Financial Information: Analysis, Users, and Purpose for Businesses

This report provides a comprehensive analysis of financial information, focusing on financial ratios and their application in measuring business performance, particularly using the example of Mercia Trading Ltd. It delves into the legal requirements for financial information across different organizational structures in the UK, including sole traders, partnerships, private limited companies, and public limited companies. The report further evaluates the need for financial information by management, emphasizing the importance of balance sheets, income statements, and cash flow statements in decision-making. It identifies both internal and external users of financial information, outlining their specific interests and how financial statements serve their needs. Finally, the report explains the purpose of financial statements, highlighting their role in providing insights into operational results, cash flow, and financial position for various stakeholders. The report concludes by emphasizing the essential role of financial information in understanding a business's financial health and making informed decisions.

Understanding Financial
Information

Table of Contents
INTRODUCTION...........................................................................................................................1
LO1..................................................................................................................................................1
1.1Explaining the financial ratios and measuring the performance of the business...................1
LO2..................................................................................................................................................1
2.1Explaining the legal requirement of the financial information from different types of
organizations in UK....................................................................................................................1
LO3. ................................................................................................................................................2
3.1 Evaluating the need for financial information by the management......................................2
LO4. ................................................................................................................................................3
4.1 Identifying the users of financial information and their interest in this information............3
LO5..................................................................................................................................................4
5.1 Explaining the purpose of the financial statements in the business. ....................................4
CONCLUSION ...............................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Financial statements are the systematic record of the financial transactions, activities and
events which contains monetary value. It represents the position of the business and presented in
the structured manner. Such statements are easy to understand and simple to develop. It plays a
crucial role in summarizing, interpreting and communicating the results to the users. The present
study is based on the evaluation of the financial performance of the Mercia Trading Ltd by
analyzing its financial ratios. Furthermore, the report includes the financial information that are
legally needed by various firms in UK. The study also includes the need, users and the purpose
of financial statements for the users and the management.
1.1Explaining the financial ratios and measuring the performance of the business.
Mercia Trading Ltd.
Ratio analysis
Particulars Formula Amount
2018
Liquidity ratio
Current assets 525
Current liabilities 255
Current ratio
Current assets/current
liabilities 2.06
Current assets 525
Inventory 240
Quick assets Current assets-inventory 285
Current liabilities 255
Quick ratio Quick assets/current liabilities 1.12
Profitability ratio
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Gross profit 470
sales 1430
Gross profit ratio Gross profit/sales*100 32.87%
Operating profit 180
sales 1430
Operating profit ratio Operating profit/sales*100 12.59%
Net income 120
sales 1430
Net profit ratio Net income/sales*100 8.39%
Net income 120
Capital employed 1300
Return on capital employed
Net income/return on capital
employed*100 9.23%
Efficiency ratios
cost of sales 960
Average inventory 275 275
Inventory turnover ratio Cost of sales/average inventory 3.49
sales 1430
working capital 270
working capital turnover
ratio sales/working capital 5.30
Interpretation- From the above report it is interpreted that ratio analysis helps in
evaluating the liquidity, profitability and the efficiency position of the Mercia Trading company.
The primary purpose of financial ratio is to measure the trends of the performance of the
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business and comparing it with the ideal ratios. However, the limitation of the financial ratio is
they are analyzed on the basis of the accounting figures which are estimated and thus lack
accuracy. Manipulation can be possible in the statements which leads to incorrect valuation of
ratio. Hence, the liquidity position of this company is said to be better as it equates with the ideal
ratio that is 2:1 which indicates efficient management of its assets and has the capability in
meeting the current obligation. The profitability position is also reflects better results which
means company has sufficient profits to meet its expenses and costs. The efficiency ratios
indicated as better ratio as it equates to 3.49 & 5.30 which means inventory and current assets are
managed effectively by the Mercia Trading company.
2.1Explaining the legal requirement of the financial information from different types of
organizations in UK.
Sole trader- It is the organization where an individual run the business on its own and are
called as the self-employed. According to the UK law, Sole trader is one whose earnings are
more than £1000 from its self employment between the one year period that begins with 6th April
2018 to 5th April 2019. They need to have VAT registration if their turnover exceeds £85000. It
is not mandatory for the sole trader to maintain financial statements in the UK.
Partnership firm- In this, each partner has the legal right to take participation in the
management of their business with subject to the terms and conditions in the agreement
(Martínez‐Ferrero, Garcia‐Sanchez and Cuadrado‐Ballesteros, 2015). Every partner must have to
assess the complete tax returns in proportion of their profits and then must have to submit these
returns annually to the HMRC. They also have to pay the National Insurance Contributions.
Private limited companies- It is compulsory for all the private companies in the UK to file
their accounting information at the companies house. The company need to submit its financial
information within 9 months of the accounting period ended. Companies whose threshold limit
exceeds in relation to the turnover that is £10.2 million, gross assets limits over £5.1 million and
the employees are 50 or more than that must need an audit of their accounts.
Public limited companies- In UK, companies are said to be public limited when it has
minimum two shareholders and have issued the shares to public for a value of at-least £50000.
The financial information or statements of these companies must be submitted at the company
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house (Du, Yu and Yu, 2017). Registration of such companies is mandatory with the companies
house. It must have minimum two direction of which one must be individual.
3.1 Evaluating the need for financial information by the management.
Financial information act as the powerful tool for the management to bring positive
outcomes within the enterprise. Such information plays a crucial role for the owners of the
business in evaluating the strengths and the weaknesses of its business. Financial information
helps the managers in formulating the budgets and in making effective future projections. The
three major financial statements that presents the financial information are balance sheet, cash
flow and profit or loss accounts.
Balance sheet- It helps the managers in determining the liabilities and the assets of the
corporate through which they can evaluate the position of the company. It directs the
management in meeting its long term obligation and creating the wealth of the shareholder by
increasing the stockholder's equity (Theriou, 2015). It provides the information to the managers
in relation to the exact owing of the business against its debt.
Income statement- Through this statement managers can get the information in terms of
the expenses and the revenues of the organization so that they can prepare the budget with full
accuracy. The managers can make appropriate estimations of the expenses and the revenues for
smooth functioning of the operations. It helps in making the report on the routine expenses of the
business within the management.
Cash flow statement- Such statements provide the financial information in relation to the
cash and cash equivalent of the business. The managers can assess the inflows and the outflows
of cash into and outside the business so that they can prepare the cash budget appropriately
(Cash flow statement, 2019). They could estimate about the coming expenses and the income
opportunities if any for the company.
4.1 Identifying the users of financial information and their interest in this information.
The users of the financial information are categorized into two main segments that are
internal and external users. Internal users are those who are present in the internal working of the
organization such as managers, owners etc. while external users are those who act as the
outsiders for the company but are affected with the performance of the entity like investors,
government authorities etc.
Internal users-
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Owners- They assess the performance of their business through the financial statements
of its business. Financial information enables the owners in ascertaining the stability level of
their business and in evaluating several economic factors that affects the functioning of their
business activities (Pucheta‐Martínez, Bel‐Oms and Olcina‐Sempere, 2016). Accounting
information helps them to make decisions regarding the use and procurement of the financial
resources. It also helps them in determining the need of expansion and diversification in their
business.
Managers- They need financial information to monitor, plan and in making business
decisions. They require the information to track the performance of the business by comparing
the current performance against the previous performance and if any deviation resulted then to
take corrective action. For analyzing the competitor and making use of bench-marking or other
tools to resolve the financial problems, such information are of great importance.
External users-
Investors- They use accounting information for identifying the performance of their
investment made in the business of the entity. Primarily they rely on the financial information
represented through the statements in order to assess the valuation, profitability and the risk
involved in their investment (Borio, Disyatat, and Juselius, 2016). Such information helps them
in developing suitable decisions regarding the further investment or to hold the investment made.
Government- Through the financial information government can monitor that the
disclosure made by the company in its statements are as per the rules and regulations. It helps in
protecting the stakeholders interest who uses such information for forming the best decisions. It
enables the government in knowing that the preparation of the statements is in compliance with
the accounting standards and right amount of taxes are paid or not.
5.1 Explaining the purpose of the financial statements in the business.
The basic objective or purpose of the financial statements is to facilitate the information
regarding the operational results, cash flow and financial position of the organization. Such
information is used by several readers in making decisions in terms of the allocation of the
resources. Moreover, different purposes are attached with each statements. Income statement
provides information relating to the ability of the business in generating profits. It reveals about
the sales volume and the expenses of the company (Nobes and Stadler, 2015). Continuous
review of this statement helps in analyzing the resulting trends in the operations of the company.
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The foremost purpose of balance sheet is facilitating the information regarding the present
status of business and measures the financial position of the entity. Such information are used to
anticipate the liquidity, debt position, and funding of an enterprise. It acts as the basis for
evaluating liquidity ratios. The purpose of the cash flow statement is to ascertain the cash
position of the corporate by showing the receipts and the disbursements of the cash. It helps in
maintaining and keeping control over the expenses.
There are some additional purposes of the financial statements that includes the credit
decisions, taxation decisions, investment decisions and the bargaining decisions. Lender make
use of the information for determining the credibility or credit worthiness of the company so that
they can evaluate the extent to which the company can borrow further (Tchamyou, 2019). A
union can make judgments on the probable ability of company to pay so that they could base
their bargaining positions.
CONCLUSION
From the above report it is summarized that financial information is very essential for the
organization in understanding its financial health and to make improved decisions in context of
its business. Financial statements facilitate several financial related matters that the investors,
creditors and other users uses to assess the financial position and performance of the enterprise.
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REFERENCES
Books and journals
Borio, C., Disyatat, P. and Juselius, M., 2016. Rethinking potential output: Embedding
information about the financial cycle. Oxford Economic Papers. 69(3). pp.655-677.
Du, Q., Yu, F. and Yu, X., 2017. Cultural proximity and the processing of financial
information. Journal of Financial and Quantitative Analysis. 52(6). pp.2703-2726.
Martínez‐Ferrero, J., Garcia‐Sanchez, I. M. and Cuadrado‐Ballesteros, B., 2015. Effect of
financial reporting quality on sustainability information disclosure. Corporate Social
Responsibility and Environmental Management. 22(1). pp.45-64.
Nobes, C. W. and Stadler, C., 2015. The qualitative characteristics of financial information, and
managers’ accounting decisions: evidence from IFRS policy changes. Accounting and
Business Research. 45(5). pp.572-601.
Pucheta‐Martínez, M. C., Bel‐Oms, I. and Olcina‐Sempere, G., 2016. Corporate governance,
female directors and quality of financial information. Business Ethics: A European
Review. 25(4). pp.363-385.
Tchamyou, V. S., 2019. The role of information sharing in modulating the effect of financial
access on inequality. Journal of African Business. pp.1-22.
Theriou, N. G., 2015. Strategic Management Process and the Importance of Structured
Formality, Financial and Non-Financial Information. European Research Studies. 18(2). p.3.
Online
Cash flow statement. 2019. [Online]. Available through: <
https://www.edupristine.com/blog/cash-flow-statement-in-detail>.
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