Financial and Management Accounting Report: Financial Analysis

This report provides a comprehensive analysis of financial statements, including income statements, balance sheets, and cash flow statements, and their crucial role in financial decision-making. It explores the purpose of each statement and how they collectively offer insights into a company's financial health. The report also examines the accounting equation (Assets = Liabilities + Equity) and its significance in maintaining the balance of financial transactions. Furthermore, it delves into how bankers utilize financial statements when assessing loan applications, highlighting the importance of liquidity, asset evaluation, and governance policies. The report concludes with a worked example, showcasing the practical application of these concepts through journal entries and the calculation of net profit.

Financial and Management Accounting
Course Code:
Course Title:
Assessment Title:
Student’s name:
Student PI Number:
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Contents
Solution 1:..................................................................................................................................................................................................................................... 3
Part a:......................................................................................................................................................................................................................................... 3
Part b:........................................................................................................................................................................................................................................ 5
Solution 2:..................................................................................................................................................................................................................................... 6
Part a.......................................................................................................................................................................................................................................... 6
Part b......................................................................................................................................................................................................................................... 6
Solution 3:..................................................................................................................................................................................................................................... 7
Part a:......................................................................................................................................................................................................................................... 7
Part b:........................................................................................................................................................................................................................................ 8
Bibliography.................................................................................................................................................................................................................................. 9
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Solution 1:
Part a:
To: Victor Lim
From: Students Name
Date: 20th September, 2018
Re: Purpose of Financial Statements
The financial statements are made to present the financial position of the company. A lot of information from the financial statements of a
company can be obtained, that can help in decision making. All the parts of the financial statements individually have a specific purpose to
serve.
The income statements of an organisation records all the incomes and expenses for a given period of time irrespective of actual cash flows
(Alvarez, 2013). This is called accrual method. This helps the management understand the profits or losses that the company is earning for a
given period of time. The income statements of various periods of a company can be used to analyse the trends of the working of the company. It
also helps the management set goals for the future period.
The balance sheet of a company helps the investors understand the position of the firm as on a given date. The balance sheet records the assets
and liabilities. A lot about a company’s financial health can be understood from a balance sheet (Easton, 2010). The liquidity of a company
which plays a very vital role in its day to day operations can be determined form the balance sheet of the company. Also the own funds and debt
funds used helps to analyse the ownership of the company (Elaine, 2015).
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As discussed the income statement of a company is based on accrual system. But in order to keep a check on the cash position of the firm, it is
important that cash flow of the company is also being recorded (Girard, 2014). Cash flow statement recorded the actual cash flows based on
various activities. This helps the management make cash policies regarding the debtors and creditors. It also, helps them make investment and
financing decisions (Ittelson, 2009).
The stamen of equity is another important part of financial statements that help the investor analyse the changes made in the owned funds of the
company. Equity is also known as the owned funds of the company, which means the funds that, can be used for the company and are owned to
its shareholders. The stamen of equity shows the changes made in the equity share capital and other free reserves of the company during the year
(McLaney & Adril, 2016).
Therefore, id all these statements are combines, they helps the investors and other users have an insight into the workings of the company. The
health of the company can be determined using the financial statements. The effect of decision made by the management on the health of the
company can also be witnessed from these statements. Hence we wee that the purpose of the financial stamen is not limited to a single function.
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Part b:
i. In order to give a loan, the bankers go through the financial statements of the applicant. The financial statements are the mirror to the
financial health of the company; they reflect the performance of the company. Before sanctioning any loan, the bankers make sure
that the applicant has a strong financial past, and the future of the financial performance of such applicant will be good enough for
them to repay back the loan along with interest (Parrino, 2013).
The financial statements of the company help the bankers understand about the liquidity of the company. It is important for the
company to have a strong liquidity position. Having a proper liquidity reflects company’s ability to repay the loan and interest when
due. Liquidity keeps the day to day operations within an organisation running. Lack of cash may put a pause on the operational
activities which may harm the profitability of the company. When a loan is sanctioned the bankers also ask for a security which could
be used in case of default of loan repayments. The financial statements help the bankers have knowledge about the assets of the
company, which can be used as security. Checking of the governance policies of the company has also become vital since, the ethical
performance of the company reflects on the financial performance. Any past frauds or defaults made will be taken into consideration
before sanctioning of the loan.
Therefore, we see that a lot of information can be obtained from the financial statements of the company. The sanctioning of loans is
very much dependent on these reports of the company.
ii. The bankers ask for the financial statements of the applicant in all the cases for loan. But they may also ask for any other information
which they may think would be helpful in evaluating the financial health of the company. For example, they may ask for a projected
income statement and balance sheet in order to evaluate the future profitability of the company (Simpson, 2012). The form of
business organisation also affects the requirements. Such as, for a company, the bankers may ask for the memorandum and articles
for assistance, whereas for a partnership firm they may ask for partnership agreement. The information asked by the bankers for
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sanctioning of the loan is very much dependent on the form of the organisation. Also, the industry to which such organisation belongs
to is taken into consideration, before asking for any documents for the financial analysis of the company.
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Solution 2:
Part a.
Accounting equation is also popularly known as the balance sheet equation. The equation stands as follows:
Assets = Liabilities + Equity
This equation is the foundation for the double entry system. This equation stands to explain that every transaction an equal effect on other
resources. For an outflow of cash, there would be either increase in asset or decrease in liability. The total of the balance sheet of the asset side is
going to equal the liability side. The accounting equation helps to lay down this fact.
Part b.
The accounting equation lays a balance between the asset and liabilities of the company. For an increase in asset there would be either decease in
other asset of decline in any liability. Whatever the transaction be, there will be two legs with same amount. If the equation does not tally it
indicates error in the books. Hence the accounting equation must always tally in order to present correct accounting data.
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Solution 3:
Part a:
Date
Asset
Total
Asset
Liability Equity Total
Liabili
ty and
Equity
Cash Accounts
receivable
Suppl
ies
Depo
sit Van Service
Equipment
Accounts
Payable
Share
Capital
Reven
ue
Expen
ses
01-07-
2018
$1,00,0
00 $0 $0 $0
$80,0
00 $8,000
$1,88,0
00 $0 $1,88,000 $0 $0
$1,88,0
00
04-07-
2018
-
$9,000 $0 $0
$4,50
0 $0 $0
-
$4,500 $0 $0 $0
-
$4,500
-
$4,500
06-07-
2018 $0 $0
$10,0
00 $0 $0 $0
$10,00
0 $10,000 $0 $0 $0
$10,00
0
16-07-
2018 $0 $5,000 $0 $0 $0 $0 $5,000 $0 $0 $5,000 $0 $5,000
23-07-
2018 $0 $7,500 $0 $0 $0 $0 $7,500 $0 $0 $7,500 $0 $7,500
26-07-
2018 $5,000 -$5,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
28-07-
2018
-
$10,00
$0 $0 $0 $0 $0 -
$10,00
-$10,000 $0 $0 $0 -
$10,00
8

0 0 0
29-07-
2018
-
$2,000 $0 $0 $0 $0 $0
-
$2,000 $0 $0 $0
-
$2,000
-
$2,000
29-07-
2018
-
$5,050 $0 $0 $0 $0 $0
-
$5,050 $0 $0 $0
-
$5,050
-
$5,050
Total
$78,95
0 $7,500
$10,0
00
$4,50
0
$80,0
00 $8,000
$1,88,9
50 $0 $1,88,000
$12,50
0
-
$11,55
0
$1,88,9
50
Part b:
The net profit of the company shall be:
Net Profit = Revenue – Expenses
Therefore, the profit for the company in the given case is $950.
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Bibliography
Alvarez, F. (2013). Financial statement analysis. Hoboken, N.J.: Wiley.
Easton, P. (2010). Financial statement analysis & valuation. Cambridge, UK: Cambridge Business Publishers.
Elaine, H. (2015). International financial statement analysis. Hoboken: John Wiley & Sons.
Girard, S. L. (2014). Business finance basics. Pompton Plains, NJ: Career Press.
Ittelson, T. (2009). Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports. Franklin Lakes, N.J.: Career
Press.
McLaney, E., & Adril, D. P. (2016). Accounting and Finance: An Introduction. United Kingdom: Pearson.
Parrino, R. (2013). Fundamentals of Corporate Finance, 2nd Edition. Milton: John Wiley & Sons.
Simpson, M. (2012). Financial accounting. Basingstoke: Macmillan Press.
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