Financial Accounting: Consolidated Financial Statements and Financial Performance Analysis

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This document provides an overview of financial accounting, focusing on the preparation of consolidated financial statements and the analysis of financial performance. It explains the features of financial statements and the usefulness of financial information. It also explores the non-financial indicators of future success and their analysis in financial performance. The document includes examples and calculations to illustrate the concepts. The subject is Financial Accounting, and the course code is UG221. The document type is a study material or assignment.
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UG221 Financial Accounting
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TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
QUESTION 1.............................................................................................................................3
a).............................................................................................................................................3
b) Explaining the features of FS and usefulness of financial information.............................5
QUESTION 2.............................................................................................................................7
a).............................................................................................................................................7
b) Discussing the importance of financial ethics and five basic morality are as follow........9
CONCLUSION........................................................................................................................10
REFERENCES.........................................................................................................................12
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INTRODUCTION
The financial accounting refers to effectively managing and handling the financial
accounting of a firm under various business situations like mergers and acquisitions. In the
given report, there are two parts, the first part is based upon the topic of acquisition and
provides an in-sight into the various steps and procedures involved in the creation of the
consolidated financial statements of the organization. Along with this, it provides the
understanding about the various important accounting terms like reliability, relevance,
comparability which are the key aspects of the financial information. While in thesecond part,
it analyses the financial and non-financial performance of the company along with
understanding the principles of professional ethics in accounting.
QUESTION 1
a)
Preparation of Consolidated statement of financial position
Particulars Amount
Non – current assets
Property plant and equipment (160000 + 50000) 210000
Goodwill 20000
230000
Current assets (30000 + 10000) 40000
Total assets 270000
Equity and liabilities
Ordinary share of £ 1 each 100000
Retained profits 158000
Non – controlling interest 12000
Total of Equity and liabilities 270000
Working notes:
Net assets of the Cee plc (Subsidiary Co.)
Particulars At acquisition (on
December 2018)
At Reporting date (31
December 2020)
Post - acquisition
Equity shares 20000 20000
Retained earnings 30000 40000 10000
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Fair value of the net
assets
50000 60000 10000
Value of Non – controlling interest at acquisition
= fair value of net assets at acquisition * % of NCI = 50000 * 20% = 10000
Goodwill = fair value being paid by parent on acquisition of controlling interest + fair value
of NCI at acquisition – Fair value of net assets on the date of acquisition
Goodwill = 60000 + 10000 – 50000 = 20000
NCI calculation for the date of reporting that is, 31 December 2020
= opening NCI on 31 December 2018 + NCI % share of profit arises on post – acquisition
= 10000 + 20% of 10000 = 12000.
Group retained earnings to be shown in consolidated statement of financial position
Pee Ltd. (parent)’s retained earnings as on 31st December 2020 + % share of post -
acquisition profit of Cee Ltd. (Subsidiary)
= 150000 + 80% of 10000 = 158000.
Therefore, there are few terms which is being used for creating the above
consolidated statement for the group in which the Pee Plc has obtained 80% share in the Cee
Ltd.
Non – controlling interest (NCI):It refers to the minority interest having a position as an
owner but is having a share of less than 50% and thus, do not hold any eligibility for
undertaking any decision. It has been measured on the basis of the net assets value in which
the parent company holds over 50% shares of the company outstanding. In addition to this,
the NCI is also not having any voting rights within the company and is basically shown under
the section of equity in the balance sheet of the parent company which is in accordance to the
GAAP. Therefore, IAS 27 is applicable in respect to the treatment of the NCI.
Consolidated statement of financial position: The consolidated statement accounts for the
group financial statement which combines the income, expenses, liabilities and equity within
a single statement. In simple terms, it includes the parent and subsidiary financial information
which is shown as if it is of singleentity with respect to IAS 27 (Narkunienė and Ulbinaitė,
2018). Thus, all the liabilities and assets of the subsidiary and the parent company is added all
together which is then adjusted in regard to the adjustments because of consolidation. The
main purpose behind doing consolidation is benefitting creditors and shareholders of the
parent organization which indicate them the final outcomes of the business operation of both
parent and subsidiary company as a single entity.
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In this way, the consolidated financial position of the group is being prepared after
the acquisition of 80% of the shares by Pee Plc in Cee Plc.
b) Explaining the features of FS and usefulness of financial information
Financial information is widely used by various parties in order to make the decision
making procedure more effective. Information presented by Financial Statement (FS) should
posses the characteristics which enhances its scope. Various types of stakeholders use this
information to accomplish their objective. The characteristics are as follows:
Relevance
It is directly related to concept of usefulness of information in order to provide
relevance to stakeholders for taking decisions. The data given by FS must be accurate in
order it should possess confirmatory and analytical value. Assenting worth represents data
precedent actions and projecting power regarding potential future circumstances. In addition
to this, users rely on these financials statement to take important decisions which can aid
them to optimize utilizes resources (Hajiha and Azadzadeh, 2019). Combination of both past
and future events helps the users to know the financial position of organization through
referring statements. Organization represents these financial statements through publishing so
that parties like lender, suppliers, banks, competitors, etc can take strategic course of action.
Data shown must not be irrelevant and unnecessary for protecting the interest of investors. It
play vital role in encouraging investors for investing in the company. Firm’s activities are
largely dependent on its way of representing this information as its creditworthiness relies on
it. Lenders, suppliers make decision on the basis of company’s efficiency of paying liabilities
so that they can get their fund back. Relevant data aids in evaluating fair position so that
investors can gain trustworthiness and invest in company. It will ultimately benefit both
organization and users to achieve their goal of earning higher return through evaluating
financial information.
Reliability
The information must be free of errors, mistakes, misleading statements, etc. so that
data can be reliable. The information provided by financial statement should give reliable
details in turn taking decisions becomes easily (Chen and et.al., 2019). Implementing this
particular characteristics while formulating financial statement creates trustworthiness among
investors. Having good credibility in industry provide assistance in enhancing fund raising
capacity of firms (Subair and et.al., 2020). Users get accurate validation for taking accurate and
suitable decisions which can as well increase their ROI. This aids in creating faithfulness
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among stakeholders so that investors can be free of burden and receive sufficient reliable
information. Underlying substances, events, etc through proper disclosure of this can be
obtained. It as well assists in avoiding unnecessary legal obligations which can be hurdle in
achieving desirable financial condition. Financial health can be judged through having
insights into its performance, operations, and cash flow (Agustiningsih, Murni and Putri,
2017). Company’s way of spending available funds via concentrating on expense and
incomes so that profitability generating capacity can be known. Lenders, financial
institutions, investors and other parties highly focus on company’s profitability generating
efficiency so firm should focus on providing reliable components that presents accurate
earning capacity of firm. The reliable data makes the clear view for investors that how easily
firm can pay its short term obligations with utilizing assets. This type of financial information
is widely useful by users for attaining their personal objective of taking strategic decisions.
Comparability
The data presented by FS according to accounting standards and policies should be
comparable so that accurate view of company can be attained by users. In addition to this,
data should reflected through published financial data must provide stakeholders opportunity
to compare the previous position with current condition in order to get accurate sense of
liquidity position. It is essential for firm to shown all data in such a manner to so that
comparability opportunity can be provided to users to have clear picture. This is crucial for
company to execute these specific characteristics to gain trustworthiness among the
stakeholders (Seifzadeh and et.al., 2020). Firm uses this qualitative feature to show its
effectiveness in adopting improving actions for optimization of monetary resources. Investors
can take decisions on the basis of company’s ability of adopting changing circumstances so
that end outcome in form of net profitability can help them to achieve their personal
objectives. Well informed decisions assist in creating healthy working atmospheres for all
types of stakeholders so that growth opportunity can be identified. Incomparable data creates
inconvenience which leads to informal and unsatisfied. It enables the users to get insights into
company’s internal process such as strategies, tactics, structure, models adopted for
enhancing the monetary position which possible through referring the published data by
company.
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QUESTION 2
a)
I)Financial performance analysis of the business on the basis of financial information
Based upon the financial data given in the appendix 1, there are certain observations
which are being made from the given data which are stated below:
Growth:The sales turnover of the company has increased by 5% which is not very
high but has at least shown an increase which is greaterin comparison to the inflation
ratewhich therefore, indicates the actualgrowth. This isverymotivating and conveys a sign of
growth and development of the business. In addition to this, the figure of profit has also
increased showing an increase in trend which is also a sign of growth.
Profitability:The major weakness of the issue which is being identified within the
financial outcomes of the company is its net profit (NP)margin of the company has decreased
to 19.8% from 20% which results into drawing attention of the management towards the cost
and also recommends that the company should implement cost control measures as the
existing system is getting worse or not performing well (Issakovaand et.al., 2017). The profits
of the company has increased by 3.9% and in addition to this, the given profits are
notablewhich states that the Patrick Financial Services is the sole partner is having100%
ownership of the business.
Credit management:In addition to the above, the average cash balances are up by
5% which conveys that the liquidity position of the company has improved as the positive
cash flow is always welcomed within the business which helps in making sure that company
is having enough liquid funds to meet with the sudden or short term obligations of the
business.Also, the average debtor’s collection days have been decreased by 3 days which
depicts the efficiency of the company in chasing its outstanding due amount from its clients.
It is noticeable that the Patrick Financial Services days are less in comparison to the industry
average which therefore, indicates good working capital needs. The mainpoint of concern is
that the Patrick is being very aggressive in respect to recovering the due amount from its
clients.
II) Non-financial information better indication of future success than financial
information
Both the information, financial and non-financial is essential for the businesses in
respect to undertaking decisions. But it is being identified that the non-financial information
is a better indicator of success in comparison to financial information. The financial
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performance indicators basically and usually give an overallmeasurement of the
previousaccomplishmentof the entity.There is no such assurance that the past monetary
exhibition of the organization will prompt a decent future executionas well. There are full
chances that the client may leave and costing might increase which results into turning past
profits into losses in a short span of time. The non-monetaryindicatorsare sometimes also
termed as the indicators of the future performance as the good and efficient performance
within these measures would result into leading a good financial performance of the company
(Dobrovicand et.al., 2018). For instance, on the off chance that a business conveys a great to
its clients, this may result into more or more exorbitant costs later on.More specifically the
information provided in appendix 2 is related to the non-monetary indicators in balanced
scorecard.The internal business processes help in measuringthe internal efficiency and
furthermore to this is that it helps in indicating the current cost efficiency based upon which
the future results can be estimated. The customer knowledge measures theefficiency of
thebusiness is handling its external customers. A good and effective performance would
definitely add more customer in the future. In the context of innovation and learning
measures help sin determining the way in which the business develops. The new products are
highlighted here with along with the indicator of employee retention and thus, it is more
concentrated on the future rather than present.
III) Financial performance analysis of the business on the basis of non-financial
information
The expanded non-financial information about the performance of the company
gives abetter insight into the major operational issues along with painting a bleaker image
about the future.
Internal business processes:It can be seen that the error rates of the jobs have increased to
16% from 10% which is probably because of the outcome of decreasing the turnaround times
in order to progressthe delivery on the time percentages. This is a very critical aspect the
users mainly expects that the accounts are correct. In addition to this, the error could also lead
to issues for clients with the bankers etc. and the worse of it is Patrick Financial
Servicescould be sued if the client incurs losses due to such errors(Cakir, Bezbradica and
Helfert, 2019). The job average completion time has also been decreased by 30% from n
average of 10 weeks to 7 weeks. It might seem to be a positive change as the clients
encourage the fast turnaround time but it could also be connected to the rise in errors and
thus, required to be further investigated.
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Customer knowledge:The clients of the company has been declining which is alarming and
highlights the higher dissatisfaction among customers. Within the bookkeeping practice, one
might expect, higher level of repeated work such as the computation of tax which is required
to be done every year. It can also be seen that the risein the revenue of the firm is majorly
becauseof the risein the average fees instead of additionalclients. The average fees are also
increased to £775 from £600, which is an approximate rise of 29per cent. This number clearly
explains the loss of clients and also there could be other reasons as well. The outcome of the
above has resulted into drop in the market share from 20 to 14 per cent.This looks like the
firm is far behind its competitors as well.
Learning and growth:The major weakness of the organization is the absence of non-core
services which is being provided. The industry’s average revenue pertaining to the non-core
work has rose to 30 from 25 per cent but the Patrick Financial Serviceshas decreasedfrom 5
to 4 per cent. It also appears that the customers are looking for accountants in order to offer
broadrange of productsand serviceswhichPatrick is ignoring. Employee turnover is
increasing depicting staff dissatisfaction and the continuity of staff is important at client in
order to ensure quality products.
b) Discussing the importance of financial ethics and five basic morality are as follow
Specialized principles and its original values
The professional ethics accounts for the code of conduct which is required to be
incorporated within the business in order to effectively meet with the professional duties. The
principles are the guiding factors which helps in providing strategic direction which helps in
carrying out the liabilities in an effective way.
Financial Ethics is important for fair and honest practicing of accounting. In addition
to this, it is crucial for accountant to follow these financial ethics in order to maintain
integrity (The value of financial ethics, 2021). Ethics also makes the practical sense because
set of books will provide more accurate information than pure fiction. Five fundamental
principles of professional ethics of accountant are as follows:
Integrity
Accountants are legally obtained to do their work with conscience in order to
exercise honestly and willingness to handle with carefully. The mentioned professional
personal must be clear-cut and honest in all qualified and trade association.
Objectivity
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For providing fair and accurate information and account should be free from bias
activity. With respective to this, having the resolve to ensure those judgments are ethical.
This is one of the crucial ethical principal for ensuring regarding not suing unfair practices,
inconsistency of concentration or unwarranted pressure of others to take priority over
professional or company position.
Confidentiality
Accountant handle sensitive information and they are morally obligated to make
sure this data isn’t shared with other parties (Bosch-Badia, Montllor-Serrats and Tarrazon-
Rodon, 2018). Ensuring that confidentiality of data is maintained appropriately for
safeguarding the company’s interest. This is ethical obligation especially important for
accountants who is responsible for handling t company’s records and accountants. If there is
not a officially permitted responsibility or obligation to make known the component of data
without considering personal advantage of accountant.
Professional Competence and due care
It is one of the important fundamental principles of financial ethics. In addition to
this, accountant should have competency to effective complete its work for providing
complete information. With respect to this, it is crucial to follow for performing ethical duty
for accountant.
Professional behavior
Accountant should adopt the higher level of professionalism for matching his actions with
standards through accomplishing responsibilities and leadership (Jaijairam, 2017). In addition
to this, he should assure that he obeys with applicable legislation and policy and
accommodating the ethical responsibility to do something in practiced mode in the notice of
municipal. This ethical principle expect the account to avoid discredits the professions for fair
practices. These are the ethical fundamental principles of accountant which need to taken
into consideration. It enables business and other stakeholders to get accurate information of
business practices.
CONCLUSION
By giving emphasis on above description it can be accomplished that monetary
accounting is vital for having smooth functioning of organization. It helps for taking strategic
decisions on the basis of financial information. In addition to this, current report has
presented consolidated financial statement. In addition to this, relevance, reliability and
comparability along with uses of financial information has been explained in the present
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report. The report has comprised five fundamental principles and importance of financial
ethics. It has commented on financial performance of business. With respect to this, non
financial has also been considered to fro the same. This ahs as well considered internal
process, etc while representing company position. The financial ethics fundamental principle
includes professional behavior & competence, confidentiality, integrity and objectivity.
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REFERENCES
Books and Journals
Agustiningsih, S. W., Murni, S. and Putri, G. A., 2017. Audit findings, local government
characteristics, and local government financial statement
disclosure. Review of Integrative Business and Economics Research.
6(3). p.179.
Bosch-Badia, M. T., Montllor-Serrats, J. and Tarrazon-Rodon, M. A., 2018. Sustainability
and ethics in the process of price determination in financial markets: A
conceptual analysis. Sustainability, 10(5), p.1638.
Cakir, G., Bezbradica, M. and Helfert, M., 2019, June. The Shift from financial to non-
financial measures during transition into digital retail–a systematic literature review.
In International conference on business information systems (pp. 189-200).
Springer, Cham.
Dobrovic, J., and et.al., 2018. Non-financial indicators and their importance in small and
medium-sized enterprises. Journal of Competitiveness, 10(2), p.41.
Hajiha, Z. and Azadzadeh, A., 2019. Audit Committee Characteristics and Financial
Statement Comparability with the Moderating Role of Audit Firm Size
and Corporate Governance. Journal of Financial Accounting
Knowledge. 6(3). pp.95-117.
Issakova, S.A., and et.al., 2017. Preparing consolidated financial statements in accordance
with IFRS.
Jaijairam, P., 2017. Ethics in Accounting. Journal of finance and accountancy. 23. pp.1-13.
Narkunienė, J. and Ulbinaitė, A., 2018. Comparative analysis of company performance
evaluation methods. Entrepreneurship and sustainability issues. 6(1). pp.125-138.
Seifzadeh, M. and et.al., 2020. The relationship between management characteristics and
financial statement readability. EuroMed Journal of Business.
Subair, M. L. and et.al., 2020. Board Characteristics and the Likelihood of Financial Statement
Fraud. Copernican Journal of Finance & Accounting, 9(1), pp.57-76.
Online
The value of financial ethics. 2021. [Online]. Available through:
<https://sevenpillarsinstitute.org/value-of-financial-ethics/>
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