Financial Strategy Report: Capital Structure & Matching Principle

This project report provides a comprehensive analysis of a company's financial strategy, focusing on its capital structure, debt and equity positions, and the application of the matching principle. The report begins with an introduction outlining the scope of the analysis, followed by an examination of the company's capital structure, including the debt-to-equity ratio and its implications. The advantages and disadvantages of the chosen capital structure are then discussed, drawing on relevant literature and financial concepts. The report further investigates the matching principle, its application in the company's accounting practices, and the benefits it provides in accurately reflecting the company's financial performance. A detailed literature review explores the advantages and disadvantages of the matching principle in the context of accrual accounting. The report concludes with a summary of findings and insights into the company's financial management practices, offering valuable insights for understanding financial strategy and accounting principles.

Running Head: Financial Strategy
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Project Report: Financial Strategy

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Contents
Introduction.......................................................................................................................3
Capital structure of the company......................................................................................3
Advantages and disadvantages.........................................................................................4
Matching principle............................................................................................................5
Advantages and disadvantages.........................................................................................6
Conclusion........................................................................................................................7
References.........................................................................................................................8

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Introduction:
This report has been prepared over the financial statements of a company to analyze
and investigate the debt and equity position of the company. In this report, capital structure of
a company has been analyzed and further the pros and cons of the capital structure of the
company has been described on the basis of their debt and equity position. Further, the
accounting concept has been analyzed and according to the position of the company,
matching concept has been analyzed and it has been found that how this concept is helping
the company to accumulate and manage the materiality concept. More, the advantages and
the disadvantages of the matching principle have been investigated in the concern of the
company to manage and administer the position and the performance of the company.
Capital structure of the company:
Capital structure of the company has been analyzed trough investing over the
performance and the position of the organization. Capital structure is the point where the debt
and equity of an organization are evaluated and the relations of both the sources are
identified. It is the process which depicts the user about the ideal ratio of the debt and equity.
According to the given case, the debt of the company is Euro 28024 in 2014 and Euro
28576 in 2013. Further, the equity of the company is Euro 55959 and Euro 53659 in 2014
and 2013 respectively. Through these calculations, it has been around that the comapny has
raised its funds 33% though the debt and 67% through the equity. According to it, it is
required for the company to manage and identify the position and maintain the funds of the
company through the market position (Kaplan and Atkinson, 2015).
Capital structure
2014 2013 Weight
Total debt 28024 28576 0.33
Total Equity 55959 53659 0.67
83983
The above given table depict about the debt position and equity position of the
company. The debt equity ratio of the company is 1:2 which an ideal ratio is. This ratio depict
that the company has just double amount of total debts that means it is quite easy for the
company to manage the risk factor as whenever the debt holder would ask for the money,

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comapny could repay them through the equity and it is also cost saving ratio (Lumby and
Jones, 2007).
Due to the fact that no matter what position company is facing, it becomes mandatory
for the company to pay the fixed interest to the debt holders whereas in equity funds,
comapny is only required to pay the dividends to the equity holders when comapny has made
some profits. Through this analysis, it has been found that the current position of the debt and
equity of the company is perfect (Moles, Parrino and Kidwekk, 2011). Comapny is not
required to pay any extra cost for the funds as the same time, the risk and return factor of the
company has also been managed. The current debt and equity position is an ideal position for
the industry which would help the organization at every level of the decision making, cost
reducing, profit enhancing etc.
Advantages and disadvantages:
Further, a literature review study has been done over the advantages and
disadvantages of capital structure of the company in context of debt and equity. Through this
report, it has been found that the current position of the debt and equity of the company is
perfect as according to the study of Ward (2012), at this level company is required to pay
very less interest to the debt holders. Further, the current capital structure makes it more
obvious for the company to enhance and diversify the activities and operations into various
new markets with less associated risk.
According to the study of Weaver, Weston and Weaver, (2001), it has been analyzed
that the debt of an organization must be lower with the equity of the company so that the
associated risk of the organization could be lesser as well as it also reduce the level of the
cost consumption of the company. The current capital structure makes the company more
independent as the equity amount is the amount of the owners which is not required to pay by
the comapny again and thus the loan position of the company is very lower (Zimmerman and
Yahya-Zadeh, 2011).
Further, it has also been studied that the current position of the equity is bit higher and
thus the ownership of the comapny has been diluted and according to the Crosson and
Needles, (2013), this state makes it difficult for the organization to make a better and quick
decision about the betterment of the organization. According to the Crowther, (2007), the

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current position of the debt is lower but still the company has to repay the entire amount back
to the debt holders along with the interest and it would enhance the cost of the company.
More, it has been found that the company is required to pay some % of the total profit
of the equity holders by the name of the dividend. It becomes a pressure over the organization
to take a decision about the retained earnings and the dividend. According to the study of the
Daft and Samson, (2014), if the business takes off than the organization is required to share a
part of the total earnings with the equity holders. Further, Davis and Davis, (2011) has
depicted into his study that with the time, the expectations of the equity holder enhances and
thus it becomes a pressure over the business to pay more dividends to the equity holders to
retain them and attract more investors towards the business.
Thus through this study, it has been found that the debt and equity management is a
crucial and complicated task for an organization as at this stage, it is contradictory for the
managers and the business to identify the best level of the debt and equity and set them in the
business to make more profits and reduce the level of the risk in the business.
Matching principle:
Through the study over the financial statement of this company, it has been found that
this company uses the accrual method and rather than waiting for the cash collection of a
transaction, it records the transaction when it has taken place. According to the given case, it
has been found that there are various accounts receivable as well as accounts payable which
have taken place but still the cash payment has not been done for that.
Through the analysis, it has been found that this company uses the matching concept
to manage and record the transaction into the books of the company. Matching concept
express that the accounting and recording of the financial information must not been done
according to the cash basis rather than it must be done according to the accrual basis to
manage the position of the company and to reach over a good conclusion (Moles, Parrino and
Kidwekk, 2011).
According to the study of the Davis and Davis (2011), matching principle is the best
principle to record the financial transaction into the books of an organization. Crosson and
Needles, (2013) depict into his study that the matching principle makes it easy for the
organization, managers as well as the users of the accounting report to analyze the position of

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the company. Regardless, in cash basis accounting recording, it becomes though for the
organization to evaluate the position of the company.
Through the study over the financial reports in the given case, it has been found that
the entire transaction has been recorded into the income statement by the company to manage
and evaluate the better position of the company and further, for making it clear about the
transaction, the amount which has not been received into the cash or which has not been paid
by the company has been shown into the balance sheet of the company.
According to the study of the Horngren, (2009), the accounting concept which has
been used by the company could be evaluated and analyzed through the financial reports of
the company. Such as, in the given reports, the total revenues has been given Euro 74,686 and
at the same time, it has been mentioned into the balance sheet of the company that Euro
21,558 has still not been received by the company and it would most probably received by
the company in the next month.
The study of Ward (2012) depict that the matching accounting principle make it more
easy for the comapny to achieve the targets as the real position of the company could easily
be achieved and a better result could be got. Further, Damodaran (2011) depict that for
managing the position and the extra amount which has not been received but which has been
shown into the books could be written off through the books by making the adjusting entries.
Advantages and disadvantages:
Further, a literature review study has been done over the advantages and
disadvantages of matching accounting principle of the company in context of accrual
methods. Through this report, it has been found that currently, this company is using the
matching accounting principle to record the financial information of the business and
maintain the position and performance of the company. Horngren (2009) depict that matching
concept is based over the concept that recording must be done of every transaction at the time
they take place and through the given case, this company uses the accrual method and rather
than waiting for the cash collection of a transaction, it records the transaction when it has
taken place.
According to the study of the Davies and Crawford, (2011), matching principle is the
best principle to record the financial transaction into the books of an organization. Garrison,
Noreen, Brewer and McGowan, (2010) depict into his study that the matching principle

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makes it easy for the organization, managers as well as the users of the accounting report to
analyze the position of the company. Regardless, in cash basis accounting recording, it
becomes though for the organization to evaluate the position of the company (Hoque, 2002).
According to the study of Bromwich and Bhimani, (2005), it has been analyzed that
the matching concept works on the point that the correlation must be there among all the
transaction and all the transaction must be matched. This becomes the matching concept more
reliable and further, this study depict that the users could evaluate the entire given
information in their own way and make a better decision about the investment into the
company (Damodaran, 2011).
Further, through the study of the various analyst, it has been found that there are few
drawbacks of the matching concept which makes this principle bit doubtful and due to which,
some financial managers do not like to choose this principle while making the financial
reports (Needles, Powers and Crosson, 2013). According to Bierman, (2010), inflation rate
makes an impact over the prices and thus a distortion sneaks into the uses of the matching
principle. Deegan, (2013) depict that matching concept depict that entire transactions must be
recorded whether the cash has been collected or not and for matching theses values, adjusting
entries must be done but after a periods of time, the worth of the amount altered and thus it
makes an impact over the performance and the position of the company.
Thus through this study, it has been found that the matching principle is an beneficial
principle which helps the manager of the organization to maintain all the activities into the
accounting books as well as it also helps the company and the stakeholders of the company to
evaluate the right position of the company. This concept also evaluates the right position of
the profit.
Conclusion:
To conclude, debt and equity management is a crucial and complicated task for an
organization as at this stage, it is contradictory for the managers and the business to identify
the best level of the debt and equity and set them in the business to make more profits and
reduce the level of the risk in the business. As well as, matching principle helps the manager
of an organization to maintain entire operations into the books so that it could help the
stakeholder of the company to evaluate the right position of the company.

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References:
Bierman, H., 2010. An introduction to accounting and managerial finance: a merger of
equals. World Scientific.
Bromwich, M. and Bhimani, A., 2005. Management accounting: Pathways to progress. Cima
publishing.
Crosson, S. V. and Needles, B. E., 2013, Managerial Accounting, 10thedn.,Cengage Learning,
USA.
Crowther, D., 2007, Managing Finance, Routledge, Burlington.
Daft, R. L.and Samson, D., 2014, Fundamentals of management: Asia Pacific edition PDF,
5thedn.,Cengage Learning, Australia.
Damodaran, A, 2011, Applied corporate finance,3rd edition, John Wiley and sons, USA
Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.
Davis, C. E.and Davis, E., 2011, Managerial accounting, John Wiley & Sons, USA.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Garrison, R.H., Noreen, E.W., Brewer, P.C. and McGowan, A., 2010. Managerial
accounting. Issues in Accounting Education, 25(4), pp.792-793.
Hansen, D., Mowen, M. and Guan, L., 2007. Cost management: accounting and control.
Cengage Learning.
Hoque, Z., 2002. Strategic management accounting. Spiro Press.
Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education
India.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Lumby,S and Jones,C,.2007, Corporate finance theory and practice, 7th edition, Thomson,
London

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Moles, P. Parrino, R and Kidwekk, D,.2011, Corporate finance, European edition, John
Wiley andsons, United Kingdom
Needles, B., Powers, M. and Crosson, S., 2013. Financial and managerial accounting.
Nelson Education.
Ward, K., 2012. Strategic management accounting. Routledge.
Weaver, S.C., Weston, J.F. and Weaver, S., 2001. Finance and accounting for nonfinancial
managers. New York: McGraw-Hill.
Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and
control. Issues in Accounting Education, 26(1), pp.258-259.
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