Financial Reporting: Analysis of Financial Performance and Ratios

This report provides a comprehensive overview of financial reporting (FR), including its objectives, conceptual frameworks (IFRS and IAS), and basic principles. It examines the stakeholders who use financial data and the value of FR in achieving business objectives and growth. The report includes the preparation of financial statements (P&L, Balance Sheet, and Statement of Changes in Equity) from a trial balance for Rita Plc. Furthermore, it interprets the business performance of Marks and Spencer using financial ratios such as profitability, liquidity, and gearing ratios, offering insights into the company's financial health and performance trends. The analysis highlights the importance of financial planning and cost management for improving business outcomes.

FINANCIAL REPORTING

INTRODUCTION
At the workplace of an entity, it is mandatory to publish all the financial statements
among stakeholders in legal direction when it is a limited firm. Further, procedure in which main
accounts of the financial are prepared and published is known as financial reporting (FR). The
current assignment focuses on various objectives or purposes of FR through which company
become beneficial. The FR system consists with various standards as well as principles which
are also explained in this project. Moreover, throughout the project process of formulating
financial statements with the help of only trial balance of firm is reflected. Apart from this,
financial performance of Marks and Spencer is presented which is a retailer and listed in FTSE
100 component. Besides these, IFRS and IAS concepts are explained along with making
difference among these. At the end of current study, advantages of IFRS towards an enterprise
and factors influence to compliance with this are described.
1. Context along with key purposes of financial reporting
FR is considered as an important tool for assessing financials of the company in proper
way. Until adequate information related to financial is not transacted and tracked effectually then
entrepreneur or managers cannot make effective type of decisions towards it. Furthermore, its
various key objectives are stated below:
 FR allows firms for tracking business information related to financials like cost, margin,
liquidity, expenditures etc. Therefore, firm can employ fruitful techniques to boost up its
performance across the sector.
 When financial plan is needed to formulate, implement, analyse, monitor and execute in
the firm then also FR is helpful. Ultimately, management will become able to meet all
goals and purposes which are desired at the time of making this plan (Nandwa, 2016).
 FR is an operation of accounting in which cash flows like payments as well as receipts
are properly disclosed in front of the company. Due to this, availability of cash level can
be ascertained which helps to make fund raising decisions using better alternative.
 Using the concept of FR, entrepreneur can assess that firm is up to which extent sound in
terms of financials in the industry. On the basis of this, effectual techniques and tactics
are executed which help to enhance business performance in adequate manner.
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 When economic resources are needed to analyse and disclose mandatory obligations then
also FR is taken into account by most of the businesses. The reason is that, it helps to
make effectual decisions related to making investment in the best option.
 Moreover, financial reporting represents assets, liabilities of the firm along with capital
raised by owner in front of internal stakeholders (Nobes, 2014). Therefore, managers and
owner able to take those decisions which come under the financial position.
2. Conceptual frameworks and basic principles of FR
In the FR different bodies and frameworks are included through which required
principles are amended. Due to lack of these, the company cannot consider in the workplace and
formulate needed statements properly. Under this, basic two kinds of the frameworks are
associated which are IFRS as well as IAS. These both give clear outline to the accountant that
which kind of transaction has to treated in which manner in final accounts. Further FR basically
comprises with several principles which help to make accounting adjustments effectively (Ball,
Jayaraman and Shivakumar, 2012). Among them, key principles are listed below:
 Consistency principle
 Expense or cost related
 Going concern
 Continuity
 Unit-of-measure
 Matching
 Separate entity assumption
 Revenue related principle
 Objectivity etc.
Apart from this, the quantitative kind of research shows overall analysis in numerical way
which sometimes easily understood by all people. The reason is that, only financial employees
and stakeholders can create understanding about this. However, when study is of the qualitative
nature then presents whole interpretation in theoretical formate. Due to this, everyone can easily
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understand the concepts and analysis mentioned (Dyreng, Mayew and Williams, 2012).
Therefore, qualitative research is highly better and effective for the company as compared to
another stated i.e. quantitative.
3. Stakeholders of an entity and reasons for which they use financial data
When the financial statements are published then utilised by various people whether are
associated with organisation internally or externally. The reason is that, it is one type of
indication for evaluating business performance and take decisions towards enterprise. Majority
of stakeholders when going to engage with a firm then use such data which are stated below:
 Managers are associated with firm internally who use financial data to review all the
expenses, incomes and cash availability. Further, overall financial performance is to be
analysed where effective decisions related to investment, expenditures, purchasing etc.
are taken. Therefore, to make such types of the judgements in enterprise managers utilise
this data.
 Shareholders utilise published financials to make investment decisions or purchase the
shares of it. These are concerned for dividend amount and returns which is possible with
profits of entity only (Cheng, Dhaliwal and Zhang, 2013). From the statements if
shareholders found that management provides adequate dividends, bonus shares, and
gains plenty profit then they will invest higher amount.
 Employees are key assets for an organisation who expect that, it will give fair and
adequate wages, allowances, bonuses, monetary rewards etc. From the analysis of
financial data if they find out that firm has capability for generating huge incomes then
they will try to engage with it. On the other side, if cannot earn better level of margins
then they will not include with it.
 Customers use such reports for assessing profit condition because when this aspect is
higher, then firm able to provide better quality of the goods and services. Along with this,
due to having huge benefits such stakeholders expect that company will offer products at
lower price as compared to rivals (Gibson, 2012).
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 Government also use financial data of the firm in order to determine tax payable
capacity. Further, it enterprise has more profit, then it will insist to take some
responsibilities of social welfare.
4. Value of FR for achieving business objectives and growth
In the above section, it has been mentioned that for tracking financial information which
highly needed FR is a supportive method. Along with this, it helps to prepare and interpret
financials in proper structure. On the basis of these all, actual performance and status of the firm
can be seen in the relevant market segment. During this, if management founds that firm
generates adequate kind of profit and manage all the expenses in profitable direction then will
frame strategies for earning more. However, in the process of financial statement's evaluation if
any issues and lacks are determined then corrective actions can be taken. Therefore, the firm
easily able to raise performance as it is basic objective for every entrepreneur. Apart from this,
for deriving that up to which extent the firm utilise resources also FR supports properly
(Guerreiro, Rodrigues and Craig, 2012). By this, it can know tactics which are mandatory to
apply in workplace for boosting performance. In order to ascertain a global or national entity
whether achieve its financial goals or not also FR is highly useful. Therefore, can employ
effectual strategies and cam achieve goals and objectives smoothly. Further, ultimately growth of
that business will be enhanced on consistent basis in the industry where it has presence.
5. Preparing financial considering a Trial balance
The present part of whole reports reflects financial statements of Rita Plc company for
the accounting period ending 31st December 2016. Under this, with the help of Trial Balance
P&L, B/S and statements of equity and gains changes are formulated as below:
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A. Statements of profit and loss
As per the above prepared P&L account, the Rita Plc generates gross profit worth of
272700 GBP at the end of FY 2016. When looking at operating incomes then it is also better
because expenses of operating are 39500 GBP. Moreover, OP of the cited enterprise is worth of
233200 GBP. Net profit which is final margin of the company earned by Rita Plc is worth of
161600 GBP at the sales amount of 285100 GBP in the accounting year ending 2016.
Considering the whole expenses and incomes it can be said that financial burden imposed is
worth of 123500 GBP (285100−161600) through the year 2016. At this position, Rita Plc
generates 56.68% net income which is adequate. On the basis of this it can be commented that,
the selected company used cost management techniques in whole year due to which performs
better in the industry.
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B. Statement for changes in equity and gains
C. Statement of the financial position
6. Interpreting business performance of Marks and Spencer by taking support of financial ratios
The present section of FR study comprises with the business performance for which some
ratios are calculated properly. In order to accomplish this task, Marks and Spencer organisation
is taken into account which has global presence in retail industry. When looking at the stock
market then it listed in LSE and FTSE 100 component. Further, it is public limited company and
originated from the country UK. In order to assess its financial performance, data gathered from
the past financials accounts like P&L, B/S etc (Flower, 2016). Higher the level of this kind of
performance creates brand image in the industry and attracts various stakeholders. In the present
scenario basically three financial ratios are computed which are profitability, gearing and
liquidity, stated below:
Profitability ratios Formula 2016 2017
Operating profit (OP) 515 190
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Net profit (NP) 407 117
Sales revenue 10555 10622
Operating profit ratio OP / Sales revenue * 100 4.88% 1.79%
Net profit ratio NP / Sales revenue * 100 3.86% 1.10%
2016 2017
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
4.88%
1.79%
Illustration 1: Operating profit ratio
2016 2017
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
3.86%
1.10%
Illustration 2: Net profit ratio
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Analysis: From the above presented calculation and graphs it can be seen that, OP ratio
was 4.88% at the end of an accounting period 2016. As one year passed i.e. 2017 then same ratio
decreased which is as of now 1.79%. Therefore, the management of M&S is not efficient for
utilising available resources which lead to boost up operating expenses. Further, declining ratio
of NP from 3.86% to 1.10% is also one kind of indication of reducing business performance. As
per both ratios of profitability the retailer has poor performance. Basic reason behind is lack of
proper financial planning along with effective cost management (Marks & Spencer Group PLC.
2017). Hence, the firm requires using attractive marketing strategies and reducing cost methods.
These will help to enhance sales as well as margin in the future years.
Liquidity ratios Formula 2016 2017
Current assets (CA) 1461 1723
Current liabilities (CL) 2105 2368
Closing stock (CS) 800 759
Prepaid expenses (PE) 155 181
Current ratio CA / CL 0.69:1 0.73:1
Quick ratio CA – (CS + PE) / CL 0.24:1 0.33:1
2016 2017
0.67
0.68
0.69
0.70
0.71
0.72
0.73
0.74
0.69
0.73
Illustration 3: Current ratio
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2016 2017
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.24
0.33
Illustration 4: Quick ratio
Analysis: Apart from profitability, a liquidity tool reflects availability of cash in the
workplace so that firm can pay short term debts taken from various external sources of finance.
Increasing way of current ratio i.e. from 0.69:1 to 0.73:1 clearly states that, M&S able to fulfil
these kinds of debts. The reason is that liquidity in the firm enhances but with very lower or
minor proportion. On the another side, quick ratio responding in positive direction where it
improves from 0.24:1 to 0.33:1. Considering to these both the ratios it can be interpreted that,
M&S has better performance where it able to manage cash and profits generates. Along with
this, due to using profitable alternatives of investment also able to enhance cash in the working
place. Therefore, ability for paying short debts improve at the fiscal period ending 2017.
Gearing ratio Formula 2016 2017
Total debt 1727 1663
Total equity 3445 3156
Debt equity ratio Total debt / Total equity 0.50:1 0.53:1
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2016 2017
0.49
0.49
0.50
0.50
0.51
0.51
0.52
0.52
0.53
0.53
0.50
0.53
Illustration 5: Debt to equity ratio
Analysis: On the basis of D/E ratio, structure of the firm can be analysed properly in
form of raising fund from market. Under this, only two financing sources involved which are like
debt or bank loan as well as equity shares (Cadman, Rusticus and Sunder, 2013). Ideal
proportion of this tool is 0.5:1 where equity capital should be double then debt. In the case of
M&S enterprise, D/E ratio increases from 0.50:1 to 0.53:1 which is not beneficial for it. In the
previous year i.e. 2016, it performs at the boarder level where actual and standard both are same.
However, due to high bank overdraft the firm unable to maintain ideal level of this ratio.
Therefore, performance declines in the next year i.e. 2017 in comparison to 2016.
7. Differentiate two terms i.e. IAS and IFRS
The present terms like IFRS and IAS are related to process of FR which support to an
accountant for formulating final accounts and publish them. However, there are some differences
among these concepts along with this similarity which are explained below:
 Full form of IAS is International Accounting Standard and on the another side IFRS
terms refers to International Financial Reporting Standard (Christiaens and et.al., 2015).
 In relation to accounting several principles, regulations, rules and standards are
published. When these are published in between accounting period 1973 to 2001 are part
of the IAS and amended later on FY 2001 are involved in another stated term i.e. IFRS.
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 A body which prepares mandatory rules and govern to IAS is the IASC whereas same for
IFRS concept is known as IASB.
 Rules, standards, laws and standards which are part of the IAS, not considered under the
another stated accounting term i.e. IFRS (Ikpefan and Akande, 2012).
 When visualising to the number of standards involved in these then IAS comprises with
total 41 whereas IFRS consists with only 9.
8. Benefits of IFRS for an organisation
IFRS is a concept which used under the financial accounting for making effectual
adjustments along with treatments of transactions in books of the final accounts. Therefore, it is
beneficial term for each and every enterprise whether it operates nationally, internationally or
globally. Furthermore, it's another benefits for the company are explained below:
 Major advantage of this for management is that, it helps to make comparison with those
firms which operate at the global level. Basic cause behind this is that IFRS provides
same formate or structure of the accounts to all the companies for formulating financial
statements (Lee, 2014). Moreover, language of the accounts is also used same i.e. English
and due to this global comparison become more easy.
 At the time of taking adequate extent of accession in capital markets of another countries
also the IFRS is effectual technique. This is to be done when accountant follows all
principles, theories, compliances etc. of IFRS in proper direction.
 The financial statements of entity are used by wide range of stakeholders for making
some decisions towards it. Under this, when enterprise uses IFRS then people able to
understand these properly and without facing any issues. Therefore, IFRS creates
understandability of the accounts among firm's stakeholders.
 Along with this, in order to improve transparency of FR in the business environment the
IFRS is highly effectual as well as supportive technique. When the statements are
required to prepare highly accurate then also the addressed concept is beneficial for
entities (Johnston and Petacchi, 2017).
 Auditing is mandatory process for all the firms which operate legally in the market. Until
and unless this procedure not complete the entity cannot publish financial statements.
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Therefore, to complete auditing in proper and effective way in the working place IFRS is
supportive technique.
9. Aspects which create influence on compliance with IFRS
An organisation which operates at the global level and necessary to publish financial
statements then use IFRS, its principles and standards where required. At the time of using these
all the compliance and consent included in IFRS the company affects from some factors.
Moreover, elements due to which compliance with IFRS influenced in global firm are such as
follows:
 Auditing is one of the important consent of IFRS and when enterprise adopts it then
affects from proper procedure of auditing along with auditor. If the person who analyse
all the statements then must be honest (Biondi and Rebérioux, 2012). The reason is that
due to lack of honesty in auditor create adverse impact on IFRS compliances.
 Size of the firm like large, middle or small in the industry is also an element affecting to
this stated concept. When a firm operates at large scale then it is highly necessary to
apply all the rules and agreement of IFRS. If not uses then unable to prepare financials
effectually which hamper while making global comparison.
 Capability of management for generating margins or incomes in specific financial years
also influenced to the compliance with IFRS up to the greater level. When it has adequate
profits then easily able to amend all the compliances in proper and smooth manner.
However, due to lack of adequate margins cannot amend these concepts in appropriate
way which is another impact.
 Moreover, leverage also has the major and huge level of impact on the accountant when
he or she is going to use consent comprises in IFRS. Along with this, on the basis of
decreasing and enhancing liquidity condition the company affects for amending all
compliances consisted in the IFRS (Kerr and Murthy, 2013).
CONCLUSION
It can be ascertained from the analysis of FR that, to discuss and derive required
information for framing an effective financial plan and taking decisions related to this FR is a
pivotal concept. It has wide range of purposes which highly beneficial for the companies
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specifically for those which operates at the international extent. Further, when internal or
external stakeholders are going to make fruitful decisions towards the firm then always
considered its financial information and reports. It can be assessed throughout the analysis that,
FR is a supportive technique for meeting desired objectives and creating increasing trend of
growth rate. Besides these, business performance of Marks and Spencer is poor at the end of FY
2017 from previous period. However, in terms of liquidity ratios it able to generate cash and
become more capable to pay short terms loans or debts. The IFRS and IAS are difference up to
the certain level where IFRS has various benefits for the multinational or global businesses.
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