Financial Statement Analysis and Cash Flow: An Accounting Case Study

This accounting case study provides a detailed analysis of financial statements, including the balance sheet, statement of changes in equity, and profit and loss account. It covers the preparation of these statements and explains the treatment of leased assets in the balance sheet. The study further examines cash flow statements, including the classification of cash flows from investing and financing activities, and discusses the limitations of cash flow statements. The case study presents calculations and interpretations for each component, offering a comprehensive understanding of financial statement analysis. References to accounting standards and relevant literature are also included, providing a robust framework for understanding the concepts discussed.

Accounting Case
Study/Analysis

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Question 1........................................................................................................................................1
a. Statement of balance sheet .....................................................................................................1
b. preparation of the change in equity statement and income statement ....................................2
c. Reasons for showing a leased asset in the balance sheet even in case the asset is not owned
legally..........................................................................................................................................2
Question 2........................................................................................................................................3
a. Framing cash flow using investing activities .........................................................................3
b. Preparing cash flow using financing activity .........................................................................4
c. Limitation of the cash flow statement ....................................................................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Accounting refers to the process of recording the financial transactions relating to the
business. The process includes recording, classifying, analysing, summarising and reporting the
transactions to internal and the external users. The present study is based on various aspect of
accounting that includes preparation of the financial statement that includes balance sheet, profit
and loss statement and the cash flow statement. Furthermore, treatment of leased asset is also
been described in the report with stating reasons of recording it as an asset on the balance sheet.
Moreover, limitations associated with the statement of cash position are also been highlighted in
the study.
Question 1
a. Statement of balance sheet
Balance sheet- It is been referred as financial statement that reports for company's asset,
shareholders equity and the liabilities for a particular period of time. It provides a base fro
computing the return rate and in making evaluation of company's capital structure (Williams and
Dobelman, 2017). It helps in depicting the financial position of an enterprise where all the
information regarding an owing of the company and an amount invested by the shareholders are
been taken into account.
Balance sheet
Particulars Amount Total amount
Liabilities
Non-current liabilities
capital 150000
less: Drawings 36000
114000
Mortgage payable 40000
Loan payable 20700
Total non-current liabilities 174700
Current liability
Accounts payable 37100
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Total current liability 37100
Total liabilities 211800
Non-current assets
land 43200
Furniture 12000
Buildings 100000
Total fixed asset 155200
Current assets
cash at bank 31000
Accounts receivable 20000
Baking supplies 5600
Total current assets 56600
Total assets 211800
b. preparation of the change in equity statement and income statement
Statement of changes in equity- This statement shows change in shareholders equity and
an owners equity throughout an accounting period. It details out movement of the reserves that
develops for an shareholders equity. It reflects changes in the share capital, value of shares
towards its shareholders. Such changes resulted due to an increase in the corporation's capital
and earnings. This results to an increase in the stockholder equity that might increase from the
sale of the shares by raising revenue of the company and decreasing operating expenses.
Statement of changes in equity
Particulars Amount Total amount
Investments 150000
Add: Net income 66000
less: Drawings -36000
Net increase in owners equity 180000
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Profit and loss account- This account shows the amount of net profit that is been earned
by the firm after adding drawings in the owners equity resulted at end and subtracting additional
capital and owners equity at the beginning of the period (Drake, Quinn and Thornock, 2017).
Profits and loss statement
Particulars Amount Total amount
Owners equity at end 150000
Add: Drawings 36000
less: Additional capital 20000
Adjusted owner's equity at end 166000
Less: Owners equity at
beginning period 100000
Net loss 66000
c. Reasons for showing a leased asset in the balance sheet even in case the asset is not owned
legally
This happens because when an organization lease its assets to lessee, it is counted as
receivable of an equal amount of the investment made in lease (Kaur, Aggarwal and Gupta,
2017). In case of finance lease, as per the accounting standards 105, assets leased by the
company is presented as as non-current asset. All types of risk and the rewards that are incidental
to legal ownership are been transferred by lessor and hence the receivable payment on lease is
been treated as repayment of the finance and the principal for reimbursing lessor for its services
and an investment.
Question 2
Cash flow statement- It refers to the financial statement that facilitates aggregate data
relating to all the cash inflows that the company receives through its ongoing operations and
sources of external investment. It involves all the cash outflows which pays for the business
activities and an investments at the given point of time (Xiao, 2018). Cash flow is considered as
most intuitive of the financial statements as it follows or reflects a cash generated by business in
terms of three major activities that is operating, financing and investing activity. Theses sections
helps an investors in determining value of the company's stock or the whole company.
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a. Framing cash flow using investing activities
Cash flow from an investing activity- Under this section, all those activities are
included that relates to cash disbursement on the plant, equipment and the property (Maaloul and
Zéghal, 2015). Through this an analyst can look into finding the changes in the capital
expenditures.
Particulars Amount
Cash flow from investing activities
Proceeds from sale of machinery 12000
Purchased land -220000
Purchased machinery -140000
Purchased shares -100000
Proceeds from Sale of long term government
bond 56000
Purchased shares -170000
Net cash flow from investing activity -562000
Interpretation- From the above analysis it has been presented that the proceeds received
from the sale of the asset or the marketable security is been added for the amount it is been sold.
However, the purchase of the machinery, shares, land seems to be deducted as per the IAS at the
time of framing the cash flow statement. Resulted net cash flow from the financing activity
evaluated as -562000 that means purchases are greater than sales proceeds that in turn means
more investment are been made as compared to the sale of the marketable securities , land and
equipments.
b. Preparing cash flow using financing activity
Cash flow from the financing activity- This section facilitates an overview of the cash
that is used in the business financing (Drake, Quinn and Thornock, 2017). It helps in measuring
the cash flow between owners, company, creditors etc. of which the source is been normally
from an equity or the debt.
Particulars Amount
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Cash flow from financing activities
Cash proceeds from issue of shares 300000
Issue of debentures 500000
Payment of dividend -60000
Repayment of loan -90000
Payment of interest -8000
Net cash flow from financing activity 642000
Interpretation- The above assessment reflects that issuance of the shares, debentures is
considered as cash inflows and are added under head of financing activity of the cash flow
statement. Furthermore, payment of dividend in cash and repayment of the loan and paying
interest amount tends to be deducted as it is indicated as cash outflow from the financing activity
of the business. Thus, net cash flow from the financing activity evaluated as 642000 which
means that cash proceeds with regards to issue of stock and the debentures is of higher value
than the interest, dividing and loan payment.
c. Limitation of the cash flow statement
There are several limitations attached with the cash flow statements that are as follows-
Fails in presenting the net income- It is the statement that fails in presenting net income
for the period as it do not takes into account the non-cash items that could be easily attained by
the profit and loss statement. It could be utilized as supplement to an income statement.
Does not provide access to the solvency position- This statement does not help in
assessing the liquidity or the solvency position of an enterprise. Appropriate position of the
liquidity could not be analysed from statement of cash flow that presents only a cash position at
period end (Williams and Dobelman, 2017). It helps in evaluating the amount of an obligation
could be met that is the statement which do not represent a real liquidity position.
Not counted as substitute of the cash flow and income statement- It is not a statement
that can be sued in place of fund flow or income statement. Functions that are been performed by
fund flow or a profit and loss statement cannot be made by CFS.
Not assess profitability- In a practical sense, cash flow from the operations do not help in
assessing the profitability of an entity as it does not consider revenues nor takes into account the
cost.
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Not conform with companies act- The provisions that are been made by companies act
are in conformity with the income and the balance sheet with respect to cash flow that is been
prepared in accordance with AS 3.
Does not analyse future cash position- Since the CFS is been framed based on historical
cost and it do not help in knowing or estimating future cash flows.
Not facilitate inter-industry contrast- Since this statement do not measure an economic
efficiency of an entity as compared to the other industry is not seen as possible. For example-
company having low amount of capital investment will be having less amount of cash flow in
comparison to other forms that has more and more investment in capital having the higher value
of the cash flow.
CONCLUSION
By summing up the above report it has been analysed that financial statement helps in
knowing the financial position, profitability and the cash position of an entity. Though, there are
various limitation attached to these statements but it is counted as the best way of reporting to
users and helping them in making appropriate or suitable decisions.
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REFERENCES
Books and Journals
Drake, M. S., Quinn, P. J. and Thornock, J. R., 2017. Who uses financial statements? A
demographic analysis of financial statement downloads from EDGAR. Accounting
Horizons. 31(3). pp.55-68.
Kaur, M., Aggarwal, N. and Gupta, M., 2017. An Investigation into Returns from Financial
Statement Analysis among High Book-to-Market Stocks. Indian Journal of Economics and
Development. 13(2). pp.353-358.
Maaloul, A. and Zéghal, D., 2015. Financial statement informativeness and intellectual capital
disclosure: An empirical analysis. Journal of Financial Reporting and Accounting. 13(1).
pp.66-90.
Williams, E. E. and Dobelman, J. A., 2017. Financial statement analysis. World Scientific Book
Chapters. pp.109-169.
Xiao, P., 2018, August. The Application of Financial Statement Analysis in Strategic
Management. In 2018 International Conference on Management, Economics, Education
and Social Sciences (MEESS 2018). Atlantis Press.
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