Financial Reporting for Different Business Structures

This assignment delves into the world of financial reporting across various business structures. It presents a comparative analysis of Profit & Loss (P&L) accounts, Balance Sheets, and Cash Flow Statements for sole proprietorships, partnerships, and companies. The text utilizes figures to illustrate these concepts for each structure. Sources cited include academic journals and books on finance, banking, and international economics. The assignment aims to equip students with a fundamental understanding of how different businesses report their financial performance.

MANAGING FINANCIAL
RESOURCES AND DECISIONS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Sources of finance available to the business firms................................................................3
1.2 Implication of sources of finance..........................................................................................4
1.3 Appropriate source of finance...............................................................................................5
TASK 2............................................................................................................................................7
2.1 Cost of varied sources of finance in respect to dividend, interest and tax.............................7
2.2 Importance of financial planning for Clariton Antiques........................................................7
2.3 Information needs of the decision makers.............................................................................8
2.4 Impact of finance on the income statement and balance sheet..............................................9
TASK 3..........................................................................................................................................10
3.1 Budget for the Clariton Antiques.........................................................................................10
3.2 Computation of unit cost.....................................................................................................10
3.3 Project evaluation method...................................................................................................11
TASK 4..........................................................................................................................................13
4.1 Financial statement of the business firms............................................................................13
4.2 Format of financial statements.............................................................................................13
...................................................................................................................................................21
4.3 Ratio analysis.......................................................................................................................22
CONCLUSION..............................................................................................................................23
REFERENCES..............................................................................................................................24
Figure 1P&L account for partner...................................................................................................16
Figure 2P&L account for sole proprietor.......................................................................................17
Figure 3 P&L account for company.............................................................................................18
Figure 4Balance sheet of company................................................................................................19
Figure 5 Balance sheet for partners...............................................................................................20

Figure 6 Balance sheet of sole trader.............................................................................................21
Figure 7 Cash flow statement of sole trader..................................................................................22
Figure 8Cash flow statement of company.....................................................................................23
Table 1 Cash budget for Clariton...................................................................................................12
Table 2Calculation of unit cost......................................................................................................12
Table 3 Computation of payback period.......................................................................................13
Table 4 Calculation of ARR..........................................................................................................13
Table 5 Calculation of NPV..........................................................................................................14
Table 6 Gross and net profit ratio..................................................................................................24
Table 7 Current ratio of Clariton...................................................................................................24
Table 8Debt equity ratio................................................................................................................25

INTRODUCTION
Finance is the one of the most important aspect of the organization on which management
have to give due importance. This is because firm always face problem of scarcity of finance in
its business. In the current research study varied areas related to finance are discussed in detail.
In this regard, discussion is carried out on implications and appropriateness of source of finance.
Apart from this, in the report importance of financial planning is explained in context of budget,
implications of failure of business to finance adequately and overtrading etc. Best project is
selected for the company on the basis of results of project valuation approach. Finally,
performance of Clariton is evaluated by using ratio analysis and areas in which it needs to work
is identified.
TASK 1
1.1 Sources of finance available to the business firms
Sources of finance are of different type and business firms by contemplating varied factors
make decision about source of finance that must be used to raise fund for the business. There are
two type of firm’s namely unincorporated and incorporated business. Unincorporated business
refers to the sole trader, partners and cooperatives that run business at small level (Helleiner,
2010). On other hand, incorporated business refers to the company that have its own existence
separate from the owner. Varied sources of finance that are used by the large and small size
business firms are given below.
Incorporated business
 Equity: It is the one of the most important source of finance that is used by the most of the
business firms. This is because under same considerable amount of fund is raised by the
business firm from the general public. In case of equity it is not mandatory to pay finance
cost in each financial year. Thus, sole control of the decision in respect to payment of
dividend depends on the business firm and according to its cash flows easily finance cost is
managed in the business (Hong. and Kostovetsky, 2012). Firm can raise millions of amount
from stock market and by using same fund business operations. For example Clariton can
launch IPO in the market for raising capital of 6 million from the market and relevant amount
can be invested in business expansion in European nations.

 Venture capital: Venture capital is the source of finance which have high degree of
similarity to the equity. Only difference between both in that in case of former one through
stock exchange funds are raised from the market. But in case of latter source of finance one
entity make investment in business of other one without taking help of any intermediary.
Venture capital firm invest cash in the relevant business firm and in return obtain
shareholding in same. Firms that are not able to raise fund from the market usually take help
of venture capital firms in order to fund their business. Clariton can raise 6 million amount
through venture capital in different stages of business like establishment of office in foreign
nations and development of strong marketing campaign etc.
 Debentures: Sometimes large proportion of fund is already raised by the firm through equity
and cost of same is already high in the business (McLean, Zhang and Zhao, 2012). In case of
such kind of situation business firms prefer to take debt from the general public by issuing
debentures. This strategy make firm capital structure balanced and benefit same. In this
regard venture capital firm can issue debentures amount to 6 million at 8% interest rate to the
individual and institutional investors. It will be mandatory to pay interest on yearly basis to
debenture holders.
Unincorporated business
 Bank loan: Bank loan is the source of finance that comes in the debt category. Under this
financial institutions like banks give a debt to the business firms like Clariton at the specific
interest rate. Bank loan of long and short term are available to the business firm at the fixed
and floating interest rate. Business firms take bank loan at fixed or floating interest rate by
considering economic condition of the nation and decisions that can be taken by the central
bank. Bank loan of 6 million can be taken from the financial institutions at specific interest
rate to fund business operations or meeting working capital needs of the business.
 Overdraft: It is a short term source of finance that is used by the small and medium size
business to meet their working capital requirements. Usually, such kind of business firms
face a problem of scarcity of finance in the business. Thus, to meet short term requirements
they often make use of overdraft facility in order to meet day to day to business expenses.
 Retained earnings: It is the internal source of finance and used by all sort of business firms
whether they are incorporated or unincorporated in nature. It is the proportion of the overall
revenue that is earned by the business firm in the specific time period. Because it is the part

of the profit there is not cost of the mentioned source of finance and due to this reason it is
widely used by the firms in their business.
1.2 Implication of sources of finance
There is a difference between internal and external source of finance. External source of
finance refers to the amount of fund that is not generated through business operations. Whereas,
internal source of finance refers to the sources through which by using assets or business cash
flows funds are raised from business.
Sources of
finance (Internal
and external
source of
finance)
Financial
implications
Legal
implications
Dilution of
control
Bankruptcy
Equity (External
source of
finance)
Dividend is the
cost of equity
and its weightage
in overall finance
cost is higher
then interest.
Need to comply
with rules and
regulations that
are related to
paper formalities
which have to be
done with Stock
exchange.
Control get
reduced in case
of equity.
First priority is
given to creditors
then
shareholders.
Venture capital
(External source
of finance)
Same of equity Require to sign
contract with VC
firm.
Same of equity Same of equity.
Debenture
(External source
of finance)
Interest paid to
debenture
holders is the
cost of this
source of
finance.
Necessary to sign
relevant
documents and
submitting it to
regulatory
authority.
Control remain
same.
Same of equity
Bank loan
(External source
Interest is the
finance cost of
Necessary to
mortgage
Control remain Same of equity

of finance) bank loan and its
rate remain less
than dividend
(Cronqvist,
Makhija and
Yonker, 2012).
property by
submitting
correct
documents to
banks.
same.
Overdraft
(External source
of finance)
Interest is the
finance cost of
overdraft
Necessary to pay
back overdraft
amount on time.
Control remain
same.
Same of equity
Retained
earnings
(Internal source
of finance)
No relevant
implications.
No relevant
implications.
No relevant
implications.
No relevant
implications.
1.3 Appropriate source of finance
Most appropriate source can be determined as a source which has minimum cost of
capital and also have minimum obligations. Management of Clariton Antiques Ltd. should
remember one thing that it cannot be possible in the practical situation to adopt the perfect source
of finance. As it does not even exists. Sources of finance are always appropriate they can't be
perfect. Clariton Antiques Ltd. Wants to acquire a building for which it needs an investment of
0.5 million and this time it is advised them to go public. That means they wanted to acquire the
funds through external sources of finance (Chen, 2012). They can have it through debenture
loans which carries fixed as well as variable interest rates which may depend on the performance
of Clariton Antiques Ltd. But in that case the loan providing company will have the priority right
on entity's building. Hence it can be suggested to Clariton Antiques Ltd. to finance the building
through issuing the Equity shares in the open market. As it is a Limited company it has the right
to issue the shares in open market. Equity shares can be issued to existing shareholders as well as
in public also. Equity shares has less obligations in comparison to other sources of finance in
category of external sources of finance. It carries less risk, Carries less obligations towards
public as company will have to pay in case it generates profits only so if there is no profit then

there will be no need to pay dividend to shareholders. In case Clariton Antiques Ltd. will go for
Equity shares then it will have more Cash-in-hand comparatively to other sources.
TASK 2
2.1 Cost of varied sources of finance in respect to dividend, interest and tax
There are many sources of finance in varied categories and cost of all of them is measured
in terms of dividend, interest and tax. These different costs are explained below.
 Dividend: For equity and venture capital dividend is the cost of source of finance. This is
because in case of both of them investors makes an investment in the company like Clariton
Antiques and in return get shareholding in the business firm. Shares are issued in huge
quantity in the market and due to this reason large amount of money in million or billion is
raised from the stock market. In case of venture capital 30% shareholding is purchased by the
VC firm (Visser, 2013). Thus, when firm earn profit in its business huge amount of dividend
is received by the shareholders. Due to this reason cost of finance for equity and venture
capital always remain high. If equity and venture capital is compared with each other on the
basis of overall cost then it can be said that venture capital is more costly then equity. This is
because in case of venture capital members of the VC firm receive dividend and along with
this they also charge seating fee from the investee firm. Thus, it can be said that cost of
finance of Venture capital is much higher than equity.
 Interest: In case of bank loan and overdraft bank loan is assumed cost of finance. As
mentioned above bank loan is available at two interest rates fixed and floating. There is some
difference between both interest rates. In case of fixed interest rate finance cost percentage
always remain same and does not get changed. Contrary to this, in case of flexible interest
rate finance cost never remain stationary and move upward and downward with change in
situation (Ross, 2011). Clariton Antiques must take loan at fixed rate because finance cost
will stood at same value even economic cycle get changed. Better decisions in respect to
finance of business operations by bank loan can be taken when finance cost is stable.
 Tax: Tax is deductible for the debt related sources of finance. It can be said that in case of
equity no tax deduction is received by the business firm. Hence, many firms by considering
low cost and tax deduction feature prefer to raise fund by taking loan from the bank.

2.2 Importance of financial planning for Clariton Antiques
Financial planning is the one of the most important instrument that is used by the business
firms to plan their expenditures on the varied business operations. Under financial plan future
cash inflows are estimated and accordingly expenditures on varied business operations are
planned. Importance of the financial planning is explained below.
 Budgeting: Budget is needed by the Clairton because by using same strong control can be
maintained on business expenses. Moreover, by using budget effective use of cash is made in
the business. Thus, there is great importance of budget for the business firms. Financial plan
is used to prepare budget by the Clarion Antiques. Budget is simply a statement which
reflects the cash inflows and outflows that are targeted in the business. Financial plan provide
input for the budget. Under financial plan the way in which expenditures will be made in the
business is determined. On this basis target for making expenses on various business
activities is determined (Antras and Foley, 2015). Thus, in this way financial is used to
prepare a budget. Clariton prepare a strategy by using which it can ensured that all
expenditures will remain within determined limit and same will not breach the level that is
determined in the budget. Thus, it can be said that financial planning help business firms in
improving its business performance.
 Implication of failure to finance business inadequately: In case of most of business firms
like Clariton it is observed that they face problem of scarcity of finance. Limited amount of
cash is available in the business and same is not used in proper manner and due to this reason
business operations of the business firms are not adequately financed. Due to inadequate
financing of the business activities business operations are performed slowly which directly
affect the firm profitability and image among the stakeholders. If there will be sufficient
amount of fund in business, firm will be able to perform its operations quickly which will
result in early delivery of work to the client. This lead to satisfaction among latter entity and
business profit. It is the financial plan which help management in ensuring that each unit of
cash is invested prudently in the business. Hence, it is clear that finance help one in making
efficient use of cash in the business.
 Overtrading: Every business firm set a specific target in terms of terms of sales for the
specific time period. Sometimes sales made by the business firm exceed the level that was
determined by the management because big portion of same is generated by selling goods on

credit basis. By doing a financial plan firm can determine the level up to which it can make
sales on credit basis within safe zone (Kocherlakota, 2010). Thus, it can be said that financial
planning help business firm in keeping stiff control on credit sales which ultimately lead to
low amount of bed debt in the income statement.
2.3 Information needs of the decision makers
Information needs of the varied decision makers is explained below. Partners: Partners needed the information about the entity which Clariton desired to
purchase in the specific time period. Before buying any company it is important to gather
number of facts and figures about same like its cash inflow, outflow trend and business
growth rate as well as business potential. These information can be obtained from the
relevant firm annual reports and internal documents. Basically partners in order to make
investment decisions needed financial statements of the relevant firm. On the basis of
these facts and figures managers create their perspective in respect to question whether
investment must be made in the business. Thus, managers require lots of company
information in order to take business decisions. Venture capitalist: Venture capital firms needed information related to the Clariton and
firm which it wants to purchase. This is because profit that will be earned by the venture
capital firm is linked to the profit that will be gained by the Clariton in to its business.
Venture capital in order to make better investment decisions needed Clariton and other
company financial statements as well as annual reports. By evaluating relevant
information VC firm decides whether investment in Clariton will be profitable for same.
It is very important for the VC firm to ensure that there is high growth prospects in
Clariton and purchase of other firm will prove profitable for same (Bäuerle. and Rieder,
2011). Thus, VC firm require income statement and balance sheet of Clariton and other
relevant company. Finance broker: Finance broker only needed information about the money that is
required by Clariton to purchase other company. On execution of deal broker will receive
relevant fee from Clariton.
2.4 Impact of finance on the income statement and balance sheet
 Venture capital: When fund is raised from the venture capital financial statements get
affected. This is because VC firm makes an investment in the company and cash is

received by the firm. Due to cash receipt in the business cash balance in the bank account
increased.
 On this basis current assets in assets section of balance sheet is increased. At same time
liability of the business firm to pay back capital also comes in existence. Due to this reason
shareholder equity in the liability side of the balance sheet get increased.
 Dividend is paid as finance cost to the VC firm and same is mentioned in the statement of
profit and loss. Dividend is expenditure for the firm and by same profit reduced in the
business. Thus, VC affects financial statements of the business firms.
 Broker: Fee will be paid to the financial broker for the service it will provided to the
Clariton. Thus, fee amount will be recorded in the P&L account and by expenditure amount
profit will decline in the business (Frieden, 2015).
 Like venture capital cash will be received in the business and due to this reason cash
section will elevate in statement of financial position. In same way debt amount will rose
by the amount that is raise from the market through finance broker. In this way transaction
with finance broker will put impact on the financial statements.
TASK 3
3.1 Budget for the Clariton Antiques
Table 1 Cash budget for Clariton
Particulars Januar
y
Februar
y March April May June
Opening cash 110000 -539750 -
392000 -76750 48500 166250
Sale 15000 22500 30000 15000 15000 3750
Receivables 142500 262500 405000 547500 330000 285000
Total cash inflow 267500 -254750 43000 485750 393500 455000
Payment 807250 137250 119750 437250 227250 219750
Total outflow 807250 137250 119750 437250 227250 219750
Closing balance -539750 -392000 -76750 48500 166250 235250
Interpretation
Budget clearly revealed that from the month of January to March can receipt for sales of
same duration is increasing but thereafter get reduced from £30000 to £3750. However,
receivables value is increasing consistently in the relevant months and further in April month.

Decline in receivables is observed in the month of May but again plunge is observed in same in
the month of June. Expenditures keeps on changing regularly as stability is not observed in the
cash flows. Expenditures decreased from the month of January to June from £807250 to
£219750. Whereas, sales increased from month of January to March from £15000 to £30000.
Thus, it can be said that even sales increased expenditures reduce. This reflects that firm have
strong control on its expenditures. However, from April to June sales reduced from £15000 to
£3750. In these months sales and expenses move in same trend. Due to all these trends cash
balance is negative in first three months as expenditure amount is expected to be much higher
than cash inflow total. With reduction of the carry forward of negative amount in upcoming
month cash flow become positive and surplus balance is observed in the month of April, May
and June. This cash surplus can be efficiently used in the business and under this allocation of
overall amount of cash surplus can be done among the operating and investment activity of the
business firm in appropriate manner. By doing so best use of cash can be done by Clariton
antiques. It will be better for the business firm to allocate 80% of cash surplus for core business
operations and remaining to meet working capital needs.
3.2 Computation of unit cost
Table 2Calculation of unit cost
Production expenses 100000
Salary 30000
Other expenses 10000
Total cost 140000
Number of units
produced 130
Per unit cost 1076.92308
Margin 30%
Sales price 1400
Interpretation
For service costing variable expenses are taken in to consideration. These are those
expenditures which does not remain same. Production expenses, salary and other expense are
considered to calculate per unit cost. Margin of 30% is added to compute sales price which is
£1400 for each antique item.

3.3 Project evaluation method
Table 3 Computation of payback period
Investment
1 Investment 2
Initial
investment -8.6 -4.4
1 1.6 -7 0.8 -3.6
2 2.8 -4.2 1.4 -2.2
3 3.4 -0.8 2 -0.2
4 3.6 2.8 2.4 2.2
5 4 6.8 2.3 4.5
6 4.2 11 2.6 7.1
Interpretation
This method is indicating the time which will be taken by the proposed project to cover
initial investment amount (Law and Singh, 2014). Alternatives are taking same duration to cover
cost and due to this reason no one is selected for the firm. Parameter for selection of project in
case of payback period is 3.5 years. On this basis it can be assumed that both are profitable for
Clariton.
Table 4 Calculation of ARR
Investment
1
Investment
2
Initial
investment 8.6 4.4
1 1.6 0.8
2 2.8 1.4
3 3.4 2
4 3.6 2.4
5 4 2.3
6 4.2 2.6
Total 15.4 11.5
Average 3 2
ARR 29.84% 43.56%
Interpretation
Mean return on first alternative is 29.84% and same for other one is 43.56%. Standard
ARR percentage is 35% and ARR of investment 2 is greater than same. Due to this reason on
this parameter investment 2 is selected for the firm.

Table 5 Calculation of NPV
Project
Pv @
14%
Present
value Project B
PV @
14%
Present
value
Initial
investment 8.6 4.4
1 1.6 0.877 1 0.8 0.877 0.70
2 2.8 0.769 2 1.4 0.769 1.08
3 3.4 0.675 2 2 0.675 1.35
4 3.6 0.592 2 2.4 0.592 1.42
5 4 0.519 2 2.3 0.519 1.19
6 4.2 0.456 2 2.6 0.456 1.18
Total 12 7
NPV 3 2.53
Interpretation
Present value of the project is computed by using NPV method (Ehrhardt and Brigham,
2016). NPV of the investment 1 is 3 and same of second alternative is 2.53. Parameter of
selection in case of NPV is £2 million. Here, investment 1 is giving better return to Clariton and
by considering this things relevant proposal is considered profitable for company.
On the basis of higher NPV investment 1 selected for the business firm.
TASK 4
4.1 Financial statement of the business firms Income statement: Income statement is prepared to identify the aggregate amount of money
earned by the firm during the year and expenditures that are made in the business. By using
the statement firm capability to control expenditures in business is judged by the managers. Statement of financial position: Balance sheet reflects the overall performance of the firm
during a financial year. By using mentioned statement in various areas company performance
is measured (Ayyagari, Demirgüç-Kunt and Maksimovic, 2012). Ratio analysis is commonly
used by the managers to evaluate the balance sheet. On the basis of results of same decisions
are made by the managers. Statement of cash flows: Relevant statement is used to evaluate cash flows that are related to
varied business activities. This statement is used to identify the pattern in which cash flow
happened in the business. Statement of cash flows is also used to compute cash amount that
remain at end of the year.

 Statement of changes in equity: Mentioned statement reflect the change that happened in the
firm equity during a specific financial year in terms of reserves and share capital. It formed a
part of notes of the balance sheet (Pompian, 2011). Notes of the financial statement: It is the section of the annual report in which detail
description is given about the way in which values of sales, expenses, assets and liability is
computed in the financial statements. It is normally provided by the firms in their annual
reports.
4.2 Format of financial statements
P&L formats
Figure 1P&L account for partner
(Source: Helleiner, 2010)

Figure 2P&L account for sole proprietor
(Source: Hong and Kostovetsky, 2012)

Balance sheet
Figure 4Balance sheet of company
(Source: Cronqvist, Makhija and Yonker, 2012)

Figure 5 Balance sheet for partners
(Source: Chen, 2012)

Figure 6 Balance sheet of sole trader
(Source: Visser,2013)
Cash flow statement

Figure 7 Cash flow statement of sole trader
(Source: Ross, 2011)

Figure 8Cash flow statement of company
(Source: Antras and Foley, 2015)
.
Difference is observed in the statements of the all relevant three entities. It must be noted
that IFRS and GAAP are followed to prepare relevant statement in case of corporate. In case of
remaining two no rules and standards are followed to prepare income statement, balance sheet
and cash flow statement (Pilbeam, 2010). In partnership everything is shared among partners but
same does not happened in case of sole proprietors and company. Thus, overall conclusion is that
to some extent there is a difference in the financial statement format which are prepared by the

partnership business, sole trader and company. In the income statement, balance sheet and cash
flow statement each and every thing is revealed separately. Thus, in better way things are
presented in financial statements of company relative to sole trader, company and partnership
business.
4.3 Ratio analysis
Table 6 Gross and net profit ratio
2015 2016
Sales 1220 1255
Gross profit 175 178
Gross profit ratio 14.34% 14.18%
Net profit 23 33
Sales 1220 1255
Net profit ratio 1.89% 2.63%
Interpretation
 Gross profit ratio: The extent to which gross profit cover portion of sales is computed by
using gross profit ratio. Ratio value change slightly in comparison to previous year and it can
be said that firm maintain consistency in its performance in terms of cost control. It can be
observed from the table given above that gross profit ratio in the FY 2015 was 14.34% and
same increased to 14.18%. Thus, only minor decline is observed in the gross profit ratio
which is not matter of concern.
 Net profit ratio: There is a large gap between gross and net profit ratio of the business firm.
This means that indirect expenses cover large portion of the firm revenue (Fracassi, 2016).
Net profit ratio is one of the most important ratio because it reflect the firm ability to control
indirect expenses in the business. Value of ratio reduced from 2.63% to 1.89% and this
means that Clariton is earning low amount of profit in the business. It does not have control

on its indirect expenses. So, this is the area where firm needs to improve its performance. It is
very important for the business firm to frame strong cost control strategy. Many methods like
economic order quantity can be used be used to control cost in business.
Table 7 Current ratio of Clariton
2015 2016
Current assets 746 785
Current liabilities 309 317
Current ratio 2.41 2.48
Interpretation
Current ratio indicate liquidity position of the business firm. Clariton liquidity position is
excellent as it have sufficient amount of current assets in its business which is used to pay
current liability to the creditors (Current ratio, 2016). However, ratio value increased from 2.41
from 2.48 and it can be said that firm give strong business performance. There is excessive
liquidity in the business and a portion of cash remain idle. Thus, it is advised that idle money
must be invested in the business to generate more income in the business.
Table 8Debt equity ratio
2015 2016
Debt 45 57
Equity 276 301
Debt equity ratio 0.16 0.19
Interpretation
Debt equity ratio reflects the capital structure of the Clariton. Proportion of debt is very
low in the capital structure which reflect that capital structure is perfect (Covas and Den Haan,
2011). However, further business firm must abstain from issuing shares in the market. If same
will not be done then finance cost may increase at fast speed in business. If firm will increase

proportion of debt in the capital structure then in that case capital structure will become more
balanced then before. However, it must be ensured that debt is taken at fixed interest rate because
by doing same control can be maintained on finance cost in business.
CONCLUSION
On the basis of above discussion it is concluded that capital structure is one of the most
important thing that is greatly affected by the sources of finance that are used by the firm to raise
capital for its project. Sources of finance must be selected cautiously because same can convert
balanced capital structure in to imbalanced. It is also concluded that projects must be evaluated
only by using project evaluation method. Apart from this ratios must be used to identify the
domain where in the organization there is a heavy need to work. Strategy can be formed in
respect to relevant area and weakness can be transformed in to strength.

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