Financial Accounting and Reporting: Analysis and Reporting for EL Ltd

This report provides a comprehensive analysis of financial accounting and reporting practices for EL Ltd, a domestic electrical services provider. The report begins by identifying various users of financial information, such as managers, employees, suppliers, the government, and customers, along with their respective needs. It then explores the legal and regulatory influences on financial statements, including the role of the Financial Reporting Council (FRC) and relevant legislation like the Companies Act 2006. The report assesses the implications of these regulations for stakeholders and how accounting standards address different laws. Furthermore, it includes the preparation of financial statements, starting with an unadjusted trial balance and progressing to adjusted trial balances, income statements, and balance sheets. The report also covers the preparation of financial statements from incomplete records and the calculation and interpretation of accounting ratios. The report concludes by summarizing the information needs of different user groups and provides a detailed financial analysis of EL Ltd's performance, incorporating key accounting principles and practices.

Financial Accounting and
Reporting

Table of Contents
INTRODUCTION ..........................................................................................................................4
TASK 1............................................................................................................................................4
1.1Different users of financial information and their needs.......................................................4
1.2 Legal and regulatory influences on financial statements......................................................5
1.3 Assess the implications for the users....................................................................................6
1.4 How different laws/ regulations are dealt with by accounting and reporting standards.......6
TASK 2............................................................................................................................................7
2.1 Prepare financial statements for a variety of business with trail balance..............................7
2.2 Prepare financial statements from incomplete records.......................................................10
2.3 Prepare a consolidated balance sheet and profit and loss statement ..................................11
TASK 3..........................................................................................................................................12
3.1 Summarize the information needs of different user groups ...............................................12
3.2 Prepare financial statements by sole trader, partnership and limited company..................13
TASK 4..........................................................................................................................................13
4.1 Calculate accounting ratios.................................................................................................13
4.2 Report incorporating and interpreting accounting ratios....................................................15
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17

INTRODUCTION
Financial accounting and reporting consists of summarizing, analysis and reporting
financial transactions related to a business. It is mandatory for an organisation to prepare
financial statements that depict true and fair picture of the business. There are many stakeholders
which are associated with a business such as suppliers, shareholders, banks, employees,
government etc (Anderson and et.al., 2015). They have interest in the company and they need the
information for decision making. There are certain domestic and international accounting
standards which provides framework and guidelines for all the companies in UK (Ingram,
LaForge and Williams, 2012). The present report is based on EL Ltd which has been in the
business for more than 10 years. They provide domestic electrical services to homes and
business units in the country. There are some laws and regulation which affect the accounting
and reporting standards. Furthermore, it is essential for the company to understand the formats of
financial statements. Apart from this, interpretation of the financial information using accounting
ratios has also been included in the report.
TASK 1
1.1Different users of financial information and their needs
Financial information helps an individual to understand the business of EL Ltd. It can be
used to analyse the growth opportunities of the firm in the future. All the individuals and groups
which are associated with the company are known as stakeholders (Brigham and Ehrhardt,
2013). It is essential for EL Ltd to protect the interest of their stakeholders. Different users of
information and their needs are given below:
Managers: They need financial information to assess the position and performance of the
company (De Groot, Alkemade, Braat and Willemen, 2010.). The managers of EL Ltd take
business decisions on the basis of this. It helps them to manage the affairs of the organisation in
the long run.
Employees: Employees of EL Ltd are completely dependent on the company for their
remuneration (Minichilli, Corbetta and MacMillan, 2010). The profitability of the company can
affect their job security and compensation. They need financial statements to evaluate the future
of the company in the industry.
Suppliers: Suppliers provide goods on credit to EL Ltd. They have to assess their
financial statement to see their credit worthiness. The financial health of the company is used to

formulate the terms of credit (Minichilli, Corbetta and MacMillan, 2010). Banks also analyse the
credit position of a business before granting a loan to them.
Government: UK government needs financial statements to make sure that EL Ltd has
presented true and fair picture of the business to its stakeholders (Bovée and Thill, 2014). They
also ensure that the company is paying its tax returns and helping in the economic growth of the
country. The government keeps a track that the business in following all rules and regulations.
Customers: Customers need financial statements to evaluate the performance of the
company and its future (Bazerman and Moore, 2012). It allows to see whether EL Ltd have the
potential to supply the goods and services according to the demands.
1.2 Legal and regulatory influences on financial statements
It is the responsibility of Financial Reporting Council (FRC) to provide framework for
financial reporting (Broadbent and Cullen, 2012). It is essential for all the companies to follow
the rules and regulations of the government. EL Ltd has to change their strategies in order to
comply with the legal and regulatory framework of the government. Different organisations
prepare their statements according to their suitability. It helps them tot reflect the true picture of
the business. For example, Joint Stock Companies Act (1844), Company Act (1900) and limited
liability consolidation (1844) made it compulsory for the companies to create audited balance
sheets (Coombs, 2014). As per the legislation of UK, all the business entities have to abide by
the rules whether it is a sole proprietor, partnership or public limited company. They have to
present their financial report at the end of each year. The main authorities are UK Accounting
Standards Board, International Accounting Standards (IAS) and Company Act 2006 (Epstein and
Buhovac, 2014). It has allowed the government to keep a track on the business activities of
different companies in UK. It has helped them to protect the rights of the stakeholders. It is
essential for EL Ltd to disclose all the material facts of the company that can affect the decision
making of the stakeholders. Apart from this, the financial statements should be should not
contain any technical languages which cannot be understood by the people (Kaplan and
Atkinson, 2011). It should be simple language and notes should be included in the balance sheet.
These notes should contain in depth details of different transactions which cannot be included in
the balance sheet.

1.3 Assess the implications for the users
Legal and regulatory framework of UK has significant implications of the stakeholders.
They can use the financial statements to assess the position and performance of EL Ltd. The
main aim of the government is to protect the interests of the consumers and other stakeholders
(Kaplan and Atkinson, 2011). But still many people believed that there are many loopholes in the
preparation of the financial reports. The financial reports of the company are very complicated.
Many companies have provided extremely detailed information which extends to more than 100
pages. Even though, all the material information have been presented in the report but it is
impossible for the users to understand it due to unimportant complexities (Ledgerwood, 2014).
Furthermore, the management of EL Ltd can opt for those accounting treatments that is in favour
of their business. It can distort the entire picture which can influence the decision making of the
people. There are certain rules and regulations which have to followed by the companies. The
overall impact on the users of the financial statements have been positive. It has allowed them to
rely on the financial reports while taking investments decisions (Lusardi, 2011). They can use
credit details, cash inflow and outflows for future decision making. The government also
analyses the statements of EL Ltd to see whether they have been working for the benefits of the
society or not. It gives them details for their income, profitability, liquidity, solvency and credit
worthiness. Financial Reporting Council (FRC) makes sure that all the companies follow the
regulations and prepare their statements accordingly (Madura, 2011). This protects the investors
and stakeholders from any unfair practices adopted by a business.
1.4 How different laws/ regulations are dealt with by accounting and reporting standards
Accounting and reporting standards are changed by the government according to the
requirements. These changes are made so as to improve transparency in the business activities of
various companies in UK. The Security and Exchange Commission has restricted instability of
stocks in the market because it ensures that generally accepted accounting principles are
followed (Ingram, LaForge and Williams, 2012). It is the responsibility of Financial Accounting
Standards Board (FASB) to form standards for the preparation of financial statements. It protects
the interest of the investors and shareholders. Furthermore, it acts as a shield for the investors
and protects them from frauds and concealment of facts. UK has Internal accounting standards
which was established to assist in comprehensive financial accounting reports. Government
Accounting Standards Board (GASB) has made guidelines which are mandatory to be followed

(Minichilli, Corbetta and MacMillan, 2010). It has helped the investors to understand different
aspects and entries in the reports. This has not only increased the reliability but transparency has
also improved in the country. Many committees have been formed which look after this prospect
of the country. In the year 1969, UK ICAEW came up with a statement that sowed the intent of
accounting standards. It made clear that there are four goals of the standards which have to be
followed by all companies (Kaplan and Atkinson, 2011). It will help in the reduction of
dissimilarities in the accounting principles. Furthermore, it was aimed to disclose the basics of
accounting and reporting. UK government has been working on the development and I
improvement in the accounting and reporting standards of the country. They want that all the
companies should follow the guidelines of the authority and prepare statements accordingly
(Crilly and Ioannou, 2014).
TASK 2
2.1 Prepare financial statements for a variety of business with trail balance
Preparation of unadjusted trial balance is simple. All the balances of the account are
transferred from ledger to the trial balance (Business Finance, 2014). The debit balances appear
on the left side while credit balances on the right side column. Unadjusted trial balance for EL
Ltd is as follows:
EL Ltd
Unadjusted Trial Balance
December 31, 2015
Account Debit Credit
Cash 32800
Accounts receivables 300
Inventory 39800
Leasehold Property 100000
Accounts payable 49000
Long term liabilities 99500
Common Stock 10000

Dividends 1000
Revenues 27800
Cost of Good sold 10200
Rent expenses 500
Suppliers Expense 500
Utilities Expense 200
Wages Expense 500
Interest Expense 500
Totals 186300 -186300
Adjustments:
 EL Ltd pays $1000 for rent of January in December
Date Account Name Debit Credit
01/12/31
Prepaid rent
-Cash
1000
1000
 Paid electricity bill $200 and is due on 15th January
Date Account Name Debit Credit
01/12/31
Utilities Expense
-Accrued expenses
200
200
 Leasehold deprecation $2000 every year
Date Account Name Debit Credit
01/12/31
Depreciation Expense 2000

-Accumulated
deprecation
2000
 Payment received from customer for the six months $1000
Date Account Name Debit Credit
01/12/31
Cash
-unearned
income
1000
1000
 Accrued wages $250 (employee worked for half a day)
Date Account Name Debit Credit
01/12/31
Wages expenses
-Accrued
expenses
250
250
Adjusted trial balance
EL Ltd
Unadjusted Trial Balance
December 31, 2015
Account Debit Credit
Cash 32800
Accounts receivables 300
Inventory 39800
Leasehold Property 100000
Accumulated deprecation 2000

Accounts payable 49000
Accrued expenses 450
Unearned Income 1000
Long term liabilities 99500
Common Stock 10000
Dividends 1000
Revenues 27800
Cost of Good sold 10200
Deprecation expense 2000
Rent expenses 500
Suppliers Expense 500
Utilities Expense 400
Wages Expense 750
Interest Expense 500
Totals 189750 -189750
2.2 Prepare financial statements from incomplete records
EL Ltd
Income statement and Balance Sheet
December 31, 2015
Account Debit Credit
Revenues 27800
Cost of goods sold 10200
Deprecation expense 2000
Rent expenses 500

Suppliers Expense 500
Utilities Expense 400
Wages Expense 750
Interest Expense 500
14850
Net Income 12950
Total 27800 -27800
Balance sheet
Account Debit Credit
Cash 32800
Accounts receivables 300
Prepaid rent 1000
Inventory 39800
Leasehold Property 100000
Accumulated deprecation 2000
Accounts payable 49000
Accrued expenses 450
Unearned Income 1000
Long term liabilities 99500
Common stock 10000
Dividends 1000

2.3 Prepare a consolidated balance sheet and profit and loss statement
Consolidated Balance Sheet
Assets 2015
Cash 14842
Financial assets 7268
Investments 509493
Loans and advances 117630
Financial assets 105873
Reinsurance assets 14843
Deferred acquisition 25234
Deferred tax assets 1394
Other assets 38813
Non current assets 109
Intangible assets 13443
Liabilities and equity 2015
Financial liabilities 9207
Liabilities to bank 25531
Unearned premium 20660
Reserves for loss 72003
Reserves for insurance 486222
Financial liabilities for unit linked contracts 105873
Deferred tax liability 4003
Other liability 38686
liability for disposal group 18

Certified liabilities 8383
Subordinates liabilities 12258
Total liabilities 782843
Shareholder's equity 63144
Non controlling interests 2955
Total equity 66099
Total liabilities and equity 848942
TASK 3
3.1 Summarize the information needs of different user groups
The stakeholder uses the information of the company for their decision making relating to
the various aspects of the company. The main stakeholders for the company includes employee's,
government, customers, society, suppliers, banks, creditors and the community (Budgeting,
2013). EL Ltd has to consider about the risk and returns of the investors. They have to take
decisions keeping in mind the changes in the stock prices. They have to ensure that the company
is in the position to pay enough dividends to their investors. Many companies retain large
amount of profits in the business and this makes the shareholders unhappy because they are not
getting good returns in their investment (De Groot, Alkemade, Braat and Willemen, 2010.). It is
essential for the company to make a balance between the two as it will help the company in the
long run. Furthermore, they have to ensure that they pay the interest and instalments to the banks
and lenders from whom they have lend money. Dividends are used to measure the growth and
development progress of the company.
On the other hand, investors considers credits and loans as risky. It increases the leverage
position of the company because a business has to pay instalments even if there are no profits in
the business. Employees have to be paid their salaries according to the norms and trends of the
industry (Bazerman and Moore, 2012). The company should protect the frights of the employees
in the organisation. Apart from this, EL Ltd has to fulfil their social obligations and they have to
take care of the society as well. Creditors analyse the short term liquidity position of the
company. It is important for the company to make sure that they have enough funds so as pay to

the creditors. Customers are at the central position of a business. They are the one against whom
the entire business revolves (Broadbent and Cullen, 2012). EL Ltd has to make sure that they get
best of goods which have excellent quality, fair and affordable prices and after sales services. It
will help the company to increase their brand value and image in the market (Ingram, LaForge
and Williams, 2012).
Figure 1: Statement of financial position sole trader

Figure 2: partner's capital account
Figure 3: Balance sheet of public limited company

3.2 Prepare financial statements by sole trader, partnership and limited company
Sole proprietorship is a business organisation which is handled and controlled by a single
owner. Partnership is contract between two or more parties who have agreed to do business
together (Minichilli, Corbetta and MacMillan, 2010). While limited company is a company in
which the ownership is divided into many shareholders. All of these firms have different formats
and regulations for the presentation of the financial statements. The preparation of the financial
statements by sole trader, partnership and limited company are as follows:
Partnership firm: A partnership firm is need to prepare Balance Sheet, Profit and loss
statement and partner's capital statement (Website Hosting and Development, 2013). Many
partnership firm operates differently because all their rules are written in the agreement which
has been mutually agreed and signed by all the parties. In case of partnership entities certain
legal requirements are present which have been developed at the time of preparing financial
statements. As per the accounting laws and principles it is necessarily required for partnership
firms to prepare partner’s capital account, P&L app account etc. Through these accounts it
becomes easy to know their overall performance in the market and in turn leads to favorable
results for company. In case of partnership firms the user of financial information involves
partners along with suppliers, customers and investors. They are interested in knowing the
financial performance of entity. Through different statements need of different parties are
satisfied by partnership businesses.
Sole proprietor: Many small companies in UK start their business with sole
proprietorship (Ingram, LaForge and Williams, 2012). They convert the business grows as it is
grows into public limited company. They have to only prepare profit and loss statement because
the government has given them the right to do so. It gives the businessman all the information
about the firm. But as the enterprise grows it becomes hard to manage all the info in one
statement. In case of sole proprietor business some legal requirements are being present where
this type of business is not required to prepare and present financial statement and for tax
purpose it is must to have such statements. Sole proprietor businesses are required to pay taxes
on the income earned and due to this reason laws have been prepared in relation with the same.
In case of sole trader business the owner of business uses the financial information in order to
know whether the overall operations are carried out as expected or not. Further, corrective
actions are taken in case organization is not performing efficiently.

Public Limited Company: In accordance to the International Accounting Standards
Board (IASB), it is compulsory for all the public limited companies to alter all the financial
statements accordi9ng to the guidelines of the government. It considers Balance Sheet, Profit and
loss and cash flow statement (De Groot, Alkemade, Braat and Willemen, 2010.). They have to
reveal all their policies and operations in the financial statement every year. The legal
requirement associated with preparation of financial statement states that for public limited
company it is must to prepare balance sheet, profit and loss account and income statement.
Further, all the statements must comply with the accounting standards so that appropriate and
reliable information must be shared with the parties who are associated with the organization. In
case of public limited companies the users of financial information are government, suppliers,
customers, investors and suppliers. They are interested in knowing the long term growth of the
business. In case of investors through financial performance they are able to know the actual
level of return on the invested capital in the shares of business.
TASK 4
4.1 Calculate accounting ratios
Accounting ratio are used to understand the financial aspects of a business. ABC
Company can used to study their liquidity, solvency and profitability for the future (Broadbent
and Cullen, 2012). There are many ratios such as liquidity ratios, working capital ratios,
profitability ration and capital gearing ratios.
Liquidity ratios are used by ABC Company to establish the ability of the firms so that
they can carry out today as well as day to day operations of the business. It ensured that their is
no cash crunch situations in the business (Epstei and Buhovac, 2014). It can be used to see
whether the company has enough marketable securities to continues their operation's in the
future. It solves the problem of too much or too little cash in the company. It can be used to
create plans and strategies for the future.
Profitability ratio as the name suggest is used to calculate the profitability of ABC
Company (Ingram, LaForge and Williams, 2012). It can be compared from the previous year's
data to find put the differences in the performance. ABC Company can make use of profitability
ratio to know the ability of the firm to convert their sales into cash. It is also used to determine
the trend of profits.

Efficiency ratio is used to calculate the efficiency of the company in their business. High
efficiency indicates that the company is making the best use of their resources (Kaplan and
Atkinson, 2011). On the other hand, low efficiency sows that the business has been
underperforming.
Apart from this, capital gearing ratio helps in the calculation of solvency position of the
company in the future (Minichilli, Corbetta and MacMillan, 2010). ABC Company has to make
sure that they have enough funds and assets to pay off their liabilities in the future. Lack of
liquidity and solvency is harmful for the company in the long run. It not only affects the growth
of the business but it creates restrictions in every activity related to the business.
Ratios Formula 2015 2014
Liquidity
ratios In '000 In '000
Current ratio
Current assets/ current
liabilities 4800 3240 1.48 3840 2800 1.37
Quick ratio Liquid assets/ current liabilities 1400 3240 0.43 1000 2800 0.35
Absolute
liquid ratios
Absolute Liquid assets/ current
liabilities 1200 3240 0.37 840 2800 0.3
Profitability
ratios
Gross profit
ratio (Gross profit/ net sales) *100 6000 22000 0.27 5200 20000 0.26
Net profit
ratio (Net profit/ net sales) *100 1800 22000 0.08 1392 20000 0.07
Working
Capital
ratios
Inventory
ratio Cost of goods sold/Inventory 22000 3400 6.47 20000 2840 7.04

Debtors
turnover ratio Net sales /Account receivables 22000 200 110 20000 160 125
Capital
Gearing
Total long term debt/
shareholders fund 3200 6960 0.45 2600 6520 0.39
4.2 Report incorporating and interpreting accounting ratios
Accounting ratios can be very useful for ABC Company because they help in the decision
making and strategy formulation. Many companies have started incorporating accounting ratio in
the financial reports (Molly, Laveren and Deloof, 2010). It is helpful for the investors to
understand the business and its growth prospects in the future. UK government has also made
many standards and guidelines which have to be followed by all the business units in the
country. These have to be incorporated in the reports every year. Management of ABC Company
can used it to make changes in their plans and strategies for the future (De Groot, Alkemade,
Braat and Willemen, 2010.). From the above accounting ratios table it acne be inferred that the
current ratio of ABC Company has been satisfactory. It was 1.37 in 2014 but it has improved to
1.48 in 2015. It shows that the company has enough funds to pay off their current liabilities.
They do not need any extra borrowings from the external parties to meet their current liabilities.
The company has shown good growth from the last year. But their quick and absolute quick ratio
is below 1 which shows that the company is entirely dependent on their stock and debtors to
meet their current liabilities (Epstei and Buhovac, 2014). They should have invested more on
cash and other marketable securities Too much dependence on stock and debtors can be harmful
for the company in long run. The have to make change in this strategies so as reduce this
dependence on stock and debtors. Gross profits and Net profits of ABC Company is also very
low. It shows that they have not been able to generated enough profits from their business. It is
essential for them to reduce their expenses so that their profitability increase to a significant level
in the next financial year (Herman, 2011). The working capital of ABC Company is high. It
means that they have enough funds to carry on their operations without the use of external help
or borrowings. It includes inventory and debtor turnover ratio. The inventory turnover ratio of
ABC Company has reduced from the last year and even their debtors turnover ratio has also
reduced. This shows that the company has to make changes in their business because they have
not performed equal to the last year. The capital gearing ratio of ABC Company is also quite low
which shows that they are less dependent of debt funds. Their majority of the funds are invested

in share capital (Conway, 2013). It means that they have low leverage ratio and the investors can
use this information for the decision making. Too much dependence on the shareholder's funds
means that the control of the company is diluted. It can affect their decision making power as
they have to take permission from the shareholder in every important decision of the business
(De Groot, Alkemade, Braat and Willemen, 2010.).
CONCLUSION
It can be concluded from the above report that financial accounting and reporting plays a
vital roles in UK. The government has been proactive in this respect and they have made all the
necessary changes to ensure that each company makes statements accordingly. It should be true
and fair. They have to revel all the material information in their income statements and balance
sheet because it is mandatory for them. They can use financial planning, accounting ratios, make
cash and sales budgets and by using investment appraisal techniques. But it is essential for them
to disclose all these aspects in the financial statements.

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