Financial Statement Analysis and Stakeholder Needs: A Report

This report provides a comprehensive analysis of financial statements and ratio analysis, focusing on their relevance to investors and stakeholders. It begins with an introduction to different types of financial statements, including the balance sheet, profit and loss account, and cash flow statement, explaining their significance in assessing an organization's financial health. The report then delves into specific financial ratios such as the net profit ratio, current ratio, accounts receivable, accounts payable, gross profit ratio, expense ratio, operating ratio, and stock turnover ratio, providing calculations and interpretations for each. Furthermore, the report discusses the varying financial information needs of different stakeholders, including banks, angel investors, peer-to-peer lenders, venture capitalists, and personal investors, highlighting the specific financial data they require for decision-making. The conclusion summarizes the importance of financial information for both companies and investors, emphasizing its role in maintaining records and guiding investment decisions.

MANAGING FINANCIAL
RESOURCES

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Q1.)..............................................................................................................................................3
Q2.)..............................................................................................................................................6
Q3.)..............................................................................................................................................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
The file is about finance and relevance of financial statements and ratio analysis for the
investors. The file is about how the information assessed by the financials of an organisation
influences investors. The file shows ratio calculations and their interpretation for the company.
Different financial information required of different stakeholders has been discussed.
Q1.)
Types of financial statements and ratio analysis
There are different financials of an organisation which depict the financial health of the
organisation: Balance sheet, Profit and loss a/c and Trading a/c. Balance sheet is the statement
showing assets and liabilities in the income statement. The assets contain the long-term assets
and current assets and liabilities the long-term liabilities and current liabilities. The balance sheet
is the financial statement that provides the basis for computation of rate of return and evaluation
of capital structure. Balance sheet helps to handle the financial power and business capabilities.
The balance sheet helps to look at the financial condition of a company at a specified moment of
time, generally at the end of accounting period. The balance sheet comprises of assets, liabilities
and owners or equity stockholders. The assets and liabilities are divided in short term and long
term obligations which includes cash accounts like checking, money market or securities of
government (Osadchy and et.al., 2018). At a given point of time, the assets have to equal
liabilities plus the owner’s equity. Asset is some resource which the business owns and has
monetary consideration. It may be a fixed asset such as warehouse, land, building or assets in the
form of cash or accounts receivables or inventory. Liabilities can be claims of creditors against
business assets.
The use of balance sheet is that it can help business in identifying how it can optimally use its
assets and take steps to improve cash reserves. The balance sheet can help identify trends in
identification of receivables and payables. The balance sheet is the first financial report assessed
by investors who are looking for doing investments in firm (Prodanova and et.al., 2019).

Profit and loss a/c is also known as income statement. It shows the earnings and expenses of the
company during a financial period. This is a financial statement which depicts the revenues,
costs and expenses which are incurred during a specific financial period which is during a
quarter or year. The profit and loss provides information about ability of company to generate
profit by increase in revenue, reduction in costs, or both of them. It is also a document used by
investors which refers to how company is handling Profit and Loss statement by revenue and
cost management. It helps them know how well the company has controlled its operating costs
and how much of revenue has been able to generate through operating income. Investors also see
the net profit of the company.
Cash flow statement
It is a financial statement that summarise the amount of cash and equivalent entering and leaving
the company. The cash flow statement is a measurement of how the company is managing the
cash position, meaning how the company can generate cash to pay the debt and fund the
operating expenses. Investors understand how the operations of country are running, from where
the money is coming from and how money is being spent (Prodanova and et.al., 2019).
Analysis of ratios
Net profit ratio
The profit earned as a percentage of sales is referred to as net profit. It shows how much profit an
organisation has been able to make from its sales. It demonstrates a company's ability to manage
costs and produce revenue. It is a valuable tool for investors to determine if a company is
effective in converting sales into profit, and it is regarded as a critical tool for company
evaluation. It can be compared to other rivals because it is expressed as a percentage.
Current ratio
The current ratio is a metric that determines whether an organisation has enough working capital
to continue operating effectively. It indicates whether a company's existing liabilities can be paid
off with current assets. It represents the company's liquidity. The current ratio should preferably
be less than 3, indicating optimum resource utilisation (Palepu and et.al., 2020).

Accounts receivable
A small business needs capital to operate, it cannot afford to lend large sums of money or for an
extended period of time. It can have an effect on working capital and reduce the company's
operating performance. As a result, a protocol must be implemented that specifies the credit
framework to be followed. To begin, the parties to whom credit will be extended may be
subjected to a credit check. This can be achieved by looking up a company's credit rating
whether it's a company that the company is working with, such as for raw material procurement.
There are credit rating agencies that award those organisations a rating based on an appraisal of
past credit histories and a review of the credit payable ability of the same by evaluating the
financials of the previous few years (Easton and et.al., 2018). If a small business is dealing with
a person, such as a supplier, the individual's credit rating should be reviewed before doing
business with him. Second, the credit should not be extended for an extended period of time
because the enterprise would need capital for regular operations. It may be spread over a specific
time span, such as 30 days, 60 days, or 90 days. After that, it can be determined who has paid
their debt on time and who has defaulted. If the number of defaulters is high, the company's
credit policy will need to be reviewed.
Accounts payable
The accounts payable duration is 18 days, which is significantly shorter than that of rivals. Since
it is a new company with limited credit, the time span is shorter. When it comes to accounts
payable, it is said that a business should take advantage of the credit period. It can aid in the
expansion of operations, the opening of new branches, and the expansion of industry. However,
it is important to remember that financial leverage should not be excessive, and the equity
capital. More debt may seem to be beneficial at first, but it can quickly become a burden if it is
accompanied by interest for a long period of time (Palepu and et.al., 2020). The company's
solvency could be jeopardised as a result of this. It's also worth noting that a reputable business
pays its bills on time. This will assist the company in maintaining a positive relationship with its
creditors and can be useful if the company needs to raise its credit cap from them. Banks and
other financial institutions would lend to a business with a strong credit history and increase the
overdraft cap.

Q2.)
a) Gross profit ratio=Gross profit/Sales=200000/500000=0.4 or 40%.
Expenses ratio=Expenses/Sales=122000/500000=0.24 or 24%.
We get expenses as 122000 by adding all the expenses (101000+12000+2000+7000).
Operating ratio=Operating expenses/Net Sales=442250/500000=0.88 or 88%
We get operating expenses as
Net profit ratio=Net profit/Sales=84000/500000=0.16 or 16%
Stock Turnover ratio=Cost of Goods sold/ Average
Inventory=293000/(76250+98500)/2=3.35
Gross profit ratio means company is able to control the operating expenses and earn operating
income from revenue. The gross profit margin is determined by dividing sales by the cost of
products sold. It is used to evaluate a company's financial health by determining how much
money is left over after all of the products have been purchased . It's also used to see how well
the organisation keeps its operating expenses under control. The ratio here is 40% which
signifies a good earning.
Dividing net profits by overall sales revenue gives the net profit margin. It is a metric for
determining a company's profitability. It's also crucial for investors to double-check this margin.
It is a metric that assesses a company's ability to extract profit from total revenue (Easton and
et.al., 2018). Net profit ratio of the company is also registered as 16% which is the profit got
after deduction of operating expenses and can be called as bottom line of the company which
investors look out for.
Expense ratio is the addition of all the operating and non-operating expenses which are divided
by sales. The expenses ratio reveals how much percentage has been cost to sales. It is mentioned
24% here which is not high and is maintained.

Operating ratio is the summation of all operating expenses which are divided by sales. The
operating ratio reveals how much expenses have been a cost in the net sales or by how much
percentage it has been a cost to sales. Here operating ratio is 88% which means company is not
able to maintain operating expenses (Reimsbach, Hahn and Gürtürk, 2018).
The stock turnover ratio is a measure of how many times inventory has been sold within a given
time span. It can be calculated by dividing the cost of products sold by the average inventory.
Stock Turnover ratio is the cost of goods sold divided by average inventory. Cost of goods sold
is the opening inventory plus purchases minus the closing inventory. Average inventory is the
opening inventory addition with closed inventory divided by two. Company has registered a ratio
of 3.35.
Q3.)
Different financial information needs of different stakeholders
As there are different types of stakeholders, therefore the needs of them also stand different. The
five types of investors are:
a) Banks: They are the loan givers for any type of business, from the loans if a business
wants capital or expansion, can do it by the monetary funds. Banks, however, do not
easily give loans. They would require financials of the company for the past five years,
and it includes the balance sheet, profit and loss statement etc. If it is a new business start
up then the business plan would be required along with some collateral. Basically, from
an ongoing company, bank wants to see how well the company is performing over the
previous years and then decide on the over draft or credit limit for the company (Hoang
and Phang, 2020).
b) Angel investors: They are people with high net worth and make investments which can
help out a company who has crossed the stage of seed financing but is not yet ready for
venture capital. The requirements of financial information of angel investors are business
plan which is convincing for the eye and complete, which includes financial projections
and detailed plans of marketing and target market specifics.
c) Peer to peer lenders: They are basically individuals who offer funding to small owners of
business. For working with investors, entrepreneurs have to apply with companies

dealing in peer to peer lending. Basically, they would want financial information such as
the credit rating of the business owner they are lending to; to avoid defaults in loans.
d) Venture capitalists: These are investors whom the business approaches when it starts
registering good amounts of revenues, as investors they usually invest a significant
amount of money and gain money through carried interest or percentage received from
hedge funds. The financial information required by them is the income statement and
cash flow statement of the company. The venture capitalists would look for customer
acquisition cost, average purchase amount and retention rates (Reimsbach, Hahn and
Gürtürk, 2018).
e) Personal investors: These are generally the family, friends and close acquaintances who
invest in a business however it can be only to a certain limit and proper documentation is
required for the same. As they are generally in the know how of the owner, they won’t
ask for financials but would like to have a fair idea of the business operations and the
way of generating wealth by it.
CONCLUSION
To conclude, it can be said that the financial information is important for both the company and
its investors which helps the company to maintain records as well as guide investors to do
investment. The ratios and analysis also help investors check the reliability and liquidity of the
business for gaining help in investment decisions and also helps the company know which
parameters need to be improved.

REFERENCES
Books and journals
Chen, C.C., Huang, H.H. and Chen, H.H., 2021. Evaluating the Rationales of Amateur Investors.
In The World Wide Web Conference.
Easton, P.D., McAnally, M.L., Sommers, G.A. and Zhang, X.J., 2018. Financial statement
analysis & valuation. Boston, MA: Cambridge Business Publishers.
Hoang, H. and Phang, S.Y., 2020. How Does Combined Assurance Affect the Reliability of
Integrated Reports and Investors’ Judgments?. European Accounting Review, pp.1-21.
Osadchy, E.A., Akhmetshin, E.M., Amirova, E.F., Bochkareva, T.N., Gazizyanova, Y. and
Yumashev, A.V., 2018. Financial statements of a company as an information base for
decision-making in a transforming economy.
Palepu, K.G., Healy, P.M., Wright, S., Bradbury, M. and Coulton, J., 2020. Business analysis
and valuation: Using financial statements. Cengage AU.
Prodanova, N.A., Trofimova, L.B., Adamenko, A.A., Erzinkyan, E.A., Savina, N.V. and
Korshunova, L.N., 2019. Methodology for assessing control in the formation of financial
statements of a consolidated business. International Journal of Recent Technology and
Engineering, 8(1), pp.2696-2702.
Reimsbach, D., Hahn, R. and Gürtürk, A., 2018. Integrated reporting and assurance of
sustainability information: An experimental study on professional investors’ information
processing. European Accounting Review, 27(3), pp.559-581.
Wen, H. and Zhu, T., 2019. Interpretation of Financial Statements.