Financial Statements: Profit and Financial Position of Business by Adam Jackson

FINANCE

TOLL-FREE NO: +61 879057034 WHATSAPP NO: +61 450461655 EMAIL: help@assignmentprime.com WEBSITE: www.assignmentprime.com

GET ASSIGNMENT HELP AT 25% OFF FROM EXPERT AUSTRALIAN WRITERS

TABLE OF CONTENTS INTRODUCTION......................................................................................................................4 Task 1.........................................................................................................................................4 1.1 Description of different users of financial statements................................................4 1.2 Influence of regulatory body on preparation of financial statements.........................5 1.3 Assessment of implications for users in the conceptual framework...........................5 1.4 Explanation of reporting standards required to be followed by business entities in dealing with regulatory requirements...............................................................................6 TASK 2.......................................................................................................................................7 AC 2.1 Preparation of financial statements from incomplete records..............................7 AC 2.2 Preparation of Financial statements of Sajid's Trader .........................................8 AC 2.3 Preparation of consolidated financial statements of subsidiary and holding company............................................................................................................................9 TASK 3.....................................................................................................................................10 AC 3.1 Different users of financial statements...............................................................10 AC 3.2 Financial statements for various types of organizations....................................10 TASK 4.....................................................................................................................................11 AC 4.1 Calculation of Gearing ratio, earning per share and price earnings ratio:..........11 AC 4.2 Interpretation of accounting ratios.....................................................................12 CONCLUSION........................................................................................................................12 REFERENCES.........................................................................................................................13

TOLL-FREE NO: +61 879057034 WHATSAPP NO: +61 450461655 EMAIL: help@assignmentprime.com WEBSITE: www.assignmentprime.com

GET ASSIGNMENT HELP AT 25% OFF FROM EXPERT AUSTRALIAN WRITERS

INDEX OF TABLES Table 1: Table 1: Trading A/C as on 30 September, 2015 (In £)................................................1 Table 2: Profit and Loss A/C as on 30 September, 2015 (In £)..................................................1 Table 3: Balance sheet as on 30 September, 2015 (In £)............................................................2 Table 4: Trading Account of Sajid Trader for the year ended 31st December, 2014(In £)........2 Table 5: Profit and loss account for the year ended 31st December, 2014 (In £).......................2 Table 6: Balance sheet of Sajid Trader as on 31st December, 2014 (In £).................................2 Table 7: Calculation of profit after interest, tax and preference dividend (In £)........................4

TOLL-FREE NO: +61 879057034 WHATSAPP NO: +61 450461655 EMAIL: help@assignmentprime.com WEBSITE: www.assignmentprime.com

GET ASSIGNMENT HELP AT 25% OFF FROM EXPERT AUSTRALIAN WRITERS

INTRODUCTION Financial statements are prepared to know the profitability and financial position of business. It is prepared by every business organizations for the recording of financial information in a proper manner. Present project report is based on the understanding of regulatory framework for financial reporting. It will include description regarding different norms to be considered by entities while preparation of financial statements. Financial statements are statements that are used by various parties, thus business entities are required to assure that provided statements are reliable and accurate. This report will helps us in identifying different users of financial statements. In addition to this, the report also describes that format of financial statements tend to vary according to the nature of business such as sole proprietorship, partnership and company.

THIS IS A SAMPLE ASSIGNMENT BUY QUALITY ASSIGNMENT TO SCORE TOP GRADES CONTACT US: TOLL-FREE NO: +61 879057034 WHATSAPP NO: +61 450461655 EMAIL: help@assignmentprime.com WEBSITE: www.assignmentprime.com

TASK 1 1.1 Description of different users of financial statements Financial statements prepared by business entities are used by different parties in order to viable decisions which are linked to the commercial activities. Description of different users and their needs is as follows1. Banks- Financial institutions require information of business in order to assess their solvency position. By the assessment of financial statements, they are able to determine capability of company in repayment of loan. 2. Potential investors and shareholders- These party assess financial statement in order to assess profitability position of the business. By considering this information, TOLL-FREE NO: +61 879057034 WHATSAPP NO: +61 450461655 EMAIL: help@assignmentprime.com WEBSITE: www.assignmentprime.com

GET ASSIGNMENT HELP AT 25% OFF FROM EXPERT AUSTRALIAN WRITERS

potential investors make decision regarding future investment stock of company (Gibson, 2010). Further, shareholders decide for reinvestment or divestment in the equity of company. 3. HMRC- For the purpose of tax evaluation, HMRC consider the financial statement prepared by the business. Through their evaluation, they assure that manipulation is not done by company for the purpose of tax evasion (Deakins, Morrison and Galloway, 2002). 4. Employees- In order to assess, growth opportunities employees of the organization also assess information in the financial statement. By considering the financial position of the company they make their decision regarding career and future employment. 5. Market and Financial press- Financial statements of the business are useful for the market for the purpose of competitive analysis (Acca Global, 2015). By considering the financial statement, performance of organization can be determined in comparison of rivalry firms. 6. Suppliers- Suppliers assess financial statements for the purpose of assessment of liquidity position in order to determine their credit policy. 1.2 Influence of regulatory body on preparation of financial statements Financial statements prepared by business organizations are generally compared by users for appropriate decision making. Due to this aspect, uniformity in preparation of financial statement has been promoted by different institutions such as IASB, ASB, IPSAS and IASC. They have provided standard guidelines which are required by complied by commercial entities. Accounting regulations in UK is mainly segregated into three parts i.e. Companies Act 2006, UK Accounting Standards Boards and International accounting Standards (De Franco and et. al., 2011). There is no mandatory compulsion on sole proprietorship firms and partnership firms for applicability of these guidelines. However, corporate entities are mandatory to implement these guidelines for accounting. In accordance with the guidelines provided by these regulatory bodies, financial statements are required to be prepared by considering UKGAAP. Along with this, financial statements must include accounting procedures and policies followed by company (Maes and et.al., 2012). Main accounting standards are based on the recording of asset and liabilities at cost and transaction should be recorded on the basis of accrual principle instead of cash TOLL-FREE NO: +61 879057034 WHATSAPP NO: +61 450461655 EMAIL: help@assignmentprime.com WEBSITE: www.assignmentprime.com

GET ASSIGNMENT HELP AT 25% OFF FROM EXPERT AUSTRALIAN WRITERS

principle (Drake, 2012). In addition to this, businesses should provide clear reflection regarding uncertainties and risks associated to the business. Further, complete information should be provided regarding aspects that can affect decision of investor. 1.3 Assessment of implications for users in the conceptual framework Conceptual framework in accounting provides basic description for the preparation and presentation of financial statements for external users (Gibson, 2010). These users require information of business efficiency in discharging their obligations by making use of their resources along with the information of net cash flow and future cash flow. Conceptual framework assure that needs of all primary users are satisfied so they can make economic decisions. This framework also provides guidance regarding basic assumptions and accountant policies to the users (Gray and et. al., 2013). By considering this information they will be able to make better interpretation and comparison of financial statements to draw valid conclusion. In this aspect following assumptions are included

Going concern- In accordance with this assumption, organization does not have any intention to close operational activities in near future. They will operate for indefinite period. If this presumption is not valid, then organizations are required to follow different basis of accounting.



Prudence- This assumption states that accounting for all possible losses is essential but effect to probable losses cannot be provided by the company (McLaney and Atrill, 2010). Objective of this presumption is to ensure future possible losses are clearly stated by business.



Consistency- Accounting policies will be uniformly followed throughout the life of business. However, changes can be made if it is said by statue or ASB or change in policy will provide better results.

1.4 Explanation of reporting standards required to be followed by business entities in dealing with regulatory requirements In order to provide guidance to business entities for the fulfilment of regulatory requirements reporting standards have been introduced (Needles and et. al., 2012). Through these standards guidelines has been developed through which organizations can prepare financial statements in an effective manner. TOLL-FREE NO: +61 879057034 WHATSAPP NO: +61 450461655 EMAIL: help@assignmentprime.com WEBSITE: www.assignmentprime.com

GET ASSIGNMENT HELP AT 25% OFF FROM EXPERT AUSTRALIAN WRITERS

In accordance with these standards, financial statements must include relevant information by which decision maker can make their decisions. Relevancy is measured by its usefulness in context of need of stakeholders [F QC6-QC10]. Further, provide information in statements should be reliable by which user can trust on it (Financial times, 2015). For this aspect, Companies Act 2006 had introduced provision of external audit that should be conducted by independent auditor. Provided information should be understandable by the users so they make their decisions in a proper manner [F QC30-QC32]. For the purpose, corporate entities are required to provide clear description about their accounting policies and assumptions.

Along with this, fundamental assumptions (going concern, prudence and consistency) are required to be followed by entity (Conceptual Framework for Financial Reporting 2010, 2015). In situation where these assumptions are not followed the company is required to provide the description for it along with the justified reason (BPP Learning Media, 2014).

TASK 2 AC 2.1 Preparation of financial statements from incomplete records Financial statements include both income statements and balance sheet. Income statements include trading and profit and loss account (De Franco, Kothari and Verdi, 2011). Trading account shows gross profit whereas Profit and loss account prepares to know the net profit or net loss. TOLL-FREE NO: +61 879057034 WHATSAPP NO: +61 450461655 EMAIL: help@assignmentprime.com WEBSITE: www.assignmentprime.com

GET ASSIGNMENT HELP AT 25% OFF FROM EXPERT AUSTRALIAN WRITERS

Table 1: Trading A/C as on 30 September, 2015 (In £) Particulars Amount Particulars To opening stock 6650 By Sales (Revenue) To Purchase 31220 By Closing stock 6240 To Gross Profit(B/F) 41310 Less: Stock Destroyed 320 Add: Salvage Value 360 79180 Table 2: Profit and Loss A/C as on 30 September, 2015 (In £) Particular Amount Particulars To Distribution Cost 3240 Add: Accrued 26 To Administration cost

By Gross Profit

Amount 72900 6280 79180 Amount 41310

3266

7480 Less: Prepaid Interest 22 To Depreciation Plant and Equipment : 8439 Property : 840 To Outstanding interest on

7458

loan To Remedial Work To Provision for Tax (20%

600 80

of 20627) To Net Profit (B/F)

4125.4 16501.6 41310

9279

Table 3: Balance sheet as on 30 September, 2015 (In £) Liability Amount Assets Share Capital Fixed Assets Ordinary shares @50p 65000 Plant and Equipment Share Premium 15000 Property Profit for the year 16501.6 Land( Revalue) Retained earning 11560 Current assets Revaluation Reserves 11500 Trade Receivable Add: Land 8000 19500 Closing Stock 8% Loan 7500 Bank 14060 Add: Accrued 600 8100 Less: Remedial work 80 Trade Creditors 9860 Prepaid Administration expenses Outstanding Distribution cost 26 Provision For Tax 4125.4 Accumulated Depreciation Plant and equipment: 10920

41310 Amount 56260 42000 40000 18740 6280 13980 22

TOLL-FREE NO: +61 879057034 WHATSAPP NO: +61 450461655 EMAIL: help@assignmentprime.com WEBSITE: www.assignmentprime.com

GET ASSIGNMENT HELP AT 25% OFF FROM EXPERT AUSTRALIAN WRITERS

Add: Current year Dep. Property: Add: Current year dep.

8439 7410 840

19359 8250 177282

177282

AC 2.2 Preparation of Financial statements of Sajid's Trader Table 4: Trading Account of Sajid Trader for the year ended 31st December, 2014(In £) Particulars Amount Particular Amount To opening Stock To credit purchase 10360 By credit sales 154420 To Gross profit (b/f) 116600 By Closing stock 4560 32020 158980 158980 Table 5: Profit and loss account for the year ended 31st December, 2014 (In £) Particulars Amount Particulars Amount To Salary and wages paid 6532 By gross profit 32020 To Repair and maintenance 4560 To General Expenses 4361 To Depreciation 12600 To Net Profit (b/f) 3967 32020 32020 Table 6: Balance sheet of Sajid Trader as on 31st December, 2014 (In £) Liability Amount Assets Amount Capital Current assets Capital 150000 Bank 4011 Add: Net Profit 3967 153967 Trade Receivable 45650 Current Liability Closing Stock 4560 Trade Creditors 13654 Fixed Assets Property, plant and equipment 126000 Less: Depreciation 12600 167621

113400 167621

Credit sales = 130130£+45650£-21360£ = 154420£ Credit Purchase = 124356£+13654£-21410£ = 116600£ Depreciation = 126000£*10% = 12600£

TOLL-FREE NO: +61 879057034 WHATSAPP NO: +61 450461655 EMAIL: help@assignmentprime.com WEBSITE: www.assignmentprime.com

GET ASSIGNMENT HELP AT 25% OFF FROM EXPERT AUSTRALIAN WRITERS

AC 2.3 Preparation of consolidated financial statements of subsidiary and holding company Consolidated financial statements: Consolidated financial statements are prepared by combining the financial statements of legal entities that are controlled by the other company called parent or holding company (Gupta, 2008). Preparation of consolidated income statements and balance sheet: The parent company acquire 80% shares of subsidiary company and remaining 20% is termed as minority interest. Consolidated income statements and balance sheet is prepared here by taking into consideration the necessary adjustments (Ahmad, 2008). Table 7: Consolidated income statement for the year ended 30th September, 2015 Revenue Cost of sales Gross profit Distribution cost Administrative expenses Finance cost Total expenses Profit before tax

92500 70500 22000 2500 5500 100 8100 13900

Income tax expense Profit for the year Profit from subsidiary (80%) Minority interest (20%) Net profit

3900 10000 3120 780 13120

Table 8: Consolidated financial statement as on 30th September, 2015 Assets Non-current assets Land 10600 P&E 30000 Investment in subsidiary 12800 Current assets Inventory 6220 Trade receivables 6815 Goodwill Cash 1865 Total assets Equity and liabilities Ordinary shares Revaluation reserve Capital reserve

68300 13000 2500 320

TOLL-FREE NO: +61 879057034 WHATSAPP NO: +61 450461655 EMAIL: help@assignmentprime.com WEBSITE: www.assignmentprime.com

GET ASSIGNMENT HELP AT 25% OFF FROM EXPERT AUSTRALIAN WRITERS

Retained earnings P&L Minority interest Noncurrent liabilities 10% loans Current liabilities Trade payable Bank overdraft Tax Total liabilities and equities

15900 2160 4620 13000 12000 875 3925 68300

TASK 3 AC 3.1 Different users of financial statements Shareholders and investors: Shareholders are the owners of company. They need financial information to know their investment potential in order to acquire higher return. Government: Government analyses the financial statements to know the tax liabilities of company. It helps the government in making economic planning and decisions (Meynard, 2013). Competitor: Competitors analyse financial statements so as to compare their own performance with the competitors firms in order to take fruitful decisions. Financial Institution: Banks and other institutions need financial information to know the credit worthiness of business to take decision about providing loan facilities. Manager: They use financial information to know the profitability and financial status of company. They analyse the extent to which company is operating well to make effective and strategic planning (Zager and Zager, 2006). AC 3.2 Financial statements for various types of organizations Sole Proprietorship: It is the most common type of organization where owner invests his own fund so that the entire profits and losses will be available for him (Brayan, 2010). He simply makes trading and profit and loss account as his income statement and the balance sheet as well. Partnership: This form of organization can be established by two or more persons. They share profit and loss in the agreed ratio. Therefore, they prepare partner's capital account, profit and loss appropriation account and balance sheet. TOLL-FREE NO: +61 879057034 WHATSAPP NO: +61 450461655 EMAIL: help@assignmentprime.com WEBSITE: www.assignmentprime.com

GET ASSIGNMENT HELP AT 25% OFF FROM EXPERT AUSTRALIAN WRITERS

Company: Company is established by following the legal requirement of company’s act (Bebbington, Gray and Laughlin, 2001). It prepares its statements according to the law of act in which it is incorporated in order to satisfy the needs of all users.

TASK 4 AC 4.1 Calculation of Gearing ratio, earning per share and price earnings ratio: Gearing ratio: It indicates the proportion of company's borrowed funds to its equity which is also known as leverage ratio (Muradoğlu and Sivaprasad, 2012). Gearing ratio = Debentures/ordinary preference share capital retained earning*100 Alpha Ltd. = 75000£/600000£+15000£+600000£*100 = 75000£/1215000£*100 = 6.17% Beta Ltd.

= 450000£/150000£+450000£+75000£*100 = 450000£/675000£*100 = 66.67%

Table 9: Calculation of profit after interest, tax and preference dividend (In £) Particular Alpha Ltd. Beta Ltd. Operating profits 300000 300000 TOLL-FREE NO: +61 879057034 WHATSAPP NO: +61 450461655 EMAIL: help@assignmentprime.com WEBSITE: www.assignmentprime.com

GET ASSIGNMENT HELP AT 25% OFF FROM EXPERT AUSTRALIAN WRITERS

Less: Interest on debenture @8% Profit Before Tax Less: Corporate Tax @25% Profit after tax Less: Preference share dividend

6000 294000 73500 220500

36000 264000 66000 198000

@10% Profit available to equity

1500

45000

shareholders

219000

153000

Earnings per share = Profit available to equity shareholders/Number of ordinary shares Alpha Ltd. = 219000£/600000 = 0.365£ Beta Ltd. = 153000£/150000 = 1.02£ Price Earnings Ratio: It is the market prospectus ratio which indicates the relationship between market price and earnings per share (Lisowsky, 2010). Price earnings ratio = Market Value per share/Earning per shareholders Alpha Ltd. = 3.65£/0.365£ = 10£ Beta Ltd.

= 10.20£/1.02£ = 10£

AC 4.2 Interpretation of accounting ratios Gearing ratio: It is the indication of financial risk which also shows that excessive debt can lead to financial difficulty for the business. The gearing ratio of Alpha and Beta Ltd. is 6.17% and 66.67% respectively. It shows that Alpha Ltd. is using very less debt capital as compared to equity capital. Therefore, company would not get benefited with reference to the tax payment (McLaney and Atrill, 2010). The Alpha Ltd. is paying only 6000£ as interest but the company has to pay tax of 73500£. However, Beta Ltd. is paying higher interest charges to 36000£ but lower tax of 66000£. Therefore, it is clear that cost of debt is lower than the cost of equity so Alpha Ltd. should increase the debt capital in its capital structure (Persons, 2011). Earning Per Share (EPS): EPS of Beta Ltd. is higher to 1.02£ as compared to Alpha Ltd. This is because; company is using higher share capital and less debt so that proportion of profits would be available to all the shareholders that are comparatively lower than Beta Ltd. Therefore, Investors should invest in Beta Ltd. because of higher earnings per share. Price Earnings ratio: Price earnings ratio of both the companies are same to 10£. It shows that investors’ future expected earnings on the basis of market price will be same for both the companies. TOLL-FREE NO: +61 879057034 WHATSAPP NO: +61 450461655 EMAIL: help@assignmentprime.com WEBSITE: www.assignmentprime.com

GET ASSIGNMENT HELP AT 25% OFF FROM EXPERT AUSTRALIAN WRITERS

CONCLUSION From the presented report, it is clear that to prepare financial statements is necessary for all the organizations. It is significant for all the users whether external or internal. Moreover, it is also important due to comparison purpose between two or more companies (International Matrime Organization financial statements, 2012). Organization can easily assess its performance by determining the profitability and financial position through such statements. For this aspect, they are required to comply guidelines and assumptions given by the regulatory bodies. By implementation of reporting standards in preparation of financial statements organizations will be able to fulfil regulatory requirements.

TOLL-FREE NO: +61 879057034 WHATSAPP NO: +61 450461655 EMAIL: help@assignmentprime.com WEBSITE: www.assignmentprime.com

GET ASSIGNMENT HELP AT 25% OFF FROM EXPERT AUSTRALIAN WRITERS

REFERENCES Books and Journals Ahmad, N., 2008. Financial Accounting. Atlantic Publishers & Dist. Bebbington, J., Gray, R. and Laughlin, R., 2001. Financial Accounting: Practice and Principles. Cengage Learning EMEA. Brayan, W. D., 2010. Financial Accounting: A Course for All Majors. IAP. De Franco, G., Kothari, S. P. and Verdi, R. S. 2011. The benefits of financial statement comparability. Journal of Accounting Research. 49(4). pp. 895-931. Gupta, A., 2008. Financial Accounting for Management: An Analytical Perspective. Pearson Education India. Lisowsky, P., 2010. Seeking shelter: Empirically modeling tax shelters using financial statement information. The Accounting Review. 85(5). pp. 1693-1720. Meynard, J., 2013. Financial Accounting, Reporting, and Analysis. OUP Oxford. MuradoÄ&#x;lu, Y. G. and Sivaprasad, S., 2012. Capital structure and abnormal returns. International Business Review. 21(3). pp. 328-341. Persons, O. S., 2011. Using financial statement data to identify factors associated with fraudulent financial reporting. Journal of Applied Business Research (JABR). 11(3). pp. 38-46. Online International Matrime Organization financial statements, 2012. [Pdf]. Available through: <http://www.imo.org/Documents/IMO_Financial_Statements_for_the_yearended_31_12_2012.pdf>. [Accessed on 7th November 2015]. Zager, K. And Zager, L., 2006. The Role of financial information in decision making process. [Pdf]. Available through: <http://businessperspectives.org/journals_free/im/2006/im_en_2006_03_Zager.pdf>. [Accessed on 7th November 2014].

TOLL-FREE NO: +61 879057034 WHATSAPP NO: +61 450461655 EMAIL: help@assignmentprime.com WEBSITE: www.assignmentprime.com

GET ASSIGNMENT HELP AT 25% OFF FROM EXPERT AUSTRALIAN WRITERS