Analysis and Interpretation of Financial Statement as a managerial tool for Decision Making - Dissertation Example

?ANALYSIS AND INTERPRETATION OF FINANCIAL MENT AS A MANAGERIAL TOOL FOR DECISION MAKING PREPARED BY ……………… NUMBER …………………… SUPERVISED BY…………………………. INSITUTION NAME …………………….. Contents Introduction ……………………………………………………………………………3 Literature Review ……………………………………………………………………… 4 Project description ……………………………………………………………………. 4 Project scope …………………………………………………………………….......... 5 Research methodology ………………………………………………………………… 6 Project priorities ………………………………………………………………………. 8 Work breakdown structures ………………………………………………………….., 9 Responsibilities matrix ………………………………………………………………... 10 Estimating project …………………………………………………………………….. 12 Estimating project cost ………………………………………………………………… 13 Network diagram ……………………………………………………………………… 13 Gantt charts …………………………………………………………………………… 16 Risk management, evaluation and closure ……………………………………………. 17 Conclusion …………………………………………………………………………….. 19 The verification of this project needs to be approved before the proceeding of the project into affection. As a result, this document will help to clearly out line the project jurisdiction and purpose, which may lead to proceedings approval into developing a charter on the project. Introduction A company`s profit expectation and economic performance may be affected by various business trends. As a result, it is up to the management to keep on reviewing and analyzing these trends especially in financial statements and other indicators of segment operations in order to give the business an appraisal through its performance in long or short term. Mostly, accounting tools are the most effective in decision-making process and gives a good benchmarking to datum. To analyze financial position of the firm, the leader of the corporate analyses its balance sheet, this gives the statement regarding the financial position and a gauge to the solidness in economic performance. Moreover, they may get these trends through an analysis of the profit and loss statements-income statements. It gives them a critical decision making tool which determines how effective will their short term and long term transactions in the long run determine the company`s profit potential. Moreover, they may analyze the cash flow of the firm because it will help them to comprehend the cash inflow of the company, out flows and how payments are made in relation to liquidity of the organization. Mostly, it will analyze the operating activities, investments, and financing cash flows. Actually, this will help the management to determine the amount of losses a business incurs. Lastly, from the firm`s equity cash flow analysis, corporate managers will help in knowing the capital structures of the firm and how it is related to the performance of the business. In fact, capital structure will indicate the various sources of funds in line with long term and short term operating activities. Hence, the managers may end up reorganizing some initiating activities such as acquisition and mergers. Moreover, they may get to comprehend other sources of funds like internal funding and retained earning, common or preferred stocks, consequently, they will have helped the management to establish adequate dividend for payments in each share and still keep the company`s state healthy. Literature Review In this section, it will be worth to give an account of other materials written by various writers in relation to how one can analyze and interpret financial statement as a managerial tool used in decision-making. The books will be explaining the various statements of finance and their analysis through various methods leading to change in decisions made by managers. Hence, the below is just a list of a few of the books. First, George J. J., 2008, Managerial Accounting: A Focus on Ethic Decision-Making, Cengage Learning, USA. This book was written through a simple straightforward language. It gives a presentation that is easy to understand in full towards equipping the reader with most of the knowledge over the rewards and expectations in the world of business. Moreover, through his description, the author has used real issues alongside real companies aimed at giving illustrated examples that are straightforward and the kind of data, which is not assumed. Additionally, it present to the reader a five step procedure of problems solving and as a result gives a basis involved in decision making using the information gotten to define the involved problems, identify objectives with an analysis of the availed options and as a result, arrives at a better solution. Second, Joseph P. J., Dan L. H., Maryanne M., Mowen, & Don R. H., 2009, Cornerstone of Financial & managerial Accounting. Cengage Learning, USA. From the book, a strong foundation of accounting is gotten in regard to core financial especially accounting. Actually, it presents those concepts and principles on decision-making process in a competent and applicable way. For instance, it presents the consistent examples in stepwise solutions to the fundamental problems. Moreover, it is presented with video tutorials for the solutions of the questions given. Moreover, it gives and address to changes that have happened in accounting like the revision of the framework, fair value, codification, GAAP and IFRS methods. Hence, it gives rich information on statement of finance and methods of analyzing them. Third, Debarshi B., 2011, Management Acounting. Dorling Kindersley Pvt. Ltd, India. The author had a perfect taste on how financial statement should be prepared and analyzed. Actually, this book gives an in depth description on interpretation each financial statement in a simple and comprehensible way. Moreover, it give more working problems to students, their solutions and further exercises to ensure there are enough practice to make the book complete. As a result, this book highly meets the requirement of student practicing as financial manager. In future, he will end up using its methods to analyze financial statement before making decisions. Fourth, Rodger H. H., James D. E., & Susan D. I., 2006, Mangerial Accountig: A decision Focus.(eighth edition). Freeload Press, ISBN 1-930789-75-0. It provides the two primary objectives of business- solvency and profitability determination. Both solvency and profitability are reflected to the company`s financial statement and through the methods of analysis in the book, it will help students to analyze data found in financial statement. Consequently, students will get to clear picture of how to determine the profitability or solvency in company. Additionally, the book is useful to those in accountant field or intending to join. Through it, enormous knowledge is presented on how internal managers, external investors or auditors use the financial statements to conclude on the organizations predictions. Fifth, Debarashi B. & Lata S., 2011, Management Accounting: for University of Delhi. Dorling Kindersley Pvt. Ltd, India. This is another book presenting principles, theoretical and conceptual aspects needed in managerial accounting in a straightforward method. It discussion of financial statements is comprehensive, with problem and their solutions. Moreover, it describes various utility of managerial accounting. Besides, it range of coverage in analysis of financial statement is overwhelming and can never be left when studying about making decisions. Sixth, Debarashi B., 2001, Financial Statement Analysis. Dorling Kindersley Pvt. Ltd, India. The book gives a full analysis of financial statement including their limitations. It analyses cash flows, changes in income, fund flow and other financial statement separately and in depth. It gives detailed objectives of each chapter, the scope intended, drawbacks and requisites. Additionally, since it analysis financial statement in various styles, it separate them according to different analysis methods, gives practical examples, exercises and solutions after every topic. Lastly, Peter A. & Maclaney E. J., Accounting and Finance for non-specialists. Prentice Hall Financial Times, UK. This is a perfect book in demonstrating basic principles about finances and accounting. It presents non-technical way or no practical approaches of accounting and finances. It is therefore user perspective especially in demonstrating how accounting statements or financial statements are usable when improving the quality depending on every decision made. Project Description Bearing these in mind, the management teams of Arthur Daniel Midland Company (ADM) set out a steering committee to oversee the various management criteria have used have been revised. These happened after a series of losses occurring to the organization in the past three years. In his report, the board of director to the firm`s share argued that poor analysis and management of the organization`s financial statement has led to poor decisions over the last three years. Hence, it would be healthy for the firm and all of its owners to set out a team that would make a good project proposal on the effective methods of analyzing and managing financial statement in a bid to improve the financial statement of the organization. ADM firm comprise of 12 members as the board directors. Out of these managers, two heads in the management are allowed to be insiders, but the rest are disqualified in order to reduce the relationship of customers to management. The insiders own 40% of the share holding and from the remainder, the highest proportion consist of institution owners. Additionally, the firm manages agricultural produce and out of it, it retrieves materials for direct human and animal consumption, raw materials for other industries and some products that needs special preparations before consumption. It has therefore managed to employ more than 300 workers, some are casual and others are involved in office work. Most of them are permanent but in times of peak in production, it involves temporary workers. As a result, there would be analysis of the organization`s financial statement in a duration of one and a half month. It would involve interviewing the relevant personnel and while others in finance related field will be provided with questionnaires to fill in. Moreover, the past records of the firm transaction will be reviewed. Additionally, the firm’s suppliers and its produce consumers may be interviewed and observed to see how they undertake their roles. Lastly, the various technologies would be determined on their viability to the working of financial analysis, how they can be improved or changed. Project Scope Objectives Through the process of analyzing financial statements, the will be determination on adequate information regarding the financial sources and the obligations they bring to the firm. Additionally, it will give a detailed account of and reliable information regarding the financial performance of the firm, which includes how sound, is the finances of the firm. In addition, it will give enough information on from the results of business operations in the time range given. Besides, useful information concerning the financial condition of the business like how it involves movement of resources to and from its business will be derived. Lastly, it will give the information that will be helpful in giving an evaluation of the performance earnings from the invested resources and hence the managerial ability to forecast will be made stronger leading to an over all improvement in business. Research Methodology Deliverable These include what can be achieved. It therefore includes the following. 1. Interviewing the finance department 2. Distributing questionnaires among other working members in this organization in different departments for them to fill in 3. Interviewing and distributing questionnaires to those supplying raw materials and those buying the firm`s product. 4. Testing the various software and hardware on their compatibility to the current working conditions of the firm 5. Reviewing the former statement of finance and writing a report over the same. 6. Identifying the various cash flows of the organization, that is, on how it out sources found and spends it in the operations. 7. Analyzing the current solvency of the firm, that is through declaring its book value, the value of its equity and debts through a corporate finance statement. 8. Simulating how personal judgment has been used effectively and intuitively towards accounting and the general process of decision-making. 9. Determining the use and observation of the general accounting principles in regard of presentation of financial statement especially the accounting method used-whether GAAP or IFRS Milestones The following include the list of the activities, which should be undertaken to ensure the project would come to materialize. Firstly, it will involve relevant person being involved for every day of the week in a period of one and a half months to prepare the effectiveness of the plan. Activity Due date Commencement of the project plan 1st May 2013 Interviewing the finance department 3rd May 2013 Questionnaires distribution in other departments except finance 10th May 2013 Questionnaire and interviewing those supplying raw materials 15th May 2013 Questionnaire and interviewing the buyers of the finished products 18th May 2013 Testing the various software and hardware for compatibility 25th may 2013 Reviewing the former accounting statements 30th May 2013 Identifying the various cash flows of the firm 3rd June 2013 Analyzing the firm`s solvency 6th June 2013 Simulating the effects of personal judgment in the firm`s performance 10th June 2013 Determining the used accounting principle 13th June 2013 Technological Requirements Time will be the most essential factor during this operation. As a result, back up for power should be made available especially during the time of testing hardware and software. Moreover, the interviewing personnel should carry along sound recording devices for easier replay in time of analysis. Moreover, printer and its accessories should be availed for printing questionnaires. Besides, one vehicle may be availed for quick availing of the required materials. Limits and Exclusions 1. When financial statements are being prepared, they are normally done through the basis in accounting principles, past experiences or convections. As a result, they do not communicate much in relation to profitability, stability, liquidity or solvency of the firm. 2. Financial statements are quantitative and tend to ignore qualitative. They thus disclose the money facts only. 3. The information being used will only be reflecting on the history of the firm without considering any change in the level of prices or value of money. 4. The chance of having personal judgments is destructive concerning preparing the financial statement. 5. Various financial statement information derived through these financial statement may be unrealistic especially on considering the varied terms, conditions and changing economic situations. 6. Some workers may give false information and others may fail to support the drills of interview and questionnaire. 7. Cost of activity may be inadequate. Project priority This project comprehension is very good. It would ensure the constraints involved are met effectively. It is constrained by time, cost, and scope. With the given cost, it is fixed and the requirements have to be strictly met. In regarding time, there is a buffer given before the commencement of the actual event and it can be said to be neutral. Time Scope Cost Constraint X Accept X Enhance X Staff Plan As a result, a plan is developed on five members showing the exact number of hours each member is to work and the payment in US dollars he will receive. Name Title Working Hours Hourly salary (USD) John Kim Project manager 200 150 Michael Kissa Assistant manager 220 120 Mary Diame accountant 180 100 Judy keddy secretary 180 80 Ephantus Bass Co-coordinator 200 120 total 980 570 Work Breakdown Structures It gives the listing of the main activities that would take place. Through our process, it will involve five processes that include the interviewing, questionnaires, testing the assisting equipments, and reviewing the accounting principles of the firm as shown below. Responsibility Matrix According to responsibility matrix section, a breakdown is given as per expectation from every person in the staff of project planning. It embraces precise prescription of the work as per its breakdown on issue of who is bestowed responsible. As a result, the listing of work is written alongside specific name of an individual on a table as shown below. The letter (R) is used to represent the leader when the activity will be done and (S) assistance. For that reason, the diverse names of team planning the project will have their initials used as follows John Kim (JKR), Michael Kissa (MK), Mary Diame (MD), Judy Keddy (JKE), and Ephantus Bass (EB). Responsibility Matrix Sub-activities Work package JKR MK MD JKE EB Overseeing plans Ensure smooth running of project R S S S S a) interviews i. financial department R S ii. other workers in other departments R S iii. suppliers R S iv. customers S R b) questionnaires administration i. financial department R S 4. ii. Workers in other departments R S iii. Suppliers R S iv. Customers R S c) Testing supporting equipments for faults i. Testing hard ware parts R S ii. Testing software parts R S d) Reviewing the accounting information i. Reviewing the former accounts R S ii. Indentifying cash flows from the financial statements S R iii. Analyzing the firm`s solvency S R iv. Effects of personal judgments S R v. Determining the use of accounting principle R S Estimation of Project Since some activities carries with them significant uncertainty, a bottom up charting approach as shown below was used to derive the time ranging of the whole project for all activities. Moreover, from the above responsibility matrix every member has been assigned duties. However, the duties has not been assigned specified amount of time concerning various aspects associated with them. Accordingly, we can rank every activity against it time range, the risk level associated with it, and it importance. As a result, we demarcate the risk levels as high (H), medium (M) and low (L). For the important ranking we use (I) and (N) for not important, we use (U) for the urgent and (R) for not urgent. Activity Time range in days Risk level importance urgency Commencement of the project plan 1-3 L I U Interviewing the finance department 4-7 H I U Questionnaires distribution in other departments except finance 3-5 L I R Questionnaire and interviewing those supplying raw materials 2-5 M N R Questionnaire and interviewing the buyers of the finished products 2-5 M N U Testing the various software and hardware for compatibility 2-5 H I U Reviewing the former accounting statements 3-5 H I U Identifying the various cash flows of the firm 3-4 M I U Analyzing the firm`s solvency 2-3 H I U Simulating the effects of personal judgment in the firm`s performance 2-4 M I U Determining the used accounting principle 2-4 L N R Estimating Project Cost Interview cost Questionnaire cost Testing equipments cost Reviewing financial statements Miscellaneous cost Total cost $200 $1000 $1000 $2000 $1500 $5700 Network Diagram The following is a pictorial representation of the activities intended to occur during the process of project. They are visually represented using a network diagram and the best or optimal path is chosen. Moreover, below it is an aiding diagram showing how the activities in the network diagram inter marries. code activity Duration in days Predecessor (s) A. 1. Ensure smooth running of project 2 NONE B. interview 2. financial department 7 1A 3. other workers in other departments 5 1A 4. suppliers 5 1A 5. customers 5 1A C. questionnaires admin 6. financial department 5 2B 5. 7. Workers in other departments 5 3B 8. Suppliers 4 4B 9. Customers 3 5B D. testing equipments 10. Testing hard ware parts 4 2B&3B 11. Testing software parts 5 2B&3B E. account info review 12. Reviewing the former accounts 5 2B&3B 13. Indentifying cash flows from the financial statements 4 2B & 3B 14. Analyzing the firm`s solvency 3 2B & 3B 15. Effects of personal judgments 4 10D, 11D, 12E,13E, & 14E 16. Determining the use of accounting principle 4 10D, 11D, 12E,13E, & 14E Gantt Charts The above representation through the network diagram gives a detailed visual representation of activities. However, time module is not given a proper representation. As a result, in order to derive the best time need for the accomplishment of the project, the various involved tasks were put on the horizontal bar and it length was determined through the need of completing the work. As per this project, the total number of days involved included 70 days to the maximum to a minimum of one and a half month. Then, referring to the table above on critical path derivation, we see that the least day covered is two. Hence, one row may therefore be taken to represent two days and be shaded differently as below. Activity Duration in days Ensuring smooth running of project Interviewing financial department Interviewing other workers in other departments Interviewing suppliers Interviewing customers Distributing questionnaires in financial department Distributing questionnaires in other Workers in other departments Distributing questionnaires among Suppliers Testing hard ware parts Testing software parts Reviewing the former accounts Indentifying cash flows from the financial statements Analyzing the firm`s solvency Effects of personal judgments Determining the use of accounting principle Risk Management, Evaluation and Closure From the above breakdown of activities, there are various risks, which can be identified in association with to the project plan. The risk may occur post and prior the project hence should be controlled. Consequently, the below will outline those risks and how they are easily mitigated and the person taken to be responsible. problem trigger action contingent responsibility Power loss during testing of equipments N/A Employing back up system Availing power back up Judy Keddy Uncooperative respondents Fear of being taken as culprits Assurance of nothing will be judged against them Avoiding questionnaire and interview administration in presence of heads of management Mary Diame Poor assessment of equipments Acquiring unqualified personnel The in charge person must be well equipped to detect any fraud Thorough screening of the members taken for investigating Ephantus Bass Inadequate assessment of accounting records Inadequate material Report to relevant authorities Make a pre assessment arrangement on data availing John Kim Failure to assess all the financial statement in the company Time limiting Ensuring personnel available is enough to handle the size of data Making a pre analysis data assessment John Kim The likelihood of getting a varied firm solvency Inappropriate data entry or provision Reporting to concerned authorities N/A Michael Kissa It is from the above other risks it’s is noted that there is variance of time, quality and cost that chips in to show varying ranges between the actual event and the proposed plan. Actually, the high-risk margins call for some of the activities, time lags and completion of some projects earlier need to be monitored thoroughly. Proposed project helps in drawing a base line from which the deviations from the line can be noted. Moreover, from the baseline calculated, it becomes easy to establish a future of the events proposed in the plan. Additionally, cost variance is also easily drawn through comparison. The actual cost is usually compared from the earned cost. In addition, the levels of deliverables could also be derived from the basic responses gotten from the clients Conclusion The above project will therefore lead to a thorough analysis of all financial statements and financial associated equipments. . As a result, one needs to select the kind of project, shutdown applicable resources and put them into new uses. From the implication derived, the analysis of the same is done, and the next project is prepared to be derived. From the above, it a thorough breakdown of the project proposal is acquired. However, this is not an approval of the project. For the approval, a team in management has to assess it validity in regard of cost and urgency. If they find it worth, they shall call for project charter drawing, it with this charter, the project will be summaries in brief, and its approval will occur. As a confirmation, the relevant authorities will sign alongside the dates. Bibliography California department of water resources, California reclamation board & Woodward-cycde Consultant ,1986, Draft project proposal and environment impact report: Butte basin overflow area plan of flood control. California Cheryl C. N. & James A. Q., 2003, How to write a grant proposal. John Wily & Sons Ltd, USA Common wealth of Dominica integrated rural development project proposal. Bib. Orton Bridgetown : IICA/CATIE Construction Institute, America society of civil engineers & committee of specification, 2008, preparing requests for proposal and specification for design-build projects. ASCE Publications Doughty L. A., 1972, America Institute for Research: Cluster I-training in project proposal preparation. E-book,2010, A textbook for financial cost and management accounting. Financial statement: Analysis and interpretation, viewed on 22 April 2013, < http://mfile.narotama.ac.id/files/ebooks/A%20Textbook%20of%20Financial%20Cost%20&%20Management%20Accounting%20(Revised%20Edition)/Chapter%206%20%20Financial%20Statements%20Analysis%20and%20Interpretation.pdf> Jack G. James P., & Clement, 2012, Successful project management. Cengage Learning, USA Jason W., 2002, The Project Management Life Cycle: A C omplete Step-by-step Methodology for Initiating Planning Executing and Closing the Project [Paperback]. 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Principles of accounting.com, 2012, chapter seventeen introduction to managerial accounting, viewed on 22 April 2013, < http://www.principlesofaccounting.com/chapter17/chapter17.html > Raymond A.,1995, Proposal writing: stages and strategies with examples. Viewed on 22 April, 2013, < http://facstaff.gpc.edu/~ebrown/infobr3.html > Rebecca G. & Richard T., 2005, Getting the grant: how educator s can write winning proposals and manage successful projects, ASCD, Beauregard St. Alexadria. Richard F. K. & Douglas A. H., 2010, financial accounting: a focus on interpretation and analysis, cengage Learning, USA. Ruth A. & Stacey S., 2010, Day by Day: Refining Writing Workshop through 180 Days of Reflective Practice, Stenhouse Publishers, USA. Soroya M. Coley, & Cynthia A., 2000,Proposal writing. Sage Publication, Inc New Delhi USA Tom S., 2004, Persuasive business proposals: writing to win more customers, clients, and contracts, AMACOM Div American management Assn, Broadway, New York. Valeria S., 2004, Pro Pack I: Project Design and Proposal Guidance for CRS Project and Program Managers, Catholic reference services, Baltimore. Winscosin, division of health & quality assurance project ,2011, Nursing home quality assurance project: a demonstration project proposal. University of Wisconsin-Madison, Department of health and science. Read More