Diploma in Accounting: Financial Statement Analysis

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Diploma in Accounting
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Table of Contents
Task 1.1.......................................................................................................................................................3
Task 1.2.......................................................................................................................................................3
Task 1.3.......................................................................................................................................................3
Task 1.4.......................................................................................................................................................3
Task 1.5.......................................................................................................................................................4
Task 1.6.......................................................................................................................................................4
Task 1.7.......................................................................................................................................................4
Task 1.8.......................................................................................................................................................5
Task 1.9.......................................................................................................................................................5
Task 1.10.....................................................................................................................................................5
Task 1.11.....................................................................................................................................................7
Task 1.13.....................................................................................................................................................7
Task 1.14.....................................................................................................................................................7
Task 1.15.....................................................................................................................................................8
Task 1.16.....................................................................................................................................................8
Task 2.1.....................................................................................................................................................10
Task 2.2.....................................................................................................................................................13
Task 2.3.....................................................................................................................................................14
Task 2.4.....................................................................................................................................................14
Task 2.5.....................................................................................................................................................15
Task 2.6.....................................................................................................................................................15
Task 2.7.....................................................................................................................................................16
Task 2.8.....................................................................................................................................................16
Task 2.10...................................................................................................................................................17
Task 2.11...................................................................................................................................................18
References................................................................................................................................................20
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Task 1.1
ExpectationsThe expectations of the client are that the financial statement is accurate and
reliable so that the client can make key decisions regarding investment and so on.
ObjectivesThe main objective of the client is to maximize the profits and reducing the costs
incurred in business activities (Brusov, et. al., 2018).
Task 1.2
Legal and Financial ObligationThe client’s legal requirements are to register the company’s
name, form an LLC, get tax identification numbers, licenses and permits and file for trademark
protection.
Task 1.3
Financial Options to make plans and achieve financial goals are:
 Create a budget. Keep track of all the expenses and revenues that will be incurred in a
year (Brusov, et. al., 2018).
 Application of SMART Goal strategy. The aim should be Specific, Measurable,
Achievable, Relevant and Timely.
Task 1.4
The agreed criteria which should be followed and communicated to the clients are:
 Analysis of ratios determining the performance of the company that indicates the
performance of the company.
 Respective Share Value of the company (Brusov, et. al., 2018).
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Task 1.5
Internal Factors
Business OwnershipNature of business ownership has a very big impact on the financial
objectives of the company (Ehiedu, 2014).
Size and Status of the businessSmall business setups are more focused on surviving and making
customer base, whereas larger enterprises are focused on growing the value of shareholders.
External Factors
CompetitorsCompetitive environment in a homogeneous product range affects the financial
goals of the company.
Political and Social ChangeChanges in the policies framed by the political and social factors can
directly impact the performance of the firm (Gepp and Kumar, 2015).
Task 1.6
Three ways that can help in obtaining feedback on financial services are:
 Providing live chat support to the customers (Ehiedu, 2014).
 Providing customer feedback forms on the official website of the company.
 Monitor various social media channels.
Task 1.7
Three possible shortfalls in financial service standards are:
 Greed and SelfishnessSometimes greed and selfishness act as a hurdle in financial
services. This can be tackled with the strict supervision of the higher authorities.
 Lack of Moral BehaviorUnethical behavior can do more harm to financial services. It
would lead to dissatisfaction from the customers.
 Issues in Financial SoftwareErrors in software can be very disastrous for the company as
well as the clients. The firm may send mails to the clients regarding their capital invested
(Gepp and Kumar, 2015).
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Task 1.8
Authorities for extracting reliable data:
 Statutory Bodies
 Revenue Services
 Official site of the Company
Sources for extracting reliable data:
 Income Account
 Balance Sheet
 Cash Flow Statement
Task 1.9
Reconciliation is a method that proves that all the transactions occurred in the business are in
accordance with the balances of the account. It is very important to regularly reconcile the
accounts of the firm as it is the only way that authenticates that the transactions have actually
taken place.
It is mandatory for the firm to comply with all statutory requirements (Gepp and Kumar, 2015).
This proves that there are businesses functions are happening accordingly and there are no
unethical practices that are being followed.
Task 1.10
Current RatioIt is a liquidity ratio that measures the firm’s capability to pay its short-term
obligations with the assets that it holds.This ratio helps in comparing the firm’s current assets
to its current liabilities.
Current Ratio= Current Assets/Current Liabilities
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Quick RatioThis ratio is an indicator of the company’s liquid position. It measures if the
company can pay off its debts by liquidating its immediate assets or cash in use. It is also known
as the acid-test ratio.
Quick Ratio= (Cash & Equivalents + Marketable Securities + Accounts Receivable)/ Current
Liabilities
Working CapitalRatio It is similar to the current assets ratio. It identifies the health of the firm’s
short term finances and its efficiency. Company’s ability to pay its debts with the help of its
assets (Parson, et. al., 2015).
If the assets of the company increase, it means that it has adequate capital to pay off any
liabilities.
Working Capital Ratio= Current Assets/Current Liabilities
Gross Margin RatioIt is a profitability ratio that compares the gross margin of the business to
net sales. It summarizes the amount of profit the company will gain is it will sell its inventory.
Gross Margin Ratio = Gross Margin/Net Sales
Net profit Margin RatioIt is the ratio that determines the percentage of profit generated as per
the percentage of the revenue. This ratio is very useful in indicating the company’s financial
health (Parson, et. al., 2015).
Net Profit Margin Ratio = Net Profit/Revenue
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Task 1.11
Financial Techniques used to analyze data are:
 Comparative Financial Statements
 Cash Flow Statements
 Trend Analysis
 Ratio Analysis
Task 1.13
Aspects that need to be considered for preparing financial advice for the clients
 Age of the Client
 Client’s ability to take risks
 The total period for which investment is to be done.
 Objective of Investment
Task 1.14
Methods of Presentation to convey information to the client:
 Providing the complete data regarding returns on particular investmentsClients should
be aware, where their money is being invested. It is important for them to know as they
can also track their progress (Ehiedu, 2014).
 Using simpler terminologies that are easier to understand Many people are unaware of
the financial terminologies. It is also difficult for them to understand the calculations
done. Therefore it is important that they should be told about the investments in
simpler terms.
 Explain the pros and cons of the schemes Clients should be aware of the consequences
of investing in equity.
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 Describe the long term and short term benefits of the investments Benefits earned
from the investment should be told clearly and beforehand to the client (Parson, et. al.,
2015).
Task 1.15
Potential Risks that should be identified and quantified to the client are:
 Risk of Low Returns.
 Risk of adhering to compliances.
 Risk of the impact of changes in the share market.
Task 1.16
Sources and features of short-term finance:
 Overdraft AgreementThrough this method, the firm can still draw money from its
account in order to have capital. There is a certain limit to this kind of transaction. Banks
charge a monthly fee for this facility from corporate offices (Ehiedu, 2014). The balance
can be negative, yet money can be withdrawn.
 Accounts Receivable FinancingThis is an immediate type of financing, where the
company can arrange money by transferring its receivables- outstanding invoices or the
money that is owed by customers. This is also a quick way for the company to arrange
capital in need.
 Customer AdvancesThis is a method under which the amount is received from the
customer before the service of goods. An account for this purpose is formed in the
books, namely a deferred revenue account or can also be stated as Unearned Revenues
or Customer Deposits (Parson, et. al., 2015).
Sources and features of Loon-Term Finance:
 Retained ProfitsIt is a good source of accumulated funds for the company. Retained
Profits or Retained Earnings is the income that is left after the distribution of dividends
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to the shareholders. This amount is retained by the company at the end of the fiscal
year.
 Issue of Equities and DebenturesAnother source of company for raising finance is by
issuing shares or by raising loans (Parson, et. al., 2015). Different types of shares serve a
different purpose. Similarly, debentures are bonds that are issued to raise capital from
external sources.
 A loan from BankBanks provides loans to companies for a set period of time. This is a
major source of capital for the company.
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Task 2.1
Calculation of Ratios
Current ratio = Current Assets/Current Liabilities
Particulars Amt ($)
Current Assets 3940
Current Liabilities 2430
Current Ratio 1.621399
Liquid Ratio = Cash + Short-Term Market Securities + Accounts Receivables)/Current Liabilities
Particulars Amt ($)
Cash $ 105,000
Market Securities $ 4,500
Receivables $ 3,050
Current Liabilities $ 2,430
112550
Liquid Ratio 46.31687243
Stock Turnover Ratio = Sales/ Inventory
Particulars Amt ($)
Sales 1600
Inventory 950
Current Ratio 1.684210526
Collection Period Days = 365 Days/ Accounts Receivable ratio
Particulars Amt ($)
No of Days $ 365
Accounts Receivable Ratio $ 25
Collected Period Ratio 14.6
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Fixed Asset Turnover Ratio = Net Sales/ Average Net Fixed Assets
Particulars Amt ($)
Net Sales $ 1,600
Average Net Fixed Assets $ 2,200
Fixed Asset Turnover 0.727
Asset Turnover Ratio = Net Sales/Average Total Assets
Particulars Amt ($)
Net sales $ 1,600
Average Total Assets $ 12,000
Asset Turnover Ratio 0.133
Assets Employee Ratio = Total Assets/ Total No of Employees
Particulars Amt ($)
Total Assets 12000
Total No of Employees 250
Assets Employee Ratio 48.0
Gross Profit Margin = (Revenue- Cost of Goods Sold)/Revenue
Particulars Amt ($)
Revenue 12400
Cost of Goods Sold 3600
Gross Profit Margin Ratio 0.7
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Net Profit Margin = Net Profit/ Revenue
Particulars Amt ($)
Net Profit 1200
Revenue 16000
Net Profit Margin Ratio -12.3
Return on Net Worth = Net Income / Shareholders’ Equity
Particulars Amt ($)
Net Income 1200
Shareholders’ Equity 6700
Return on Net Worth -4.6
Return on Total Assets = Net Income/ Total Assets
Particulars Amt ($)
Net Income 1200
Total Assets 12000
Return on Total Assets -9.0
Profit per Employee = Total Revenue/Total No of Employees
Particulars Amt ($)
Total Revenue 1200
Total no of employees 250
Profit per Employee 0.8
Debt to Equity = Total Liabilities/ Shareholder’s Equity
Particulars Amt ($)
Total Liabilities $ 2,430
Shareholders’ Equity $ 6,700
Debt to Equity Ratio -1.8
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