Financial Statement Analysis: A Comprehensive Guide

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Finance for Managers
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Table of Contents
Task 1...............................................................................................................................................3
1.1.................................................................................................................................................3
1.2.................................................................................................................................................3
1.3.................................................................................................................................................3
1.4.................................................................................................................................................4
Task 2...............................................................................................................................................5
2.1.................................................................................................................................................5
2.2.................................................................................................................................................5
Task 3...............................................................................................................................................7
3.1.................................................................................................................................................7
3.2.................................................................................................................................................7
3.3.................................................................................................................................................8
3.4.................................................................................................................................................9
Task 4.............................................................................................................................................10
4.1 & 4.2.....................................................................................................................................10
4.3...............................................................................................................................................14
References......................................................................................................................................16
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Task 1
1.1
Financial recording and reporting is a process which collects, process and delivers information
relating to finance in a timely and accurate manner. Reporting of such information recorded
appropriately is considered as financial reporting (Acharya & Ryan, 2016). Financial recording
and reporting are useful for the management and other stakeholders as well as provides all the
information regarding the financial position of the organization including financial statements,
cash flow statements, etc. thus helping in decision making for the organization. Purpose and
requirements of financial records include:
 Legal Requirements: It is legally required for some organizations to prepare and record
their financial data for compliance requirements. If the same is not fulfilled then, in that
case, legal actions can be taken on such an organization.
 Tax Requirements: Also there are certain tax requirements imposed by the regulatory
authorities which initiate the organization to prepare such financial records as with the
help of such financial records tax liability is computed.
 Internal Control requirement: Financial records also helps in managing the internal
control system of the organization as it helps in analyses of the budgets and other
processes that could help in finding the problems in the organization.
1.2
Various techniques are used for recording financial information in the business organization.
Some of them are as follows:
 Double-entry bookkeeping: In this system double entry effect is given for every
transaction that occurs in the organization at any time. For every debit entry, there is an
equivalent credit entry. It is based on the equation which states that Asset is equal to the
sum of liabilities and equity of the company.
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 Day Books and Ledgers: In this technique, the accounting transactions are recorded based
on date and then the same is transferred into the specific ledgers as required. This method
is used in the traditional method of accounting and not used in the modern accounting
method.
1.3
Following are some of the requirements of financial reporting:
 For Sole Traders: Sole traders are required to prepare the financial and report financial
statements which include a balance sheet, Profit and loss including drawings account as a
sole trader takes out money for its personal use also.
 For Partnership firm: All the reporting requirements are same for partnership firm i.e. it
has to prepare and report on all the requirements including all financial details but
additionally it has to report the partnership deed and details of the distribution of profits
among partners
 For Companies: For companies, there are some additional requirements that it needs to
fulfill while financial reporting. These include a statement of changes in equity, details
relating to the accounting policies adopted, etc. Also, any other requirements as listed by
other regulatory bodies are to be fulfilled by the companies.
1.4
Financial statements can be used by many people and all the stakeholders of the organization
require financial statements for various reasons (Jolanta, 2015). Some of the users and usefulness
of financial statements are as follows:
 Management: Financial statements are used by management for decision making and
comparing the performance of the company from the budgeted.
 Shareholders: Financial statements help in gaining the knowledge relating to the
profitability of the organization to the shareholders by which they can consider the
investment made by them in the organization
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 Employees: Appraisal and promotion of the employees are based on the financial
performance of the company. Financial statements help in determining the stability in the
organization and growth which has happened in the past financial year.
 Government Authorities: Financial statements help in determining whether all the legal
requirements are met by the organization as led by the regulatory bodies and government
organization. Also, it helps in determining the liabilities relating to taxation and other
obligations for the company.
 Creditors: These stakeholders are those to whom the company owes money. Creditors
are concerned about the financial statements as the financial position of the company is
determined by these statements. Creditors keep track of the financial statements to
confirm whether the money is secured with the organization.

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Task 2
2.1
Working capital is considered as the capital which is used in business to carry out daily
operations. Various components are used by investors as well as analysts to analyze a company's
cash flow (Aktas, 2015). These elements include the inflow and outflow of cash and
management of inventory.
Bank & Cash Balances: Cash balances are considered as an important component due to the
availability of current assets. It is the element that is required for performing all the functions
within the organization. Hence every firm needs to maintain an adequate amount of cash
balances. With this bank, balances are also necessary as it enables the firm to convert its
accounts receivables and payables.
Debtors: It can also be determined as the management of receivables. This term explains the
claim of money which is owed to the firm from the customers that have been arising out of the
sale of goods and services. This is also a significant component after cash and inventory.
Creditors: Creditors or payables are also the source of finance for working capital. This is
closely related to the management of cash. Effectiveness in payable management leads to an
increase in the supply of goods firms.
Stock: Inventory management is the chief part of total working capital. The management of
inventory is done effectively than it leads to the maximization of earnings to the shareholders.
2.2
There are various ways through which the working capital can be managed and effectiveness can
be maintained in the inflow and outflow of cash.
Payment and Collection Cycle: The first and foremost method is related to the proper
collection of payment from the debtors so that working capital cannot get affected. The suppliers,
in turn, should also be paid timely so as make business more flexible.
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Stock Control: Managing the procurement of inventory helps in making most of the working
capital. More of the stock can replace the burden on the cash resources of business but on the
other hand, insufficient cash may lead to loss of sales and customer relationships.
Make informed financing decisions: The decisions related to finances can be made fastest and
quickly through the proper management of working capital for the company. Giving priority to
working capital may allow making the strategic investment decision which in turn will help in
driving operational performance and efficiency.
Therefore, management of working capital is considered as the backbone for all the business
operations.
Given Information
Particulars Amount
Selling Price (Per Unit) £ 15
Variable Cost (Per Unit) £ 10
Fixed cost (Per Month) £ 6,000
Computation of Minimum Number of Units
Particulars Amount
Selling Price (Per Unit) $ 15
Less: Variable Cost (Per Unit) $ 10
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Contribution (Per Unit) $ 5
Fixed Cost $ 6,000
Break Even Point (Fixed Cost/Contribution per unit) 1200
Computation of New selling Price if Units produced is 2000 units per month
Particulars Amount
Number of Units Sold 2000
Variable cost (Per Unit) £ 10
Total Variable Cost £ 20,000
At Break-even point profit is equal to Zero thus contribution is equal to Fixed Cost
Let the selling price be X
Particulars Amount
Selling Price X
Number of units 2000
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Total Revenue 2000*X
Variable Cost £ 20,000
Contribution (2000*X)-20000
As per the equation
Contribution = Fixed cost
(2000*X)-20000 = 6000
2000*x = 26000
X = 26000/2000
X = £ 13
Thus the selling price of the product will be £ 13 to achieve the break-even point if 2000 units
are produced each month
Task 3
3.1
Management accounting and financial accounting are the techniques used in the organization and
implemented in the organizational processes which help the management in correct decision
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making by using financial data. Management and financial accounts are useful for all the
stakeholders of the organization including management, employees, financial institutions,
shareholders, etc. Management accounting provides important data and reports which help in the
computation of ratios that are useful and facilitates decision making based on the same.
Following are the difference between management and financial accounting:
Serial No. Basis Management
Accounting
Financial
Accounting
1 Application Helps in decision
making for the
management
Analysis, recording
and summarizing of
information relating
to finance of the
company
2 Scope Covers the whole
organization and its
processes
Only covers the
financial aspect of the
organization
3 Statutory requirement Not required as per
legal or other
obligations
Has to comply with
legal obligations and
regulations as stated
4 Usage Used only by the
management and
owners
Used by all the
stakeholders
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3.2
Budgets are also one of the management accounting technique which plays an important role in
making a decision and helps in reducing the overall cost of the organization. Budgets are
prepared with the help of cash flow statements and the forecasts made of the cash flows. Budget
is very important for management as it helps in focusing on important things by allocating the
amount of expense to each activity (Sponem & Lambert, 2016). The budget also helps in
conducting variance analysis by comparing the budgeted results with actual and understanding
the reasons for the same. Following are the advantages and disadvantages of budgets:
Advantages: Budgets help in making strategic plans which facilitate effective decision making.
It also helps in effective utilization and allocation of resources which improves the efficiency in
various departments.
Disadvantages: Preparation of budget is time-consuming and requires a lot of effort by
management for its preparation. Also budget only considers the financial outcome of the
transaction thus ignoring the non-financial factors.
3.3
The table below shows the flexible budget prepared for the organization with the help of a fixed
budget provided as there is a change in the units of the production in the budget. Also, variance
analysis of the same has been done after preparation of the budget which shows the difference
between the actual and budgeted data to identify the reasons for the same.
Flexible Budget
Particulars Total Amount
Direct Material £ 9,000
Direct Labor £ 6,000
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Maintenance £ 1,500
Total Variable Cost £ 16,500
Semi Variable Cost
Other costs £ 4,600
Fixed Cost
Depreciation £ 2,000
Rent And Rates £ 1,500
Total Fixed Cost £ 3,500
Total Cost £ 24,600
Variance Analysis
Particulars Budgeted Actual Variance Favorable/Adverse
Direct Material £ 9,000 £ 8,500 £ 500 Favorable
Direct Labor £ 6,000 £ 4,500 £ 1,500 Favorable
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