting to analysis the weather their invested money will be going to give best result
in future or not.
Managers:
The managers of company get benefited by financial information, this helps them to
make effective decision by analysing the organisational performance (Valentinetti and Rea,
2012).
External Stakeholders:
They make impact on company's performance indirectly. They are also get benefited
from financial information which is discussed below:
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Investors:
As financial information plays an important role for Marks and Spencer in order to get
investment from investor. As financial information is beneficial for investor as on the basis of
financial information they make investment decision.
Customers:
The financial information is very beneficial for customers also as they get proper
satisfaction by evaluating goodwill of Marks and Spencer (Koh, 2011).
4. Value of financial reporting for meeting organisational objectives and growth
Financial reporting plays an important role in organisation in order to achieve
organisational goals and objectives. With help of evaluating financial statements, manager of
Marks and Spencer can make strategic decision in organisation. These statement shows clear
picture of company's financial statements so by analysing these statements stakeholder of
company get satisfied and can be loyal to company. As an authentic and accurate financial
reports will allow Marks and Spencer to identify opportunity and grab that opportunity in order
to get growth in the market. The statements also assist to determine actual business position
which can help to expand the business more promptly. With the help of proper financial
reporting, it enable managers of Marks and Spencer to invest the money accordingly and achieve
organisational goals (Edog, banya and Kamardin, 2014). The customer satisfaction is also
possible with help of analysing financial statement of company. As if financial statement shows
good image of company than they can gain customer faith and loyalty. The company can take
competitive advantage in the market as by analysing proper financial statements and then
according to that make strategic decision in organisation. As this will help company to get
growth and achieve organisational goals.
5. Financial statement
Profit and Loss statement:
Profit and loss statement shows the company's income and expenditure for a particular
period.
Particular Amount
Revenues 385100
Less: Cost of sales -297563
Profit 87537
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Add: Other income 5600
Gross profit 93137
Less: operating expenses -83663
Operating profit 9475
Less: Finance cost -830
Profit before tax 8645
Less: Tax -1500
Profit after tax 7145
Add: Other comprehensive income 2100
Total Comprehensive income 9245
The profit and loss statement of company is showing that gross profit for company is
93137 for the particular year. As apart from this, company had some operating expenses of
78500. As after deducting the operating expenses company is having operating profits of 9475.
Company has profit before tax is 8645, it has profit after tax of 7145.
(b)Statement of changes in equity for the year ended 31st December 2017
Particular
Ordinary
share
capital
Revaluatio
n reserve
Retained
earnings Total
As per trial balance 86700 40700 32100 159500
Total Comprehensive income 2100 7145 9245
Preference dividend -2330 -2330
Ordinary dividend -4340 -4340
86700 42800 32575 162075
Financial Statement
Statement of financial position
Assets Amount
Non current assets:
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Land and property 115000
Plant and equipment 37275
Investment property 25400
Total non current assets 177675
Current assets:
Inventory 17300
Trade inventories 62000
Total current assets 85300
Total assets 262975
Equities and liabilities
Ordinary Share @25 each 86700
Revaluation reserve 42800
Retained earning 32575
Total equities 162075
Non current liabilities:
10% redeemable preference share 23300
Deferred taxation 8900
Total non current liabilities 32200
Trade payables 65700
Bank overdraft 1500
Tax payables 1500
Total current liabilities 68700
Total equities and liabilities 262975
The financial statement of company shows actual financial position of company. As from
the above Balance sheet it can be said that company has total non current assets of 177675 And
total current assets of 262975. As company has total current liabilities of 162075 and overall
equity of 262975
6. Interpretation of financial statement of Marks and Spencer
From the financial statement of Marks and Spencer, it can be said that total revenue for
the company is 10622000 for year 2017 but in 2018 it has been increased and reached to new
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level that is 10698200 so it can be said that sales of company has increased. The cost of revenue
for company in 2017 is 6629300 and it increased and reached to 6745600 in year 2018. The
gross profit for company for 2017 is 3992700 and in the year 2018 it has become 3952600. After
deducting operating expenses of company, operating income for year 2017 is 707300 and
operating income for 2018 is 677400. So it can be said that company has incurred more
operating expenses in year 2018. As from balance sheet it can be said that current assets for the
company is 1723300 for year 2017 and for the year 2018 it reduced to 1317900 which means
company has sold its some current assets and also used the current assets to pay off liabilities.
Marks and Spencer has made investment for long term also. As including current assets,
company has total asset of amounting 8292500 for year 2017. Similarly company has total asset
of 7550200 for 2018 so it can be said it has been reduced to a certain extent. This means
company pay off its long term and short term liabilities. As for year 2017, total current liability
has 2368000 and for year 2017 it has reached to 1826000. The current liabilities has been
reduced and current assets also reduced so which means some of current liabilities has been paid
off. Total liabilities including current and non current of Marks and Spencer for year 2017 is
5142100 and for the year 2018 is 4596000. So it is a good for company that liability is reducing
continuously.
Ratio analysis
Financial ratios of Marks and Spencer
Particular ratios Formula 2017 2018
Liquidity ratio’s:
Current ratio: Current asset/ current liabilities
0.7217415
115
0.7277449
324
Liquid ratio: Current asset- inventory+ prepaid
expenses/ Current liabilities
0.2940306
681
0.4073057
432
7. Difference between IFRS and IAS
There are different principle in accounting which needs to taken care by companies while
preparing their financial statements. These standards are issued by International Accounting
Standard Board (IASB). The posting of transaction and other records in financial statement has
some pre defined principles which is issued by International Accounting Standard (IAS). As in
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year 2001 evolution of accounting has done and it came with new set of principle which is
known as International Financial Reporting Standard (IFRS). These principles are universally
accepted and it is followed by all accountant across the world. The difference between IFRS and
IAS is discussed below:
IFRS IAS
This is evolution of old standard and this helps
accountant to make record of transaction in
final accounts effectively.
This was helpful for providing normal
accounting standard to organisations.
As IASB used to perform significant decisions
(Nurunnabi and Alam, 2012).
The related decisions is being taken by IAS
and investigated by IASC.
This was came in 2001 by IASB. As IASC has came up with IAS in year 1973.
8. Evaluation of benefits of IFRS
The IFRS was developed in 2001 by IASB. As these standard are based on improvement
of corporate governance and increase the free flow of capital across globe. These standards are
very helpful in order to solve many accounting problem of accountant which can decrease
profitability of company (Alexander, Bonaci and Mustata, 2012). As execution of IFRS enable
company to prepare clear and transparent financial statement which allows investor and
stakeholders to evaluate financial position of company and than make investment decisions. The
advantage of these standards are discussed below:
 With help of these standards companies can make clear and transparent financial
statements. It will help to attract more number of investors.
 The economy of country can be benefited by enhancing growth of company international
business.
 This is helpful in motivating international investor which overall lead to more foreign
capital to nation.
 As it provides great opportunities to accountant worldwide to follow same accounting
practice.
 The company get huge amount of foreign capital if they can create faith and confidence
in mind of capitalist that there financial statements are prepared and comply with
generally accepted accounting standards.
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 This also helps investor to better understand investment opportunities between company
who has prepared their financial statements with help of accounting standards and those
which prepare their financial statements without any standards.
9. Ascertaining the varying degree of compliance with IFRS
The international financial reporting standards are used worldwide and it is also accepted
across the globe. These standards guide companies to prepare their financial statement
accordingly. These 13 International financial reporting standard and 29 international accounting
standard is being followed at global level by every company. These IFRS rules and regulation
needs to be followed by every size of company at globally. The Marks and Spencer has also been
following IFRS in order to prepare their financial statement and these also very helpful for
company to take decisions regarding financing and investing. In United Kingdom, government
have implied different accounting rules and regulation for companies to prepare their financial
statement (Aletkin, 2014). The Marks and Spencer is operating their business across globe so it
is crucial for company to use international financial reporting standard which can be used at
global level. These are also accepted universally.
CONCLUSION
In the conclusion it can be said that the financial statement of company plays an
important role for both company and its stakeholders. There are some conceptual and regulatory
framework for the companies in order to prepare financial statement which needs to be followed
by organisations. The financial information is very helpful for both internal and external
stakeholders in order to evaluate financial performance of company. Financial reporting plays
and important role to achieve organisational goals and objectives. With help of interpretation of
financial statements company can draw an useful conclusion for making decisions. There
standard which are set by IFRS and IAS needs to be followed by companies to perform better at
global level.
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REFERENCES
Books and Journals
Aletkin, P. A., 2014. International financial reporting standards implementation into the Russian
accounting system. Mediterranean Journal of Social Sciences. 5(24). p.33.
Alexander, D., Bonaci, C. G. and Mustata, R. V., 2012. Fair value measurement in financial
reporting. Procedia Economics and Finance. 3. pp.84-90.
Edogbanya, A. and Kamardin, H., 2014. Adoption of international financial reporting standards
in Nigeria: concepts and issues. Journal of Advance Management Science. 2.
Ghosh, A. A. and Tang, C. Y., 2015. Assessing financial reporting quality of family firms: The
auditors׳ perspective. Journal of Accounting and Economics. 60(1). pp.95-116.
Iyoha, F. O. and Owolabi, A., 2012. Adopting international financial reporting standards (IFRS)
in Africa: benefits, prospects and challenges. African J. Accounting, Auditing and
Finance. 1(1).
Kassem, R., 2012. Earnings Management and Financial Reporting Fraud: Can External Auditors
Spot the Difference?.
Koh, K., 2011. Value or glamour? An empirical investigation of the effect of celebrity CEOs on
financial reporting practices and firm performance. Accounting & Finance. 51(2).
pp.517-547.
Nurunnabi, M. and Alam Hossain, M., 2012. The voluntary disclosure of internet financial
reporting (IFR) in an emerging economy: a case of digital Bangladesh. Journal of Asia
Business Studies. 6(1). pp.17-42.
Valentinetti, D. and Rea, M. A., 2012. IFRS Taxonomy and financial reporting practices: The
case of Italian listed companies. International Journal of Accounting Information
Systems. 13(2). pp.163-180.
Online
Financial statement. 2018. [Online]. Available through:
<https://in.finance.yahoo.com/quote/MKS.L/financials?p=MKS.L>
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APPENDIX
Balance sheet
Period ending 31/03/18 01/04/17
Current assets
Cash and cash equivalents 207700 468600
Short-term investments - -
Net receivables 144800 137800
Inventory 781000 758500
Other current assets 10900 167700
Total current assets 1317900 1723300
Long-term investments 43600 51500
4393900 4837800
Goodwill 77400 78400
Intangible assets 521800 630600
Accumulated amortisation - -
Other assets 1195600 970900
- -
Total assets 7550200 8292500
Current liabilities
Accounts payable 872900 967500
125300 517600
Other current liabilities 222600 224300
Total current liabilities 1826000 2368000
Long-term debt 1622900 1663400
Other liabilities 1099400 1062400
- -
Minority interest -2500 -5900
Negative goodwill - -
Total liabilities 4596000 5142100
Property plant and
equipment
Deferred long-term asset
charges
Short/current long-term
debt
Deferred long-term
liability charges
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Income statement
Revenue 31/03/18 01/04/17
Total revenue 10698200 10622000
Cost of revenue 6745600 6629300
Gross profit 3952600 3992700
Operating expenses
Research development - -
3324700 3348600
Non-recurring - -
Others -49500 -63200
Total operating expenses 10020800 9914700
Operating income or loss 677400 707300
Income from continuing operations
-610600 -530900
677400 707300
Interest expense -95400 -100200
Income before tax 66800 176400
Income tax expense 37700 60700
Minority interest -2500 -5900
29100 115700
Currency in GBP. All
numbers in thousands
Selling general and
administrative
Total other income/expenses
net
Earnings before interest and
taxes
Net income from continuing
ops
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