University Management Accounting Assignment: Financial Analysis Report

This document presents a comprehensive solution to a management accounting assignment, addressing various aspects of financial statement analysis. Part A includes detailed answers to essay questions, such as how financial statements are used by bankers, investors, and labor negotiators, as well as identifying violations of accounting principles. Part B provides solutions to exercises and questions, including the preparation of financial statements like income statements and balance sheets, along with the application of accounting principles. The assignment covers topics such as debt levels, dividends, auditor's reports, the accounting equation, and the use of subsidiary ledgers. The solution demonstrates an understanding of financial reporting, analysis, and interpretation, providing a valuable resource for students studying management accounting.

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student
Name of the University
Author Note

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Table of Contents
Part A...............................................................................................................................................2
Answer to Question 1...................................................................................................................2
Answer to Question 2...................................................................................................................2
Answer to Question 3...................................................................................................................2
Answer to Question 4...................................................................................................................2
Answer to Question 5...................................................................................................................3
Answer to Question 6...................................................................................................................3
Answer to Question 7...................................................................................................................3
Part B...............................................................................................................................................4
Answer to Exercise 1...................................................................................................................4
Answer to Exercise 2...................................................................................................................4
Answer to Question 3...................................................................................................................5
Answer to Exercise 4...................................................................................................................5
Answer to Exercise 5...................................................................................................................6
Answer to Question 6...................................................................................................................7
Answer to Question 7...................................................................................................................7
Answer to Question 8...................................................................................................................9
References and Bibliography.....................................................................................................10

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Part A
Answer to Question 1
A) The information provided in financial statements is useful in deciding whether a loan
should be granted to a business or not. The credit worthiness and the scope of bad debts
of the business can be determined by using the debt repayment details of the business.
B) The information that would be required from the financial statements of the entity are the
dividend yield of the company. The changes in the share prices of the entity over the
years are also essential to assess the company’s prospects (Gitman, Juchau and Flanagan
2015).
C) The financial statements can be used in negotiations with the management about
increasing the salaries of the employees. The profit levels and trends of the business can
be used as a basis for suggesting the rate of improvement in the salaries.
Answer to Question 2
 The matching concept has been violated in this situation as the asset is not related to the
business.
 The historical cost assumption principle has been violated in this situation.
 The time period assumption is being violated in this case.
 The going concern assumption is being violated in this particular situation.
Answer to Question 3
The financial statements would be used in reviewing the debt levels and ratio between the
assets and liabilities of the company. It will also be used in assessing the risk of default of the
loan and the revenues generated by the entity. The overall profitability will also be taken into
consideration.
Answer to Question 4
The main difference between dividends and other expenditures are the person to whom
they are paid to. Dividends are paid to the shareholders, who are the owners of the company.
They can only be paid to the shareholders after paying all the remaining expenditures. Other
expenditures are allowed as a deduction in calculating the income taxes. Dividends are paid after
the payment of the taxes to the authorities (Ofori‐Sasu, Abor and Osei 2017).

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Answer to Question 5
a. The main purpose of the auditor’s report is to provide a reasonable assurance that the
books of accounts are free from any major errors. They apply all the required procedures
to make a judgement on the validity of the financial statements.
b. A going concern is a business which plans to continue its operations in the near future
and not liquidate itself at the end of the financial year. The business is looking to grow
and expand into the future while also trying to maintain the accepted levels of
profitability (Fischer, Marsh and Brown 2016).
c. No, it cannot be said that aspects like losses, restructuring and the disposal of segments
are the precursors to the demise of a company. They can also be considered to be steps
towards making the company more efficient and profitable for the period following the
period for which the above mentioned activities have taken place.
d. The auditors are suggesting that the losses incurred by the company have resulted in the
overall deficit of the company going up to $49.7 million. The lack of sufficient cash and
working capital with the company add to the doubts that the company may not be able to
continue its operations in the foreseeable future. The plans of the management do not
contain any details about the adjustments that have occurred as a result of the
uncertainties.
Answer to Question 6
Merck & Co. mean that the results of the lawsuits faced by them are likely to result in
their favour. The losses that will be incurred by them due to these lawsuits are not likely to cause
any material changes in the financial statements of the entity. Here, material means the changes
are unlikely to cause major losses to the company. Remote means the chances of losses
occurring due to the lawsuits are extremely low or unlikely. The legal authorities are in the best
position to determine the outcome of a lawsuit (Hærem, Pentland and Miller 2015).
Answer to Question 7
On the basis of the information provided, it can be said that Unique Factory is a business
entity. This is because the financial statements suggest that the entity is involved in the sales of
goods and is incurring administrative and other expenses. It is also recording net income in its
books of accounts after the payment of taxes. It is also recording depreciation on the assets and

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the liabilities of the entity, net of accumulated depreciation. Hence, these suggest that the
business is being carried on to make profits through the normal course of business.
Part B
Answer to Exercise 1
Particulars Amount
Long-term debt 41000
Accounts
Payable
24000
Total Liabilities 65000
Answer to Exercise 2
Particulars Amount
Sales 560000
Less: Cost of Goods Sold 400000
Gross Profit 160000
Less: Salary Expense 40000
PBIT 120000
Less: Interest expense 30000
PBT 90000
Less: Income tax expense 25000
Net Income for the company 65000

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Answer to Question 3
A)
Particulars Amount
Net Sales 190000
Less: Cost of Sales 80000
Gross Profit 110000
Less: /operating
expenses
45000
Net Income before tax 65000
Less: Income Taxes 30000
Net Income for 2014 35000
B) The net income will increase the profit levels of Micco’s Gift Store. They will increase
the retained earnings available with the entity, ultimately increasing the level of equity available
with the same. These additional funds can either be reinvested by the business or distributed as
dividends to the shareholders. It will ultimately impact the financial position of the entity
positively.
C) As the total income of the entity from the sales is more than all the expenditures paid by
the company, the business can be said to be profitable. The net income available with the entity
after the payment of taxes is positive. Hence, as the business is having surplus to distribute
amongst the shareholders, it is profitable.
Answer to Exercise 4
SL.
No.
Particulars Appears on which statement Type of
Account
1 Retained Earnings Balance Sheet OE
2 Buildings Balance Sheet A

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3 Common Stock Balance Sheet OE
4 Accounts Payable Balance Sheet L
5 Football ticket
sales
Income Statement R
6 Salaries expense Income Statement E
7 Accounts
receivable
Balance Sheet A
Answer to Exercise 5
a)
Particulars Amount
Equipment 42000
Inventories 22000
Accounts receivable 14000
Cash 30000
Prepaid Expenses 2000
Total Assets 110000
b)
Particulars Amount
Accounts Payable 12000
Income Taxes Payable 5000
Notes Payable 20000
Total Liabilities at the end of
2016
37000
c) The accounting equation suggests that the assets of an entity are equal to the sum of the
liabilities of the entity and its equity. The holders of the common stock of Galaxy Corporation
have a claim on the assets of the company.

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Answer to Question 6
a. This is the Consolidated Income Statement. The title is an accurate description of the
information that follows the title. Yes, I think the title is better than the title that I am
accustomed to.
b. The business appears to be a service company. This is because of the items like revenues
from fares and cargo in the Income Statement of the entity. There is no mention of the
manufacturing expenditure or sale of retail products mentioned in the entity.
c. The rentals and other operating expenses incurred by the entity also suggest that the
business is involved in providing aircraft related services. This is because most of the
revenues generated by the business are through aircraft related services. The expenditures
incurred by the business are related to the maintenance of the aircraft and other service
related expenditures.
d. It is not possible to calculate the gross profit for this company. This is because no
sufficient details have been provided about the goods sold by the company or their cost. It
is only possible to calculate the operating profit earned by the entity.
Answer to Question 7
 Cash account requires a subsidiary ledger to record the cash receipts and payments made
by the entity. It contains details about the liquidity position of the entity.
 Marketable Securities contains details of the securities available with the company. The
entries made in the subsidiary ledger contain information about the purchases and sales of
the securities.
 The accounts receivables contains details about the credit sales made by an entity. The
entries recorded in this ledger record the details of the debtors of the company and when
the payments have been received from them.
 The inventory requires a subsidiary ledger to know the stock levels available with the
company. They are used in making entries about the purchase and sales of the inventory.
 Other current assets are those assets which cannot be classified into one of the above
mentioned categories of assets. They contain details of the assets that arise in a company
during a year and their value.

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 The property and equipment requires a subsidiary ledger to understand the values of the
properties available with the company. The ledger records the purchase, disposal and
depreciation in the value of the property.
 The investments made by the company should be tracked on a timely basis to understand
the values of the company’s investments. Any change in their values can be easily
understood through a subsidiary ledger. The subsidiary ledger records the opening values,
changes in the values and the closing values of the investments.
 The other investments which cannot be classified as property or investments are
classified under this category. This subsidiary ledger records the values of the total
investments at the beginning and the end of the year.
 The accounts payable subsidiary ledger is required to understand the payments to be
made by the company. It records the credit undertaken by a company in different forms.
It is needed to understand the obligations of a company and whether it can meet them or
not.
 The accrued and other liabilities need to be recorded to ensure that they are not exceeding
the limit that can be afforded by a company. The subsidiary ledger records the liabilities
accrued and paid off in a particular financial year.
 The long-term debt requires a subsidiary ledger to understand the obligations of a
company arising in the future. As these are not immediate, classifying them separately is
essential for a business entity. This subsidiary ledger records the debts undertaken by an
entity and the debt repaid in a given financial year.
 The deferred revenue ledger is useful for a business in understanding the amount of
revenue that it will receive in the future. This is useful in understanding the financial
position of the company for a given period.
 The shareholder’s equity is essential in understanding the details of the equity of a
company and how much of it is financed through debt capital. It also helps in knowing
the accumulated profits available with a company.
Answer to Question 8
A) The purchases made will increase the inventory levels of the company and also increase
the amount of debt. It will increase the accounts payable of the company.

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B) This will cause a reduction in the accounts payable and also a reduction in the inventory
levels.
C) The payments will result in the reduction in the cash levels and the accounts payable of
the company.
D) Both transactions would reduce the inventory levels. Cash sales would increase the sales
made while credit sales would improve the accounts receivable.
E) Returns would lead to an increase in the inventory levels while reducing the profits
earned by the entity.
F) This will improve the cash balances and the profits earned by the company.

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References and Bibliography
Fischer, M., Marsh, T. and Brown, P.D., 2016. Going concern: Decision usefulness or harbinger
of doom?. Journal of Business and Accounting, 9(1), p.136.
Gibson, A.M., 2016. Internal Control: It's More Than a Locked Safe.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Hærem, T., Pentland, B.T. and Miller, K.D., 2015. Task complexity: Extending a core
concept. Academy of Management Review, 40(3), pp.446-460.
Ofori‐Sasu, D., Abor, J.Y. and Osei, A.K., 2017. Dividend policy and shareholders’ value:
evidence from listed companies in Ghana. African Development Review, 29(2), pp.293-304.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2019. Financial accounting. Wiley.