Different Interests with the Financial Statements of the Company - Assignment Example

Finance Name Professor Date Task 1 Financial statements of a company are used by the stakeholders of the company. Every company has different stakeholders who have different interests with the financial statements of the company. Food plc has the following stakeholders; 1. The management of Food Plc- the management of the company is among the major stakeholders. They aim at ensuring that the financial statements of the company are attractive to look at. That means that their main focus is on the profitability of the company. The management tries to increase the profits of the company by increasing sales and cutting n costs. Costs are cut by reducing unnecessary costs and increasing efficiency in the production and delivery processes in the company. The management will carry out an analysis of the financial statements of Food Plc over the years to track the trend of the company. The management will try to analyze the actual budget and the achieved resists by the company. The management will then analyses the cause of any variances. 2. Shareholders- the shareholders are usually the investors in the company. The aim of shareholders is to increase their wealth. That happens when the share price increases or when the company declares more dividends. That will make them happy because they are sure that their funds are properly and efficiently utilized. There appears a conflict between the management and the shareholders. The shareholders are usually after wealth creation while the management is after profitability. 3. Employees- The employees of a company and potential employees are also users of financial statements. The employees will use the financial statements to ensure that they have security of the existence of the company’s operations in the future. If the company has decreasing profitability over the years, that will be worrying to the employees in terms of their long term employment. The potential employees will sue the financial statements to analyses the level of competitiveness of the company with the other companies in the same industry. 4. Financial institutions- The financial institutions have to use the financial stamens in determining the credit level that they will forward to the company. That means that the institutions will analyze the financial ineptness of the company and the ability of the company to repay its debts using the existing assets. 5. Government- the government is the other user of the financial statements of a company. The government will use the stamens in checking if the company has been submitting the right amount of taxes. 6. Suppliers, customers, and competitors- The suppliers will use the financial statements to ensure that the company is in a position to pay for its supplies. The customers will use the financial statements to determine the long term survival of the company. The suppliers will use the financial statements to gauge their performance against other companies in the industry. The laws of the government usually affect the financial statements by ensuring that the financial statement declares a true and fair position of the company. That is done to ensure that the involved stakeholders are protected from cases of overrating of profits or under declaration of the profits (Tulsian 2006). The laws also ensure that there is a set standard that is used in the preparation of the financial statements. That helps in ensuring uniformity and proper declaration of the financial statements. That also aims at enduring that the financial statements are easy to understand by people who do not have much accounting knowledge. Task 2. Preparation of financial statements Capital opening closing capital Motor van 7500 5000 stock materials 1350 1450 Debtors 3400 3750 pre paid insurance 160 170 cash 1500 3000 13910 13370 creditors 1250 1450 12660 11920 change in capital -740 Net profit 13360 Sale control account bal b/f 3400 cash 43300 sales 36150 c/f 3750 purchases control account b/f 1250 materials 17300 purchases 15900 c.f 1450 profit and loss statement sales 36150 cost of sales 15900 Gross profit 20250 running expenses -4100 depreciation -2500 wages -5100 admin -250 tools -600 general expenses -350 Net profit 7350 Assets Motor Van 5000 inventory 1450 Debtors 3750 Prepaid insurance 170 cash 3000 Total assets 13370 capital closing 11920 creditors 1450 Total liabilities 13370 Task 3 Keswick co Derwent (80%) consolidated revenue 8400 2560 10960 Cost of sales -4600 -1360 -5960 Gross profit 3800 1200 5000 Operating expenses -2200 -432 -2632 Profit before tax 1600 768 2368 Tax -600 -112 -712 Profit for the year 1000 656 1656 b Consolidated balance sheet Major Minor (75%) Consolidated Noncurrent assets 50000 18750 68750 Investment in minor ltd 15000 15000 Inventory 11800 5250 17050 other current assets 10000 4500 14500 Total assets 86800 28500 115300 share capital 45000 15000 60000 retained earnings 30000 11250 41250 current liabilities 30000 1800 31800 Total equity and liabilities 105000 28050 133050 Task 4. Interpretation of financial statements 2010 2009 Gross profit margin ( sales revenue- cost of goods sold)/sales revenue 0.25 0.225008 operating profit margin operating income/sales revenues 0.110028 0.084943 net profit margin profit after taxes/ sales revenue 0.066562 0.048835 Total return on assets (profit after taxes interest)/total assets 0.130772 0.105972 Net return on total assets profit after taxes/total assets 0.130772 0.105972 Current ratio current assets/current liabilities 2.397668 2.384024 Working capital current assets-current liabilities 3237 2339 Quick ratio (current assets- inventory)/current liabilities 1.355354 1.147337 Days of inventory inventory/ (cost of goods sold/365) 68.17626 75.46246 inventory turnover cost of goods sold/inventory 5.35377 4.836842 average collection accounts receivable/(total sales/365) 48.18796 47.54178 receivables turnover sales/receivables 7.574505 7.677457 days receivables receivables/(sales/365) 48.18796 47.54178 return on equity net income/ equity 0.130772 0.105972 Financial statement can be interpreted differently by different people. The most common way of interpreting financial statements is by the use of ratios. Ratios are used to show the trend of the company intermesh of performance. They can also be used when comparing different companies (Tulsian 2006). That makes them very helpful for investors who are interested in investing but are not sure about the company to invest in. The ratios are as follows; 1. Profitability ratios The profitability ratios are used to show the ability of a company to convert its sales to profits. That will ensure that the company is efficient in all its operations (Tulsian 2006). There are some companies that have high sales but at the end have low profits. That is caused by inefficiency in the processes involved. The profitability ratios include the following; a. Gross profit margin ( (sales revenue- cost of sales)/ revenue) The ratio shows the rate at which the cost of sales of a company is converted into sales. That measures the ability of a company to convert raw materials into sales using the most efficient and cost effective process (Tulsian 2006). The ratio can be used to gauge the efficient of machines been used in a company and the ability of the machines to convert raw materials into useable. From the ratio analysis on Food Plc, the gross profit margin for 2009 was 22.9% while that for 2010 was 25%. That shows that the company has improved its level of efficiency and that is a remarkable thing inters of improved efficiency. The recommended ratio is 25%. That shows that the company is now at par with the recommended ratio. B, operating profit ratio (operating income/ sales) The ratio analyses the ability of the company converting its sales into operating income. That shows the efficiency levels that exist in the company. The ratio for 2009 was 8.49% and for 2010 11%. 2. Liquidity ratios The ratios are used to analyses the ability of a company to repay its debts in case it becomes bankrupt. The ratios include the liqudity ratio, and the quick acid ratio (Tulsian 2006). The current ratio shows the ability of a company to pay its current liabilities using its current assets. The recommended ratio for the current ratio is 2:1 or 1.5:1 depending on the volatility of the industry that the company is found. The current ratio for Food Plc for 2009 was 2.38 while that for 2010 was 2.39. That means that the company is liquid enough to repay its current liabilities using its current assets. The quick ratio analyses the ability of the company to pay its current liabilities using current assets but excluding inventory (Tulsian 2006). Inventory is excluded in the ratio because it is considered not to be very liquid at times and hence the income from the sale of the inventory will not help much. 3. Efficiency ratios This is the ratios that are used in deterring the ability of a company to pay its debtors and suppliers. That can be analyzed by the used of the inventory and receivables turnover (Tulsian 2006). That shows after how long inventory is paid and after how long a company receives its payments. A food company should be one in which the payments are paid at a prolonged timed and receive dues at the shortest duration possible. Reference Tulsian, C 2006, Financial Accounting, Delhi, Dorling Kindersley Ltd. Read More