Financial Reporting and Financial Accounting - Essay Example

Financial Reporting and Financial Accounting School Task 2: The Financial ments with Comments on Important Ratios C. Egget Financial Position Statement As at the year ended..……… Non-current assets (Amounts in £) Property, Plant and Equipment 31,800 31,800 Current Assets Stocks 6,400 Debtors 10,000 Cash at bank 5,200 Cash in hand (700) 21,700 Total Assets 53,500 Equity and Liabilities Equity Capital in business 48,200 Add: Net income 9,200 Less: Drawings for the year (19000+600) (19,600) 37,800 Non-current Liabilities Long-term debt 10,000 10,000 Current Liabilities Creditors 5,000 Loan interest payable 200 Rates payable 500 5,700 Total Equity and Liabilities 53,500 C. Egget Profit and loss Statement For the year ended…………… (Amounts in £) Sales revenue 78,500 Less: Cost of goods sold (39,100) Gross Profit 39,400 Add: Discount Received 700 40,100 Less: Expenses Salaries 12,200 Interest expense 800 Rates 3,700 Insurance 2,900 Depreciation 8,400 Motor expense 1,400 Heating and Lighting 1,500 30,900 Net Profit 9,200 Ratios Analysis There are many ways to look at how a company has performed during a financial year. Statement of income, statement of financial position, and statement of cash flow play vital role in assessing the performance of a company. However, the experts employ another important technique to determine whether the company performed well or below expectations. This technique is known as the Ratio Analysis. In this method, experts calculate some important ratios from the financial statements of the company the performance of which is to be checked (Bragg, 2012, p. 23). All these ratios have their own specific formulae and they are interpreted by experts by looking at the figures obtained from calculations. The management and the CFOs of large business entities and the users of these statements as well rely heavily on the ratios of a company (Tracy, 2012, p. 14). Some important ratios of the company the data of which is given are also calculated with their interpretation to ensure better understanding of them. These are as follows: Ratios Determined Calculated Values Formulae Used Net profit margins 11.70% Net profit/Net sales Current ratio 3.8 CA/CL Gross Profit ratio 50% Gross profit/Net sales Stock turnover rate 5.4 (COGS/(Opening stock +closing stock)/2) Acid test ratio 2.7 CA-inventory-prepayments/CL Gearing ratio 29.3% debt ratio =total debt / total assets ROCE 20.9% EBIT / (Total Assets - Current Liabilities) Interpretation Net Profit Margins: The gross profit margin ratio shows how much net amount an entity earns on the percentage amount of sales made. This ratio is calculated in percentages and for the given scenario and data, the ratio calculated indicates the fact that the entity has earned sufficient net profits during the previous year. The ratio is sufficient evidence that the company has performed well for earning net profits quite enough for its forth coming years’ operations. Looking at the ratio, the new investors can be expected for making investment in the company as the figures of the ratio will boost their confidence that the company will continue to be performing well. The positive expectations regarding the increase in investors will also benefit the company as the management will look forward to expand the business with further investments for new investors. Current Ratio: Current ratio means the respective currency of current assets the company holds for a single respective unit currency of current liability (Leach, 2010). Or, simply, the number of Euros of current assets available to the company to meet a single euro of current liability. The current ratio for the company is quite favorable as it has 3.7 Euros in current assets to meet a single unit in its current liabilities. Gross profit ratio: The gross profit figure of the company is exactly half of the net sales as shown by the ratio. It is a good sign for the company regards the fact that their cost of sales is very nominal allowing the company to earn a sufficient amount of profit even if other operating expenses are a little higher. Since higher gross profits mostly result in higher net profits, therefore the gross profit ratio in this case is expected to attract existing as well as new investors. Stock Turnover Ratio: stock turnover ratio is indicative of the fact the number of time the stock was produced by the entity during the year and sold out afterward. The calculated ratio is 5.4 times which means that the company was able to produce and sell its stocks for 5.4 times during the year. This is quite favorable situation for the company as it indicates the company is very efficient in its operations. Acid test Ratio: this ratio excludes the prepayments and inventory from the current assets and then compares it with the current liabilities for the purpose of determining whether the current assets, excluding stocks and prepayments, are sufficient enough to meet the current liabilities. Since the ratio is about 2.7 times, it depicts positive signs showing that the above mentioned current assets have 2.7 Euros for one euro of current liabilities. Gearing Ratio: The gearing ratio (debt ratio) shows the percentage of total debts to total assets. In other words we can say that debt ratio is the total debts as a percentage of total assets. The provided data gives us a debt ratio of 29.3% showing that the company has obtained 29.3% of debts as response to 100% total assets. It means the company is largely dependent on its own capital and has not taken many debts in order to be far away from the fear of insolvency. ROCE: Return On Capital Employed (ROCE) means the amount earned for the company by the capital employed. For the given data, the ratio amounts to 4.5 meaning that the company’s 1 euro of capital employed earns 4.5 Euros for it. 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 Adjustment Cons. Income Statement 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 Deferred 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: There is a suspense amount on the balance sheet’s assets side. Some unknown reasons, most probably some missing information in the given data, may have resulted in this amount. Introduction to Consolidated Financial Statements These are the accumulated accounting record of the financial statements of separate legal entities which are under the control of a single parent company (Shahzad, 2011, p. 24). Consolidated financial statements combine all these financial statements from different entities into a single set of financial statements. Such financial statements are always prepared by the parent companies of grouping companies (Gibson, 2012, p. 13). Just like simple financial statements, the consolidated financial statements comprise of the consolidated statement of financial position and a consolidated income statement therewith. Purpose of consolidated financial statements The major use of consolidated financial statements is to allow the investors and other users of financial statements to study the overall performance of the entire enterprise or as gathering separate information regarding the entities those contained in the group would be difficult for them. Since separate information would be a scattered scenario, the users will never be able to get a true and clear image of the financial performance of the enterprise/group as a whole (Gallimberti, Marra & Prencipe, 2013). This is the main reason why parent companies in a group are required by the relevant standards to prepare consolidated financial statements. Advantages of preparing consolidated financial statements Introduction of new products and services is of great importance for a company in order to have expansion in its business. For this purpose, generally, large companies purchase those smaller companies which are involved in the businesses of providing such products and services as required by the purchasing company. These newly acquired companies normally continue to carry on their own businesses but are mainly controlled by the parent companies after becoming their subsidiaries. All the subsidiaries of the parent company have their own separate records which are then compiled at the year-end by the parent company into a single set of consolidated financial statements. This set of financial statements allows users to determine the strength of the group as a whole. References Bragg, S. M. (2012) Business Ratios and Formulas: A Comprehensive Guide, Wiley Leach, R. (2010) Ratios Made Simple: A beginners guide to the key financial ratios, Harriman House Tracy, A. (2012) Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet, CreateSpace Independent Publishing Platform Gallimberti, C.M., Marra, A. & Prencipe, A. (2013) Consolidation: Preparing and Understanding Consolidated Financial Statements Under IFRS, McGraw Hill Higher Education Shahzad, I. (2011) Consolidation of Financial Statements: A New Approach: An Easy Way to Understand and Prepare Consolidated Financial Statements, LAP LAMBERT Academic Publishing Gibson, C. H. (2012) Financial Reporting and Analysis: Using Financial Accounting Information, South-Western Cengage Learning Read More