Financial Accounting and Reporting: Analysis of Financial Statements

This report delves into the realm of financial accounting and reporting, commencing with an exploration of the diverse users of financial statements, including investors, employees, customers, government entities, suppliers, and shareholders, and their respective information needs. It then elucidates the legal and regulatory influences shaping financial statements, encompassing the Companies Act 2006, UK accounting standards, GAAP, IFRS, and IAS, and assesses the implications of these frameworks for various stakeholders. The report further examines the ways different laws and regulations are addressed by accounting and reporting standards. It differentiates the information needs of various user groups, and prepares financial statements for publication by sole traders, partnerships, and limited companies. The report also includes the calculation and interpretation of accounting ratios to assess the performance and position of a company, along with suitable comparisons. The document concludes by providing a summary of the key findings and insights gained throughout the analysis.

Financial Accounting
and Reporting

TABLE OF CONTENTS
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................3
1.1 Describing the different users of financial statement and their needs...................................3
1.2 Explaining the legal and regulatory framework influences on financial statements.............4
1.3 Assessing the implications for users......................................................................................5
1.4 Explaining different laws/regulations are dealt with by accounting and reporting standards
......................................................................................................................................................6
3.1 Explaining the information needs of different groups vary ..................................................6
3.2 Preparing financial statements for publication by a sole trader, partnership and limited
company.......................................................................................................................................7
Task 2...............................................................................................................................................8
Task 3...............................................................................................................................................8
4.1 Calculating accounting ratios to assess the performance and position of the ABC Ltd........8
4.2 Preparing a report incorporating and interpreting accounting ratios, including suitable
comparisons.................................................................................................................................9
Conclusion.....................................................................................................................................10
References......................................................................................................................................12

INDEX OF TABLES
Table 1: Fundamental principles towards preparing Financial statements......................................8
Table 2: Format of income statement..............................................................................................9
Table 3: Format of profit and loss statement.................................................................................10
Table 4: Format of Cash flow statement........................................................................................10
Table 5: Format of Balance sheet..................................................................................................11
Table 6: Calculation of Ratios.......................................................................................................12

INTRODUCTION
Financial accounting is a specialized branch of accounting and it is concerned with the
summary, analysis and reporting of monetary transactions for decision makers (Macve, 2015).
This involves preparation of the monetary statements for those people, who interested in
receiving such information. Financial statement is a process in which statements are produced,
which discloses the economic position of company to management, investors, stakeholders and
to the government (Francis and et.al., 2015). This report is based on the different cases, users of
financial statements and their needs are described. The legal and regulatory influences on these
statements and the implication for the users are explained. Format of the monetary statements for
a variety of businesses and a consolidated balance sheet and profit and loss a/c for a single group
of company is prepared. Incorporating and interpreting of accounting ratios are covered in this
report.
TASK 1
1.1 Describing the different users of financial statement and their needs
There are many users of financial statements which are produced by the company (Users
of Financial Statements, 2015). As it provides useful information to the users, some of these are:
Investors- They are more interested to know the company's profits and also the security
of their investments. With the help of the company's past financial statements, investor can
estimate the future returns (Armstrong and et.al., 2015). By this they can determine whether to
invest or not and can also access the ability of the firm to pay good returns.
Employees- They also need to know the stability and profitability of the company and
the ability of the company to provide remunerations, employment opportunities, retirement
benefits etc in the future (Weygandt, Kimmel and Kieso, 2015). The major interest of employees
is to know the current financial position of the company so they can plan their future in the
organization.
Customers- As customers are dependent on the company for specialized supplies and for
this they need to know whether company will continue supply them in the future or not (Barth,
2015). They need information of the profitability and the sales of the company to know the
continuance of the business.

Government- The main user of financial statement is government; they require this to
determine the correctness of the tax declared in the tax returns (Martin and Roychowdhury,
2015). They need information that, need information of the profitability, sales of the company
and whether firm is paying tax or not, the contribution of the firm towards the society, and did
they follow the government regulations.
Suppliers and other trade creditors- Suppliers are those who supply the products and
services of the company (Hirtle and et.al., 2015). They need financial statement to know the
credit worthiness of the firm and to know whether they supply goods on credit.
Shareholders- They are the owner of the shares which is issued by the organization, they
use financial statement to assess the risk and return of their investment in the company. With the
help of the financial statement, they can determine whether to purchase shares or not and by this
they can also access the ability of firm to pay good dividends.
1.2 Explaining the legal and regulatory framework influences on financial statements
There are different legal and regulatory influences which are to be determined at the time
of preparing financial statements. In UK, accounting regulations are divided into three main
regulatory authorities and governance which must be abide by all the entities whether sole trade
partnership or limited companies while preparing their financial year end (Martínez‐Ferrero,
Garcia‐Sanchez and Cuadrado‐Ballesteros, 2015). The three regulatory bodies are the Companies
act 2006, UK accounting standards board and the international accounting standards. They need
financial statement to know the credit worthiness of the firm
GAAP (Generally accepted accounting principles) are the framework which includes the
guidelines of general accounting. It includes rules, which are to be followed by a
business/financial manager while recording, summarizing and preparing the financial statements.
The rules and guidelines are to be considered while preparing financial reports (Greenbaum,
Thakor and Boot, 2015).
IFRS (International Financial Reporting Standards) are designed as a common language
for business affairs, so that across the international boundaries company accounts are
understandable and comparable. These are important for those companies that have dealing in

several countries (Hirtle and et.al., 2015). All listed and grouped EU companies are required to
use IFRS since 2005.
IAS (International Accounting Standards), this is the accounting standards issued by the
IASB and the IASC. All the UK listed and sometimes unlisted companies are required to present
their financial statements by using international standards.
Company’s act 2005, 'Accounts and reports' are structured so that provisions which apply
to different companies are easily identifiable. Companies Act 2006 implements relevant
requirement of EU laws (Macve, 2015). This act is wide ranging and all the laws applicable to
companies are covered. This required compulsory audit of balance sheet and profit and loss a/c.
The role of UK accounting standard board is to issue accounting standards; it influences the
development of international standards. The IASB was formed to replace the IASC.
1.3 Assessing the implications for users
There are different legal and regulatory frameworks which are to be determined by all the
entities (Lang and Stice-Lawrence, 2015). Whether sole trade partnership or limited companies
at the time of preparing their financial statements like profit and loss a/c, balance sheet and cash
flow statements. While determining this framework, there are great impacts on users, such as:
 The applications of legal and regulatory framework have a positive impact on the users,
with the help of the financial statement they can get the accurate information about the
company on which investors are interested to invest.
 By applying these guidelines it is easier way to understand the financial statements of the
company, from which we can acquire the information related to the profits or losses from
the profit and loss a/c (Weygandt, Kimmel and Kieso, 2015).
 This helps the investors in getting the proper information of the financial position of the
company. By this, risk and return are analyzed, they are more interested to know the
company's profits and also the security of their investments and it helps to make effective
investment decisions (Users of Financial Statements, 2015).
 It also helps in determining the exact position of the company in the market. With these
employees can compare the financial position with the other companies.

 This have positive impact on the investors, by the help of financial statement they can
evaluate the performance of the management by this they can determine the risk associate
with their investment (Robinson and et.al., 2015).
 It helps in evaluating the financial strength and staying power of the company for the
customers and the suppliers.
 It also helps the Board of directors, to review the financial performance of company
through financial statements.
1.4 Explaining different laws/regulations are dealt with by accounting and reporting standards
There are different laws and regulations are dealt, some of these are:
International Accounting Standards (IASs) - It was found on 1st April, 2001. They are
accounting standards which is issued by the International Accounting Standard Board (Macve,
2015). It is an older set of standards which reflect particular types of transaction and other events
in financial statement. Earlier, it was issued by the Board of International Accounting Standard
Committee.
IASB also reissue standards some of them are IAS 1 presentation of financial statements,
IAS 3- consolidated financial statements, IAS 7- statements of cash flows, etc.
International Financial Reporting Standards (IFRS) - This is designed in a common
global language for business affairs so that company's accounts are easily understandable and
comparable across the international boundaries (Armstrong and et.al., 2015). Standards which
are issued by IASC are still within use today and go by the name International Accounting
Standards. IFRS are the rules, which are followed by the company to maintain books of
accounts, which are understandable, comparable for the users.
Accounting Standards Board (ASB) - It was taken from the Accounting Standard
committee (ASC) in 1990. The role of ASB is to issue accounting standards. It was recognized
for the purpose, under the companies Act 1985. The ASB have 10 Board Members in which 2
were full-time and rest is for part-time. Votes of seven Board members were required, under the
ASB's constitution (Martin and Roychowdhury, 2015). They have the power to issue new
accounting standards. It provides a framework to solve the financial accounting and corporate
reporting issues.

3.1 Explaining the information needs of different groups vary.
Information needed is varied according to the different users. Some of this information
that needed by users are:
Shareholders- They are the individuals, group that owns one or more shares in a
company. They have the potential to earn dividend if company does well (Users of Financial
Statements, 2015). To purchase the shares of the company, firstly they have to focus on the
profitability and the performance of the company. This information can be accessed from the
Profit and loss a/c of financial statements. It helps in making decision whether to invest funds in
company or not.
Government- They need information that the company is paying tax or not and this
information can be accessed from the income statements of company.
Investors- They are interested to know the company's profits and losses and also the
security of their investments. They require the information like return on investment,
creditworthiness, profitability etc, which can be evaluate from the Profit and loss a/c and also
from Balance Sheet (Hirtle and et.al., 2015).
Employees- The information which they want is to know the stability, position,
profitability as well as the sales of the company. The entire information can be acquired from the
income statements and also from Balance Sheet (Lang and Stice-Lawrence, 2015).
Suppliers and other trade creditors- They need information to know the credit
worthiness and also the numbers of creditors and short term liabilities of the company which can
be accessed from the Balance Sheet of company.
3.2 Preparing financial statements for publication by a sole trader, partnership and limited
company
There are different types of business like sole trader, partnership and limited company
(Weygandt, Kimmel and Kieso, 2015). Each business has different fundamental principles
towards preparing financial statements, which are:
Table 1: Fundamental principles towards preparing financial statements
Types of business Formats

Sole trader This is a type of business which is owned and run by a person.
They are legally responsible for all aspects of the business
(Barth, 2015). The fundamental principle while preparing
financial statement is they have to focus on income statement
so that they get to know the income and expenses of the
business.
Partnerships According to the partnership act, 1890, It is a legal form of
business which is operated by 2 or more individuals, who share
management and the profits. As profits are distributed between
the partners, they are more interested to know the earnings of
the company (Greenbaum, Thakor and Boot, 2015). For this
they have to focus on the income statements.
Limited company Limited company is a form of incorporation, whose liability is
undertaken by the company's shareholders. EL. Ltd. Is a private
limited company; they have to focus on all the 3 main financial
statements by following the guidelines of the IFRS (Weygandt,
Kimmel and Kieso, 2015). The 3 statements are the income
statement, Cash flow and the balance sheet.
Sole proprietor and Partnerships
Table 2: Format of income statement
Income statement Amount
Revenues (sales) XXX
Expenses
cost of good sold (XXX)
Salary (XXX)
Rent (XXX)
Advertising (XXX)
Insurance (XXX)
Others (XXX)
Total expenses (XXX)

Operating income / Loss XXX / (XXX)
Other gains and losses
Gain on sales of machinery XXX
Loss on sale of land (XXX)
Income before income taxes XXX / (XXX)
Income tax expenses (XXX)
Net income / Loss XXX / (XXX)
Limited company
Profit and loss statement
Table 3: Format of profit and loss statement
Profit and loss statement Amount
sales revenue XXX
Cost of sold (including overhead
and purchased value) XXX
Gross margin XXX
Operational cost
variable (XXX)
Fixed (XXX)
Net profit before taxation XXX
Income taxes (XXX)
Net profit XXX / (XXX)
Cash flow statement
Table 4: Format of Cash flow statement
Statement of Cash flow Amount
Cash flow from operating Activities
Net income XXX
Add: Depreciation expenses XXX
Increase in account receivable (XXX)
Decrease in inventory XXX
Decrease in accounts payable (XXX)
Cash provided (used) in operating activities XXX
Cash flow from investing activities
Capital expenditure (XXX)
Proceeds from sale of property XXX
Cash provided (used) by investing activities (XXX)

Cash flow from financing activities
Borrowing of long term debt XXX
Cash dividends (XXX)
Purchase of treasury stock (XXX)
Cash provided (used) by financing activities (XXX)
Net increase in cash XXX
Cash at the beginning of the year XXX
Cash at the end of the year XXX
Balance sheet
Table 5: Format of Balance sheet
Balance sheets As on 31st
December 2016
ASSETS
Current assets
Cash at bank XXX
Inventory XXX
Debtors XXX
Total current assets XXX
Non Current assets
Building XXX
Plant and equipment XXX
Vehicles XXX
Total noncurrent assets XXX
TOTAL ASSETS XXX
LIABILITIES
Current liabilities
Credit cards XXX
Creditors XXX
Tax payable XXX
Total current liabilities XXX
Noncurrent liabilities
long term loans XXX
Owners Equity
Capital XXX

Retained earning XXX
Current earnings XXX
Total owner Equity XXX
TOTAL LIABILITIES XXX
TASK 2
Note: To be completed.
TASK 3
4.1 Calculating accounting ratios to assess the performance and position of the ABC Ltd.
Ratios
Table 6: Calculation of Ratios
Ratio Formula
2015
(£000)
2014
(£000)
Profitability ratio
Gross profit 6000 5200
Net sales 28000 25200
Gross profit ratio gross profit/net sales *100 21.4 20.6
Operating profit 2200 1600
Operating profit
ratio operating profit/net sales *100 7.9 6.3
Average total assets 6700 5960
Net income 1800 1392
Return on assets Net income/ average total assets *100 26.9 23.4
Liquidity ratio
Current assets 4800 3840
Current liabilities 3240 2800
Current ratio current assets/current liabilities 1.5 1.4
Quick assets 1400 1000
Quick ratio Quick assets/ current liabilities 0.4 0.4
Efficiency ratio
Cash 1200 840
Cash turnover net sales/cash 23.3 30.0
Total assets turnover net sales/average total assets 4.2 4.2
Cost of goods sold 22000 20000
Average inventory 1700 1420
Inventory turnover cost of goods sold/ average inventory 12.9 14.1

4.2 Preparing a report incorporating and interpreting accounting ratios, including suitable
comparisons
Accounting ratios are the mathematical comparison and are considered to be a part of the
financial system analysis (Leuz and Wysocki, 2016). It usually relates one financial statement
amount to another. Accounting ratio helps the investors, creditors, management to understand the
business performance and need of improvements in the company. They are the most important
and the widespread tool which is used to analyze the business financial standing (Dagiliene,
2015). These are also used to compare the different companies in different industries. Here, in
this report there is comparison of the 2 years that is 2015 and 2014. Different accounting ratios
which are calculated are:
Profitability ratios- This is calculated to assess the business ability whether they
generate earnings or not. It can be assessed by comparing the expenses and other relevant costs
incurred during a specific period of time (Martin and Roychowdhury, 2015). It covers gross
profit, operating profit and return on assets ratios. The Gross profit ratio increases from 20.6 to
21.4., this is because there is increase in the gross profit as well as increase in the net sales of the
company in 2015. The operating profit also increase to 7.9, because due to increase in the net
sales and decline in the expenses as compared to the previous year. With an increase in the
profitability ratio from the last year results in more healthy financial position of the ABC Ltd in
2015.
Liquidity ratios- These ratios are calculated to determine the company's ability whether
to pay off its short term debt obligations or not (Barth, 2015). The higher will be the liquidity
ratio, the larger will be the margin of safety which shows that the company possesses to cover
short term debts. On the basis of the above calculations, current ratios and quick ratios are
calculated. The current ratio increases from 1.4 to 1.5 which means the assets of the ABC ltd can
easily convert into cash in a short period.
Efficiency ratios- These ratios are measured to analysis how well ABC ltd. is using its
assets internally as well as how well they manage its liabilities. The assets turnover ratio of both
the year is same it means in 2015 company is not using its assets efficiently. For good returns

ABC has to focus on proper investment plans. Comparing to the 2014, in 2015 the cash turnover
and the inventory turnover of the company goes down. It shows that, cited company is
overstocking or overbuilding its inventory or they have problem while selling products to the
customers.
CONCLUSION
This report is based on different scenario and in this different users like investors,
shareholders, government of financial statements and their needs are discussed. The implications
for users and frameworks like IFRS, IAS and ASB etc. on financial statements are explained.
Sole trader, Partnerships and Limited company's fundamental principles towards preparing
financial statements are discussed. Different ratios like Profitability, liquidity ratio, efficiency
ratios are incorporated and interpreted. Information needed are varied according to the investors,
government, suppliers etc. are explained. Furthermore, IFRS, IASs Laws/regulations that are
dealt with by accounting and reporting standards are covered in this report.

REFERENCES
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<http://finance.mapsofworld.com/financial-report/statement/users.html>. [Accessed on
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