Financial Accounting and Reporting: Detailed Analysis Report

This report delves into the core concepts of financial accounting and reporting. It begins with an introduction to financial statements, outlining the needs of various users and the legal and regulatory influences shaping financial reporting. The report then progresses to practical applications, including the preparation of financial statements based on adjusted trial balances, the handling of incomplete records, and the consolidation of financial statements. Furthermore, it explores the variance in information needs across different user groups and examines the financial statements of various business structures, such as sole traders, partnerships, and companies. A significant portion of the report is dedicated to ratio analysis, encompassing the analysis of financial ratios for Alpha and Beta Ltd, along with their interpretation from an investment perspective. Overall, the report provides a comprehensive overview of financial accounting principles and practices, offering valuable insights into the analysis and interpretation of financial information. This report is available on Desklib, a platform offering AI-based study tools and resources for students.

FINANCIAL ACCOUNTING
AND REPORTING

TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................3
1.1 Different users of Financial Statements and their needs........................................................3
1.2 Explain the legal and regulatory influences on financial statement......................................4
1.3 Assess the implication for users in the conceptual framework..............................................5
1.4 Reporting standards dealing with regulatory requirements ..................................................5
TASK 2............................................................................................................................................6
2.1 Financial statements on the basis of adjusted trial balance ...................................................6
2.2 Preparation of financial statements from incomplete records................................................8
2.3 Consolidated income statement and balance sheet................................................................9
TASK 3..........................................................................................................................................11
3.1 Way in which information needs of different user groups vary from each other................11
3.2 Financial statements of sole trader, partnership and company............................................12
...................................................................................................................................................13
....................................................................................................................................................14
TASK 4..........................................................................................................................................19
4.1 Ratio analysis of Alpha and Beta ltd....................................................................................19
4.2 Interpreting the Accounting Ratios from Investment Point of view....................................21
CONCLUSION..............................................................................................................................21
REFERENCES..............................................................................................................................22

INTRODUCTION
Financial Accounting refers to the recording, organizing, summarizing and presenting the
financial transactions in a meaningful manner by following standard guidelines and reporting the
information into a prescribed Financial Reporting Framework in Financial Statements such as
Balance Sheet, Income Statement and Cash Flow Statement. This report covers widely the
implications and assumptions underlying the regulatory framework and how different laws and
regulations govern the accounting and reporting standards moreover preparation of financial
statements from incomplete records and making appropriate adjustments and consolidation as
well and further calculations of some of accounting ratios and their interpretation and decisions
and recommendations based thereon.
1.1 Different users of Financial Statements and their needs
 Owners and Investors: Stakeholders or owners who have invested their capital in
Company are always eager for release of financial statements to value their investment as
overvalued, undervalued or fairly priced to make decision to buy, sell or hold the amount
already invested and also to calculate their Return On Investment (Council, 2013).
Potential investors willing to invest in Company would like to know the returns and
profitability offered to investors. In case of small firms or partnership entity financial
information acts as deciding factor to analyses to continue, improve or drop the idea of
continual.
 Management: Management of a company comprises hired professionals who have expertise
in various fields to support effective decision making. Financial Statements serve their need
for organizational growth and sustainable development by providing basis for decision
making and in continuous improvement in company performance and overall development.
Management carries feasibility study of various ventures available by comparing various
items of financial statements.
 Employees: As per Maslow's theory on hierarchy safety is major concern for employee
which he can assess from financial statements of a company hence for employees salaries
, bonus, perks and perquisites plays a major role and which comes from strong financial

position of a company which ensures employees of its safety and continual period of
relationship with Company (Münch, 2014). They may also be interested in Company's
financial statements to assess company's expansion possibilities and various career
development opportunities available with him.
 Others: Customers of Companies such as seller’s distributors are interested into
company's existence and stability to analyses its association with companies. For
formation of taxation and regulation purposes government is also interested in financial
statement of a company. Public such as students, researchers, analysts need financial
information for some valid reason and to add value to their theoretical reports (Green,
2014). Trade creditors and lenders are also interested in financial statements to examine
the company's liquidity and its ability to pay the obligations and assets to recover the
dues.
1.2 Explain the legal and regulatory influences on financial statement
Financial statements are prepared following the policies and procedures accepted
generally. To make the Accounts of various entities comparable, reliable, relevant and
understandable various legal laws and regulations are decided and made mandatory for equal
applicability to all the organizations. Tax Laws govern the extent of tax payable by entity on its
direct and indirect income. Some indirect taxes which mainly impacts entity are customs, excise,
VAT, service tax, sales tax etc (Sikka, 2015). and besides this company has to pay Income tax
directly to Government. Various Legal and regulations govern the agreements enforceable by
law regarding sale deeds, registration and transfer of immovable properties etc. which have large
impact on financial statements. Regulations or legal compliance with Laws related to labor plays
a vital role on financial statements by way of providing for Bonus, Leave encasement, Travel
allowance, Gratuity payments etc. As per the regulations issued Company has to follow
Financial Reporting Framework to present the financial statements in a better manner. For
beneficial and fair reflection of accounting information the way accounts are produced and
presented plays a major role in analysis and interpretation of Financial Statements.
Structure of taxes and design and implementation of workplace by Government affect a business
environment on a large basis. The amount of support and financial help granted by ways of
subsidies, tax holidays, Government grants etc. Plays a major role on financial statements.
Amount and nature of government investments into infrastructure and human capital,

development and research programs acts as incentive to business organization and therefore lays
great emphasis on financial information (Khalifa, 2013.). Protection and Licensing of Intellectual
Property Rights such as Patents, Royalties, Copy rights etc. acts as deciding factor and increase
the asset side of Balance sheet. Therefore, recognizing the diversity, issues and complexity of
these issues impact the Financial Statements to allow and drive economic growth. ASB
(Accounting Standard Board) being a senior technical committee for quality control, attestation
and auditing for measuring the performance and issuance of reports for non-issuers. IASB
(International Accounting Standards Board) issues a framework with theoretical base, a
statement of principles, a philosophy and a map and acts as a guide to preparation of Financial
Statements in a better and presentable manner which is quickly and easily understandable. IASC
was replaced by IASC on 1st April 2001. IPSAS (International Public Sector Accounting
Standards) issues set of accounting standards for use by public sector Companies around the
world for better and fair presentation of financial statements. Compliance with Companies Act
for provisions regarding Board meetings, Directors, Financial statements etc. have a major
influence on financial statements of accompany. Stock exchange rules have to be abided by all
the listed companies for comparison and regulation in a better and fair manner. Directives issued
by European Union have to be followed as being the member of such union policies and
framework need to be looked upon.
1.3 Assess the implication for users in the conceptual framework
Conceptual framework refers to a system of ideas and objectives which ultimately leads to
creation of per-defined and consistent set of standards and rules (Mendoza, 2014). Users while
using Financial Information from different sources or prepared with reference to distinct
Accounting Auditing Standards will produce financial information which will be at variance with
each other as various guidelines or principles takes into consideration various assumptions and
policies which are outcome of different scenarios and circumstances existing at the time of
preparing Financial Statements. Since each conceptual framework has several variations and
contexts therefore comparison of Financial Statement using different regulatory frameworks is
not allowed. Therefore, thorough knowledge of each of framework is necessary to compare
information from Financial Statements.

1.4 Reporting standards dealing with regulatory requirements
Reporting Standards are developed using regulations governing the business organization
to present the financial statements in a better and practical manner which gives out a clear picture
to the user. Reporting standards covers areas and rules provisioned by regulations for example
Valuation of Inventories shall be strictly governed by the regulations of custom in case of
imports/exports and excise in case of manufacturing in the same country (Bakre, 2014).
Regulations form the basis of uniform inter and intra firm comparison for formation of policies
and standards and help even auditors to form opinion and provides a better approach and
understanding of Financial statements as whole by interpreting various policies and procedures
underlying the formation. Underlying assumptions of regulatory authorities is that all the
companies falling under the specified criteria follows Reporting norms perfectly and in the
manner prescribed therein (Brief, 2013). According to capital Maintenance concept profit is said
to be earned if there is any value addition to the net assets of the company during the year.
Therefore, profits should not be recognised until and unless assets have been maintained and
essentially there should be increase in value of assets during the period.
TASK 2
2.1 Financial statements on the basis of adjusted trial balance
Table 1 Adjusted trial balance
Revenue 72900
Purchase 31220
Inventory 1 Oct 2014 6390
Distribution cost 29240
Administration cost 7480
Land at valuation 40000
Property at cost 42000
Property accumulated depreciation 840

Plant and equipment at cost 56260
Plant and equipment accumulated depreciation 8439
Trade receivables 18740
Trade payable 9860
Bank 14060
Ordinary issued 50p shares 65000
Share premium account 15000
Revaluation reserve at 1Oct 2014 11500
Retained earnings at 1 Oct 2014 11560
8% loan redeemable 2112 7500
Administration cost 22000
Interest 600
Micelle nous income 65391
267990 267990
Table 2 Revised income statement
Revenue 72900
Purchase 31220
Gross profit 41680
Administration cost 7480
Distribution cost 29240
Property accumulated depreciation 840
Plant and equipment accumulated depreciation 8439

Total cost 45999
EBIT -4319
Tax 863.8
Net profit -3455.2
Table 3 Revised balance sheet
Assets 0
Plant and equipment at cost 47821
Land at valuation 40000
Property at cost 41160
Trade receivables 18740
Bank 14060
Inventory 1 Oct 2014 6390
168171
Liability
Trade payables 9860
Ordinary issued 50p shares 61544.8
Share premium account 15000
Retained earnings at 1 Oct 2014 11560
8% loan redeemable 2112 7500
Distribution cost 29240
Revaluation reserve 19500
Accrued interest @8% 600

Miscellaneous expenses 13367
168172
2.2 Preparation of financial statements from incomplete records
Table 4 Balance sheet of Sajid business firm
Assets
Non current asset
Property, plant and equipment 126000 113400
Current assets
Closing stock 10360 4560
Trade receivables 21360 45650
Bank 13690 13690
171410 177300
Equity and liability
Capital 150000 163646
Current liability
Trade payables 21410 13654
171410 177300

Table 5 P&L statement of the business firm
Sales 346215
COGS 50000
Gross profit 296215
Salaries and wages paid 6532
Repair and maintenance 4560
General expenses paid 4361
Receipts from trade receivables 130160
Payment to trade payables 124356
Depreciation 12600
Total of expenses 282569
Net profit 13646
2.3 Consolidated income statement and balance sheet
Paren
t
Subsidia
ry
Consolidated income
statement
Revenue 92500 45000 137500
Cost of sales 70500 36000 106500
Gross profit 22000 9000 31000
Distribution cost 2500 1200 3700
Administrative expenses 5500 2400 7900
Finance cost 1000 1000

PBT 13900 5400 19300
Income tax expenses 3900 1500 5400
Profit for the year 10000 3900 13900
Paren
t
Subsidia
ry Consolidated balance sheet
Assets
Non current asset
Land 5500 3900 9400
Plant and equipment 20000 10000 30000
Investment in subsidiary 12800 0 12800
Goodwill 1000 1000
38300 14900 53200
Current assets
Inventory 4925 1295 6220
Trade receivables 5710 1105 6815
Cash 1865 0 1865
12500 2400 14900
50800 17300 68100
Equity and liability
Ordinary shares 13000 5000 18000
Revaluation reserve 2500 0 2500
Retained earning 12300 4500 16800
27800 9500 37300
27800 9500 37300

Non current liability
10% loans 13000 0 13000
Current liability 0
Trade payables 7000 5000 12000
Bank overdraft 0 875 875
Tax 3000 925 3925
Miscellaneous provision 1000 1000
23000 7800 30800
Total equity and liability 50800 17300 68100
TASK 3
3.1 Way in which information needs of different user groups vary from each other
Basically there are the three different users of the financial statement for the business firm.
These users are the shareholders and managers as well as creditors. Investor makes an
investment in the company. A rational investor always like to know about the extent to which
investment in the business firm will be profitable for him. Hence, he requires income statement
and balance sheet of the business firm (Khalifa, 2013). By evaluating these financial statements
an investor can easily identify the strong and weak points of the business firm. On the basis of
identified weakness and strength firm determine whether he must make an investment in the
company. On other hand, other important stakeholder of the firm is manager. Managers needs to
make business decisions in order to improve organization performance. In this require they
require financial statements and firm other documents. By using these financial statements they
find out areas where company condition is critical and strict actions are required to improve the
firm performance. Hence, it can be said that investor need brief information but manager need
detail information about the business firm to make decisions. Hence, it can be said that
information needs of the managers and investors vary from each other. Creditor only require firm
balance sheet in order to identify the time that is taken by the business firm to make payment to
the creditors (Mendoza, 2014). Hence, it is clear that information needs of the creditors,
shareholders and managers is different from each other.