Importance of Financial Accounting and Reporting - Essay Example

Task Report on the Importance of Financial Accounting and Reporting Board of Directors Importance of Financial Accounting and Reporting Gentlemen, This report contains some importance information about financial accounting and reporting. The report is issued vide your letter for the information I was asked for. Methodology The information was gathered from different sources which are mentioned below in the last page. Introducing to financial accounting and financial reporting Financial accounting keep proper and complete track of financial transactions. In this accounting branch, the financial transactions are incorporated in the financial statements. These statements include a balance sheet, income statement, cash flow statement etc. Financial statements are issued by companies after regular intervals or on a proper routine schedule (Robinson 2012). These statements are provided to general public outside the company and the main receivers of the information included therein are generally for the stockholders/owners. Certain other users are also there which are to be discussed below. Financial reporting The Financial Accounting Standards Board says financial reporting to be financial statements as well as other ways to communicate financial information related to the enterprise to the outside users. Financial reporting, compared to the financial accounting, is quite broader concept that encompasses the financial statements, the notes that are given below those statements and the disclosures. Financial statements are useful in providing important information to make decisions about the credit decisions and investments and also to assess the cash flow prospects. Information about the resources of the enterprise, its claim to these resources obtained and the changes that these resources undergo is also provided by the financial statements. Information provided by financial reporting is used by management and others who make economic decisions. Financial reporting primarily focuses on information about the earnings and the components it has. (International Financial Reporting Standards, 2013) Users of Financial users The users of financial statements are also known as the stakeholders. They are divided into the following groups. (Ramachandaran, 2008) Investors: these people make investments in the entity. They are interested about the security of their investments and potential profits in the entity. People interested in making investment in an entity make use of the financial statements, especially the income statement, with the help of which they can estimate the future incomes and performance of the entity they are interested to invest in. The solvency of the company and the financial strength will reveal whether their investments will be secured or not. Investors like unit trusts and pension funds are the most sophisticated and the largest group of investors. Lenders: they need the information about the entity’s financial strength and performance to know whether the entity will be able to pay them in future. This depends on how are the solvency conditions of the entity. They are shown by the balance sheet/statement of financial position. The entities may back up the long-term loans acquired by giving securities over specific assets. The information relating to these assets will then be needed by the lenders of such secured loans. Trade unions and employees representatives: they need the information as to whether an employer is able to offer possible pay ups and secure employment. Their interests in the benefits, bonuses and salaries will also be high. In case a part of the business needs a closure, divisional profitability information will also be useful. Government agencies: in order to plan for industrial and financial policies, government agencies will need to know about the performance of the economy. Financial statements are used by the tax authorities also in order to assess how much the entity is required to pay in lieu of tax. Supplier: since large entities are involved in business mostly on credit terms, their suppliers will definitely look into the financial strength of the entity to ensure they will be paid. Similarly new suppliers will also require financial statements to ensure the health of the business. Customers: If a customer is dependent on a company for some specialized supplies, then it will need to know if the company will be able to continue the supply of the product in the future. Public: the general public may also wish to determine the effects of the company on local environment, the economy and the local community as an entity can contribute to the local community and environment by providing business for local suppliers and employment. Regulatory and Legal Impacts on Financial Statements The legal and regulatory authorities and respective acts and regulations have significant influences on the preparation and reporting of the financial statements of a respective company. In most countries, the legal and regulatory acts and rules superseded the International Financial; Reporting Standards and requires that the Company’s financial statements have to be prepared and reported in the manner which has been described in those rules and regulations. Most of the countries legal and regulatory requirements do not differ from the International Financial Reporting Standards in significant ways but they do change in some aspects and then requires the company’s and entity’s to use comply with those rules and regulations. Implications for Users Where such local legal and regulatory rules are required to be followed upon by the company’s in preparation of the financial statements and financial reporting in those cases the users of those financial statements are affected as the accounting treatment and reporting of most significant accounting matters are different as compared to those which would have been done and complied with the International Accounting Standards if the local legal legislation and regulations would not have been required to be complied with. Also the users are the expected to have the knowledge of the important legal regulations and rules so they might be able to interpret those accounting treatments and reporting which have been made as per the local legal rules and legislation and not the International Financial Reporting Standards. Dealing by Accounting and Financial standards with Different Laws and Regulations Most laws and regulations are dealt in within the International Financial Reporting Standards in a way that if in a particulate accounting matter, different treatment is required as per the laws and regulations and as per IFRS then in that case, mostly laws and regulations supersede the requirement as per the IFRS and thus the accounting treatment and reporting as stated per the laws and regulations are complied with. These were some major discussions of what I was asked. I hope this would help you in making important decisions. You are welcome to ask me again if there is some more information required. Yours Truly Task 2: Financial Statements for the given data and some important ratios with their interpretation Statement of Financial Position (Amounts in £) Non-current assists Equipment 31800 31800 Current Assets Inventory 6400 Accounts Receivables 10000 Cash in hand -700 Cash at bank 5200 20900 Total assets 52700 Equity and Liabilities Equity Capital 45600 Add: Net Profit 11000 Less: Drawings -19600 37000 Non-current Liabilities Long-term Loan 10000 10000 Current Liabilities Accounts Payables 5000 Rates owing 500 Loan interest owing 200 5700 Total Equity and Liabilities 52700 Income Statement (Amounts in £) Sales 80900 Less: Cost of sales -39,100 Gross Profit 41800 Less: Expenses Rates 3700 Salaries 12200 Insurance 2900 Interest expense 600 Depreciation 8400 Motor expense 1400 Heating and Lighting 1500 Bad debts 800 31500 Add: Discount Received 700 Net Profit 11000 Ratios of the Company Ratio analysis is always important for better understanding of the company’s performance. Every company needs proper ratio analysis for taking proper decisions (Wild & Chiappetta, 2007). Following are some important ratios that are vital for careful analysis of a company’s performance. After the calculated ratios, a brief discussion of them is also given that will help to understand the facts and figures. Ratios Formulae Values from the given data Gross Profit ratio Gross profit/Net sales 51.7 % Net profit margins Net profit/Net sales 13.6 % ROCE ratio EBIT / (Total Assets - Current Liabilities) 4.5 Stock turnover rate (COGS/(Opening stock +closing stock)/2) 5.6 Current ratio CA/CL 3.7 Acid test ratio CA-inventory/CL 2.5 Gearing ratio debt ratio =total debt / total assets 30 % Comments Gross profit ratio: the figures this ratio shows are very much attractive as the gross profit is half of the sales during the year. This shows a good sign of the company’s operations as the ratios quite high. This ratio will certainly allow the company to attract new investors by introducing high dividends provided the expenses are not that high to reduce the net profit. Net Profit Margins: This ratio is indicative of the fact that net profit earned during the year is enough for the operations of the company to be carried out in the forth coming years. Since the net profit ratio is high, this is good for the company and the new investors will now be expected to invest in the company as nit is evident that the company is performing very well. ROCE ratio: this ratio determines how much the capital employed earns for the company. The statistics of the ratio determined shows that a euro of capital employed contributes a return of 4.5 Euros which is quite favorable for the company. Stock Turnover Ratio: This ratio indicates that how many times the stock has been produced and afterward sold out. Since the ratio is 5.6 so this is very much favorable for the prospects of the company. The company has produced its stock 5.6 times during the period. It shows that the company is operating well. Current Ratio: This ratio indicates the amount of current assets as compared to the current liabilities. Since this ratio is 3.7 so this indicates that the company has more current assets as compared to current liabilities. Asset test Ratio: This ratio indicates the amount of other current assets excluding prepayments and stock and shows whether they are enough to meet the current liabilities of the company. Since the ratio determined is 2.5 times, it shows that the company ha s 2.5 Euros as current assets excluding prepayments and stock for one euro of current Gearing Ratio: This ratio shows that how much total assets and total debts the company has acquired. Since the ratio is 30% so it shows that the total assets are 30% of the total debts. Task 3: Consolidated Financial Statements Consolidated Income Statement For The Year Ended December 31, 2012                   2012 SYCO U.K P/C   SUBO U.K Ltd ADJUSMENT CONS. IMCOME STATE Sales 850,000 225,000 1,075,000 Cost Of Sales (460,000) (37,500)   (497,500) Gross Profit 390,000   187,500   577,500 Sundry Expenses (150,000)   (87,500)   (237,500) Income From Shares in group component 60,000 - (60,000) - Profit Before Tax 300,000 100,000 340,000 Tax @ 5% and 10% resp (15,000) (10,000) (25,000) Profit After Tax 285,000 90,000 315,000 Consolidated Statement of Financial Position For the Year Ended December 31, 2012 Amounts in £ Non-current tangible assets 860,000 Intangible Assets 36000 896,000 Current Assets Inventory 275,000 Accounts Receivables 215,000 Bank 18,000 Cash 7,000 Suspense (Note 1) 6000 Total Assets 1,417,000 Equity and Liabilities Share Capital 450,000 Gross Revenue 43,200 Non Controlling Interest 60,000 Non-current liabilities Deffered Taxation 240,000 Current Liabilities Trade Accounts Payable 85,000 Other payables, taxation and social securities 150,000 Total Equity and Liabilities 1,417,000 \ Note 1: The suspense arises due to some unknown factors or amounts. It may be due to relevant information missing from the data given in the case. References International Accounting Standards Board,. (2013). International financial reporting standards as issued at 1 January 2013. Ramachandran, N. (2008). Financial accounting for management. New Delhi: Tata McGraw-Hill. Robinson, T. R. (2012). International financial statement analysis. Hoboken, N.J: John Wiley & Sons. Wild, J. J., & Chiappetta, B. (2007). Financial and managerial accounting: Information for decisions. Boston, Mass: McGraw-Hill. Read More