Financial Accounting: An Analysis of Financial Statements

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Financial Accounting

Table of Contents
Introduction.........................................................................................................................................3
Part A...................................................................................................................................................4
Define financial accounting and its purpose?................................................................................4
Name two internal stake holders and four external stake holders of a large business
organization. For the internal and external stake holders, you have identified above, comment
briefly on why each of them might be interested in the financial information of the
organization.....................................................................................................................................5
PART B:...............................................................................................................................................8
Client 1: You are required to draw a journal and calculate the Owner’s Capital at 1st
January 2019....................................................................................................................................8
Client 2 Munteanu Limited is a retailing company and a client for your accounting firm. Its
trial balance at 31st December 2018 is as follows:.......................................................................10
Client 3............................................................................................................................................11
Client 4 Hilly is a retailer and is the 4th client in your clients’ portfolio. Information relating
to his business for January 2019 is as follows:.............................................................................13
Client 5............................................................................................................................................16
Conclusion...........................................................................................................................................18
References..........................................................................................................................................19

Introduction
This report determines the awareness of rules and regulations related to financial reporting, as
junior accountant of company. It is an accounting system which keeps the record of the
company’s finance related activities. In this the first entry are recorded, summarised, then
presented in financial statement and then this statements are used for making decisions in the
business. It depicts the true performance and position of business. This statements are used
externally and internally both. In financial accounting the double entry system is generally
used for recording of the data. It generally takes into consideration the needs of the external
users like government, suppliers, customers and banks. Financial accounting give the finance
related information of the company to the outsiders, so that they can analyse the information
for making investment decisions. Every limited companies prepares books. This is very
important for every business as it shows income and cost spent of company, it is also called
final account .

Part A
Define financial accounting and its purpose?
This system of account includes preparation, of financial statements that can be used for the
external use, means it can be helpful to the external users like government, stakeholders,
customers, suppliers etc (Weil, et. al., 2013). it depicts the true and correct position and
performance of business. It includes preparation of trading, profit and loss account, that
depicts net profit of business and balance sheet that shows, the assets and debts or net capital
of business. Financial accounting, is prepared according to some accounting standards that
include various principles according to which the accounting is done. These accounting
principles cannot be changed by the firm frequently; it can be changed only when it is
required by the law or for better presentation of these statement.
Purpose:
 The objective of the such accounting is, to prepare accounting reports that can be used
as a decision making tool by the external users of this statement.
 It helps in giving satisfaction to the customers as they can study the financial
statements and get to know about the profits and soundness of income of the business.
Financial statements another purpose is to help the management in taking the decisions and
check the financial soundness of the business (Hall, 2012).
 It helps to know about the finance position and changes, if occurred in financial
position as compared to, last accounting period.
 This statements provide the information to the various users, such as:
Managers
Managers take the help of the financial statements in knowing the correct financial position
and to take the decisions accordingly. As these are the most important part in decision
making process as all decisions are taken after considering performance of business.
Shareholders

Shareholders uses the accounting statements to know rate of return from the shares they have
invested in the business.
Investors
Investors use financial statements to know the debt paying capacity of the business by
judging their profits and interest giving capacity.
Financial institutions
They use financial statements to decide whether they should give loans to this business or
not. It checks the financial health of the business.
Competitors
Competitors study these statements to analyse their performance in the market with rivalry
company so that they can improve their performance (Nam, et. al., 2019). And to know where
they stand in the market, to fight with their competitors in the long run.
Government
Government uses financial statements to calculate the tax from the profit earned and it helps
to know the economic progress of the business.
Name two internal stake holders and four external stake holders of a large business
organization. For the internal and external stake holders, you have identified above,
comment briefly on why each of them might be interested in the financial information
of the organization.
Stakeholders are individual or groups who, are keen interested in activities of business. They
study financial statements of business to know the various information and they can influence
by the performance and they can also influence the activities of the organisations. They can
be external or internal.
Internal stake holders
Internal stakeholders, are those persons or groups which, are interested in internal functioning
of the business or those who have interest within the organization (Honková, 2018). The two
internal stake holders are shareholders and employees.

External stakeholders
External stake holders are individual and companies which are outside of a company. They
can influence the various activities of the business. They can also be said as secondary stake
holders. They use these information of company to know its performance and state of
liquidity. These stake holders do not take part in the daily activity of the company but then to
the company’s action affect them. They don’t have any idea related to internal matters of the
company; they just only use financial statements. The four external stake holders are
suppliers, creditors, competitors and government.
Interest of shareholders in the financial statements
1. Shareholders- these use the statements to know the financial strength of company.
They want to, know whether the company is in loss or in profit, whether they will get the
good return or not. As they are considered as the owner of company so they want to get
information about financial performance of the company and whether the company is able to
provide them good interest on their investment.
2. Employees- different employees have different perspective looking towards the
financial statements. They check the financial performance to check whether the company
will give them bonus and handsome amount of increment in their salary. They also study the
financial statements to have deep knowledge of the current position of the business as many
companies involve their employees to help them in making decisions which requires detail
understanding. For these particular reasons the employees of company are interested in the
financial statements.
3. Government- they generally have keen watch on the big companies to know the
amount of profit they have earned. They are generally interested to know earnings of business
as they can earn the high amount of tax on it. They also do future predictions on the basis of
the financial statements. Various government agencies like sales tax department and income
tax check whether the company has paid true tax and have not indulged in window dressing.
Suppliers- these are the people who give goods to the particular are business only the
suppliers will provide goods when the company has good financial health. They also analyse

the financial statements to check whether to give goods on credit or not. They know about the
finance related health of the company before supplying them the goods (Bhattacharyya,
2012). Hence, these are the main purpose for the use of financial statements by the suppliers.
Creditors- these include individuals and various financial stamens which check the financial
statements to know the debt paying capacity of the company. By studying they get sure about
that they will get their money back. Creditors are generally the person who provides goods on
credit (Gupta & Sharma, 2012). These groups are interested to know the financial soundness
of, company before providing them credit. They are like the watch dogs for the purpose of
being safe in considerations it their money.
4. Competitors- they use these statements to compare their performance with that their
rival companies. So that they can know where they stand in the market and that helps in
making the decisions and formulate various strategies. They try to know the financial status
of other companies, so that they can know the competitive edge of their company and can
improve their performance in the market in the long run.

Liabilities amount Assets Amount
Payables : S hood 12150 premises 240000
Brown 16600 Van 51250
fixtures 8100
inventory 23900
Receivable: P
Mullen
4400
F Lane 6100
Cash at Bank 68400
Cash in Hand 15600
Total 28,750 Total 4,17,750
PART B:
Client 1: You are required to draw a journal and calculate the Owner’s Capital at 1st
January 2019
-Capital owner

Assets – Liabilities = 4,17,250 – 28750 = 389,000

Client 2 Munteanu Limited is a retailing company and a client for your accounting
firm. Its trial balance at 31st December 2018 is as follows:
Trial balance
Particular dr. a/c Particular Cr. a/c
Opening balance 15,000 sales 1,38,000
Purchases 61,000 Less: returns inwards
-3,000
1,35000
Less: return outwards
-1500
59,500 Closing stock 20000
Gross profit 157500
Total 293000 total 293000

Client 3
Quest A: Explain the purpose of preparing the Bank Reconciliation Statement to Burcu
the CEO because he is having difficulties in understanding the reasons why this should
be performed on a monthly basis.?
A: Bank reconciliation Statement: Normally a firm or business maintains a cash book
which maintains the bank and cash transaction in it. The cash book comes with the two
different columns the cash and the bank column which shows us cash availability in business
and cash availability in bank (Onuoha & Amponsah, 2012). Banks also keeps another
account for customer in whom the bank records the deposited and withdrawal related
information. Whenever a customer deposited cash in the bank it recorded in credit side and
whenever, customer withdrawal the cash it is recorded in the debit side of the book. And
every information sent to the customer by the bank whenever they want by a statement on
their home or through e-mail. A BRS made for rectifying the difference between balance cash
as per cash book and the passbook on the given date. It is not necessary to make a BRS on a
particular date. It just happens on periodically basis to know that every bank related
transaction is recorded properly or not and same as by the bank is happening correctly or not.
It helps in taking the errors in the transactions and a customer can get his exact balance on the
specific date. On the bank statement it is necessary to identify the unissued cheques and
deposit in transit by comparing the company who are issuing cheques and deposit to the
cheques which are shown on the statement. Adding back the deposit by using the cash
balance shown in bank statement. And then to deduct or remove the any unnecessary
outstanding cheques. And this adjusts the bank cash balance (May, 2013). And adding the
interest earned and receivable amount using the companies ending cash balance and deduct
the entire bank service fee, penalties and NFS cheques.
Q.B List and explain some of the areas which may cause your record to vary from the
bank records (bank statements)
B: Reasons for difference between cash balance and bank balance:
1. Outstanding cheques: It is outstanding check that is issued by person, but does not clear
in the bank accounts. these cheques are called outstanding check.

2. Deposit in transit: these are type of funds which are received by company and also sent
back to bank but not processed and not deposited in the bank account.
3. Errors on the company’s book: the small errors in the cash book can also be big problem
sometime and also can generate to the difference between balance in bank statements and
cash book.
Q.C Explain the term “imprest” as used in a petty cash System?
C: An imprest system of petty cash means that the ledger account petty cash will be close
down at a fixed amount. If the amount of petty cash is $50 than it will be always report a
debit amount of $50 only