Accounting for Managers: Financial Statement Analysis Report

This report provides a comprehensive overview of accounting principles relevant for managers, covering a range of topics including the differentiation between financial and management accounting reports, classification of accounting terms, analysis of financial structure, and the distinction between cash flow budgets and statements of cash flows. The report also explores depreciation, financial ratios, profitability and solvency analysis, variable cost computations, contribution margin, break-even output, and the preparation of price quotations. Furthermore, it delves into the impact of debt, changes in owner's equity, and the reasons for retaining profits within a business. The report utilizes financial ratios to assess the financial performance of a company and provides insights into its profitability and solvency. It also includes calculations for variable costs, contribution margins, and break-even points, culminating in a conclusion and references.

Accounting for Managers 3

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Question 1........................................................................................................................................1
A. Differentiating between financial accounting report and management accounting report1
Q.2 Classifying the following terms:-....................................................................................1
C) Analysing the financial structure of the public company:-...............................................2
D) Differentiating between a cash flow budget and a statement of cash flows:-..................2
E. Depreciation and importance of depreciation in business point of view- .........................3
F. Comparing the pair and determining which is larger aspects:-..........................................3
Question 2........................................................................................................................................4
A. Financial position and performance that affected by not taking into account the fact that a
debt:-.......................................................................................................................................4
B. Factors that causing negative cash flow from operating activity:-....................................4
C. Changes in owner equity:- ................................................................................................4
D. Explaining the reasons why business owners would leave profits in the business rather
than withdrawing them for personal use:- .............................................................................5
Question 3........................................................................................................................................5
A) Calculation of financial ratios...........................................................................................5
B) Report about the profitability and solvency of the company............................................7
Question 4........................................................................................................................................7
A) Computation of variable cost per glass.............................................................................7
B) Contribution per margin....................................................................................................7
C) Break-even output.............................................................................................................8
D) Acceptance of order..........................................................................................................8
E) Conclusion.........................................................................................................................8
F) Calculation of Profit and Loss..........................................................................................8
Question 5........................................................................................................................................8
Preparation of Price Quotation for Job No. 43.......................................................................8
Question 6........................................................................................................................................9
C. Retained profit and earnings...........................................................................................10

d) non financial information that venture capitalist concern about......................................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Accounting is quite useful for management to analyse business transactions. Present
report deals with various accounting practices which are used by the management to assess
performance of business and take enhanced decisions. Thus, accounting practices aids in making
better decisions by the management.
Question 1
A. Differentiating between financial accounting report and management accounting report
The major difference between management accounting and financial accounting report is
management accounting reports presented internally and financial accounting report is presented
for the external stakeholders. Financial accounting reports shows present the financial healt of
the company while management accounting reports concerning the day to day operation and
helping to the managers in decision making process.
Financial accounting examples: 1. Balance sheet- A balance sheet shows of a company assets
liabilities, and shareholders equity. 2.Income statement- Income statement of a company shows
company expenses and revenue over a certain time of period (Scott, 2015).
Management accounting examples:-1. Budget report- budget reports shows expected revenues
and expenses incurred in a certain time period.
2. Job costing report- the cost incurred by specific job and compared with revenue expectation.
Q.2 Classifying the following terms:-
 Paid up capital- paid up capital is the total amount of money which company receive in
exchange of shares. In balance sheet paid up capital shown under the shareholders' equity
section.
 Bank loan- a bank loan is current liabilities that represent the debt which paid up in the
following mention year.
 Provision of annual leave – In balance sheet provision of annual leave shown in current
liabilities. This provision made is made for the respect of annual leave entitlement.
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 Brand name and Intellectual property- Brand name and intellectual property are
considered as capital assets and recorded in balance sheet as intangible assets.
 Account receivable – account receivable represents a money which owned by its
customers and in balance sheet account receivable recorded as current assets.
 Prepaid insurance premium- It is the portion of total insurance that have been paid in
advance so in balance sheet prepaid insurance premium considered in assets side.
 Deposit paid by a customer for work yet to be done – this term concern in balance sheet
as current liabilities (Libby, 2017).
 Retained profit- Retained profit is the total percentage of net earning by the company and
recorded under shareholders' equity in balance sheet.
C) Analysing the financial structure of the public company:-
1. In a public company ownership is spread among the general public in form of shares
which are freely traded in stock exchange. Public company can transform into private company
by buy back shares from shareholders. A public company can transform into private company by
sterilization the memorandum of association and the article of association in the company.
2. Apart from shareholders investors and lenders, creditor, management of a company and
government shown interest in financial statement (Khairi and Baridwan, 2015). Commercial
banks, employees and prospective investor have shown interest in financial statements.
D) Differentiating between a cash flow budget and a statement of cash flows:-
One of the major difference between these two is that statement of cash flow is required
for the making of financial statement. Statement of cash flows shows cash inflow and cash
outflow in relevance of company operating activity and financing activity. While the cash budget
is prepared for the upcoming period. Cash budget is the prepared for the planning and utility of
manager.
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E. Depreciation and importance of depreciation in business point of view-
Depreciation means the monetary value of an assets decreases over a certain time period
while using of assets and obsolescences. It shows the reduction value of assets. Depreciation is to
used for the reducing the historical value of assets. For replacing or purchasing new assets. Many
companies used depreciation as a tax benefits point of view because depreciation is non cash
expense in income statements.
For instance if a company purchase a $900 machinery on 13th april of 2008 and take
$100 worth of depreciation in 2008 and then additional $100 per year for the next eight years. At
the end of eight years the value of assets is zero.
F. Comparing the pair and determining which is larger aspects:-
 Gross profit and Net Profit – gross profit is the first level of the profit in income
statements and it only shows sales revenue less from cost of goods sold and term of net
profit is much wider. Net profit contain all revenues less from all expenses (Christensen,
Lee, Walker and Zeng, 2015).
 Paid up capital and owners equity- Paid up capital can never surpass the owner equity.
The owner equity stated the authorized capital which shows upward bound.
 Earning per share and dividend per share - earning per share is much broader then the
dividend per share it shows profitability of a company is per share of its stock.
 Current assets and current liabilities – current assets much be larger because current
assets contains all cash and cash equivalents receivables.
 Operating profit and net profit- net profit is much wider and broader term because net
profit shows after operating expenses deducting from the total revenues.
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Question 2
A. Financial position and performance that affected by not taking into account the fact that a
debt:-
A bad debt of company is non fault-finding for a company's operation. Financial debt can
be larger in nature and that directly affect the financial position of the company. For instance:-
Bad Debt expense – bad debts refers to the loss in financial statement because amount of sold
good and services is not paid by the customers. Bad debts recorded as a selling and
administration expenses and shown in the income statement. While calculating net income the
related account of bad debts and accounts of receivables both affected the financial statements.
B. Factors that causing negative cash flow from operating activity:-
1. Dwindling net income – it is the major factor causing in reducing the cash flow from
operating profit from one period to next time period (Diatmika, Irianto and Baridwan,
2016).
2. Declining sales or margin contraction – aforementioned loss of pricing power and
declining aggregate demand in the market can cause the negative cash inflow from the
operating activities.
3. Changing in the working capital – Increase or decrease of current assets and current
liabilities affects the cash flow statements. For instance – labour inventory turnover,
growth in days sales, declining in days payable outstanding.
Yes this is not ideal situation for any company the negative cash flow from operating
activity indicates the poor financial performance and position in a company.
C. Changes in owner equity:-
 Revenue & Expenses - revenue is the inflow of all assets uprise out of selling of goods
and services that directly affect the net profit of a company and owners capital if
revenues increase that means there is significantly change in owners capital.
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 Impact of Equity structure – when a company loses money during the normal cause of
business resulted will their decreasing in equity of owners capital. This term affects when
the owner take out cash for personal use and paying cash for an expense.
 Interest Rates – interest rates changes the company profit secure or unsecured loans with
fixed or floating rates affect the operating activities of business. If there is higher rate of
interest in loans that mean directing affecting the business activities (Zeff, 2016).
D. Explaining the reasons why business owners would leave profits in the business rather than
withdrawing them for personal use:-
1. Better Return on Investment:- A higher rate of return on investment assisting the
owner to not withdrawing all money from business. A higher rate of return making the financial
structure strong. If business owners would leave the profit in the organization resulted company
financial and income statements shows a better growth (Accounting, 2018). It also promotes the
strategies to increase sales revenue for instance:- increase productivity of your staff, develop new
product lines, find new customers. If company face any type of financial crisis management can
use the owners' equity fund for the reducing the impact of the organization. More ownerships'
equity promotes the long term business strategies for expanding the operational areas.
Question 3
A) Calculation of financial ratios
Financial ratios of Helen Magnus business
Particulars Formula 2018 2017
Net profit margin Net income / sales 6.67% 15.00%
Rate of return on owner's
Equity Net income / Shareholders' Equity 8.33% 14.03%
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Current ratio Current assets / Current Liabilities 5 6.58
Acid-test ratio Liquid assets / Current liabilities 1.33 3.83
Debt ratio Total debt / Total assets 0.13 0
Inventory turnover period
Cost of sales / Average inventory *
12 29.65 28.36
Working notes
2017 2018
Sales 90000 135000
Cost of Sales 58500 94500
Gross profit 31500 40500
All other expenses 18000 31500
Net profit 13500 9000
Current assets 2017 2018
Cash 18000 -27000
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inventory 24750 49500
Accounts receivable 16500 45000
Total current assets 59250 67500
Liquid assets 34500 18000
average inventory
2017 2018
49500 / 2 76500 / 2
24750 38250
Total liabilities 9000 31500
Shareholders equity 96250 108000
Total assets 105250 139500
B) Report about the profitability and solvency of the company
It can be interpreted from the calculation of ratios that business is not successful as
profitability aspect is not good. The ratio was good in 2017 and in next year, it was reduced by
huge margin. Return on owner's equity is also lowered as it was 14.03 % in 2017 and reduced to
8.33 % in 2018. Current ratio is more than ideal ratio of 2 : 1 which means that business is not
effectively using current assets to pay-off liabilities (Taleb, Gibson and Hovey, 2015). Acid-test
ratio is more in both years and as such, extreme short-term liabilities will not be paid by the firm.
Debt ratio was 0 in 2017 and 0.13 in 2018 which means that debt is not used to finance activities.
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Inventory turnover period was 28 days in previous year but increased to 29 days which means
that to stock is not quickly replenish to achieve sales. Thus, financial performance of the
business is not good.
Question 4
A) Computation of variable cost per glass
The variable costs consist of raw material of 2, machine operator labour of 15 hours and
transport and distribution of 1. Total per unit variable cost is 3
B) Contribution per margin
Formula of Contribution per margin = Selling price per unit – Variable cost per unit
= 5 – 3
= 2
C) Break-even output
Break-even output = N / P - V
Where N is Number of units sold, P = Price per unit, V = Variable cost per unit
= 0 / 3.5 – 2.03
= 0 /1.47
= 0
D) Acceptance of order
The order should not be accepted by the Glassy Ltd as per unit cost is 3.50 of wine glass.
If 1000 special order is received, cost per unit is 1.80. On the other hand, deducting transport
expenses, total cost comes out to 2.5. Thus, original cost – special order cost = 2.5 – 1.80 = 0.7
which means there is a loss of 0.7 on per unit of wine glass. Thus, it should not be accepted.
E) Conclusion
The order can be received when normal price of 3.50 or more than that is provided to
make 1000 wine glasses as profit would increase.
F) Calculation of Profit and Loss
The profit on wine glasses = 2000 * 3.5 = 7000 and on champagne glasses = 600 * 5 =
3000
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Question 5
Preparation of Price Quotation for Job No. 43
Job cost sheet
Raw materials Amount
Direct materials 14000
Direct labour costs 12600
Manufacturing overheads 14017.5
Administration overheads 16301.25
Total costs 56918.75
18783.1875
Final price 75701.9375
Question 6
A) Factors which are influencing that level of cash a business hold:-
11 Terms of purchase and sales – Activity of purchasing and selling goods determine the
fluctuation of cash how much working capital requirement for the daily activities in the
business . If company deals into daily basis that means company need more working
capital requirement.11 Nature of business vary upon the business activities which company deals with others
parties for instance transport corporation which has a short operating cycle and deals into
predominantly on cash basis has a modest working capital requirement.
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11 Production policy of a company determining the fluctuation of cash flows in the
organization. Production policy of a company may curb the working capital requirements
(Qvortrup, 2015).11 Collection period of receivables if a speed collection period of account receivable in a
firm need carry large working capital requirements.11 Credit position of the firms- if a firm have high goodwill in the market that means
company can carry lower cash in the market. Company gets liberal credit policy from
banks and others institutions.
B. Costs that incurring for holding too low a level of inventory:-
1. Storage cost- organization holds their inventory and stocks in warehouses and storages
rooms both of which incurred money to rent, maintenance and manage. For instance a business
that decide to keep low levels of inventories that might requires less square footage for his
business.
2. Shipping cost- lower level of inventory can potentially be costly to business due to
shipping cost. For purchasing of goods and storing them into the warehouses all process have
includes cost (Brown, 2014).
3. Consideration-keeping lower level of inventory can cause the increase the risk of
running out of product and production miss out on sales.
C. Retained profit and earnings
It refers to profit that are not distributed to stockholders and other parties. it shown under
shareholders' equity in the balance sheet.
Pros of retained earnings and profit
It does not add debt profile or sap of the company profits with interest payment. It allows
the managing full control of your business. It allows business expansion, high limit,
consideration.
Cons of retained earnings and profit
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Misses the chance of business opportunities while organization building the funds.
Company need cash for ongoing process and resources
Yes retained profit and earning is the free and internal source of finance. The simple
reason for that they are end product of current business (Kim and Zhang, 2016).
d) non financial information that venture capitalist concern about
Venture capitalist requires non financial information for making in decision to investing
the money in the organization. Non financial information contains future legislations, matching
industry standards with good practices, improving the management structure of the organization.
After all the non financial information helps to venture capitalist and investors to invest their
money in the organization for instance if company faces internal conflict result might be no
getting desired investment.
CONCLUSION
Hereby it can be concluded that management is benefited with the help of accounting
information to take effective decisions. Furthermore, finance is required to be effectively utilised
in the business so that operational activities can be met with much ease.
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REFERENCES
Books and Journals
Brown, R. ed., 2014. A history of accounting and accountants. Routledge.
Christensen, H. B., Lee, E., Walker, M. and Zeng, C., 2015. Incentives or standards: What
determines accounting quality changes around IFRS adoption?. European Accounting
Review. 24(1). pp.31-61.
Diatmika, I.W.B., Irianto, G. and Baridwan, Z., 2016. Determinants of Behavior Intention Of
Accounting Information Systems Based Information Technology Acceptance. Imperial
Journal of Interdisciplinary Research. 2(8).
Khairi, M. S. and Baridwan, Z., 2015. An empirical study on organizational acceptance
accounting information systems in Sharia banking. The International Journal of
Accounting and Business Society. 23(1). pp.97-122.
Kim, J. B. and Zhang, L., 2016. Accounting conservatism and stock price crash risk: Firm‐level
evidence. Contemporary Accounting Research. 33(1). pp.412-441.
Libby, R., 2017. Accounting and human information processing. In The Routledge Companion to
Behavioural Accounting Research (pp. 42-54). Routledge.
Qvortrup, J., 2015. A voice for children in statistical and social accounting: A plea for children’s
right to be heard. InConstructing and reconstructing childhood (pp. 74-93). Routledge.
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