Continental Limited Financial Statement Accounting Essay

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A companys financial statement can be used to derive financial information by different users such as the managers and employees of a company or external users such as government agencies and tax authorities to fulfill their needs. Because of this, financial statements need to fulfill distinctive criteria such as Reliability, Accuracy and Understandability in order to provide useful information to the users. If a financial statement is unable to fulfill such criteria, the financial account information would not be reliable for decision making decisions by the user.

Task 2

An income statement is a financial document that allows the investors and creditors to gauge the financial performance of a company and to also to forecast future performances of the company allowing it to generate future cash flow. A balance sheet is a financial document which contains the assets, equity and liabilities of a company at a given period of time. The balance sheet can be used with another balance sheet of a different period of time for comparison and is used to provide data for calculating the accounting ratios. Both of these financial documents are used internally within an organization by the company directors and management to monitor the overall performance of the company or organization.

Task 3

Financial documents such as the balance sheet and income statement are prepared by companies for the purpose of reporting their business information to external observers such as potential investors and financial lenders like banks and financial institutions. In order to convey the right information to the public and external users, these financial documents need to present an accurate and highly comprehensible image of the company's financial situation and to evaluate the overall performance of the company.

Task 4

An accounting ratio is a fundamental analysis method to measure how profitable or efficient a company based on the data from the balance sheet. It is used to interpret financial information by the business owners and as a source of quantitative financial information which can be used to make business decisions. The accounting ratio is able to provide the liquidity, asset turnover and profitability ratios of a company, allowing the business owners to make specific decisions to improve their company's performance.

2.0 Answer for Task 1:

A company's financial statement can be used by both internal and external users to derive financial information according to the book Financial & Managerial Accounting (2009) by Dr Carl S Warren, Dr James M Reeve, Jonathan E. Duchac. Based on the book, internal users would be made up of the people within the organization such as the manager and employees of the company and shareholders, while external users would then be the people outside the organization such as the tax authorities and government agencies.

2.1.1 Five Different Users for Continental Limited financial statement

Managers of the Company

Managers of a company are the people that are appointed by the owners of that company to oversee and supervise the day-to-day activities of the company. Managers of the company require accounting information from the financial statement to understand the current financial situation for the company. For the case of Continental Limited, the manager is able to predict the future financial condition of the company allowing them to better manage the business in a more efficient manner and to make effective planning decisions.

Employees of the Company

The employees of a company are the people who are employed by a company to carry out its business activities. For example, the employees of Continental Limited require information from the financial statement to gauge the current financial situation of the company as they are dependent on the company for their wages and salaries and their future careers.

Shareholders or Owner of the Company

Shareholders or the Owner of a company are the business proprietors of a company which means that the company or shares of the company belongs to them. Shareholders or an owner of a company require accounting information from the financial statement to assess how effectively the management of a company is performing its stewardship function and how profitably the management is running the daily operations of the company. Besides that, the shareholders and owner of Continental Limited is able find out how much profit can be withdrawn from the business for their dividend payment.

Tax Authorities

Tax Authorities are any government entities which are authorized to impose and collect taxes on tax payers such as individuals and business entities. For example, tax authorities require accounting information from the financial statement of Continental Limited to calculate the business profits earned by business companies in order to assess and impose the tax payable by the company.

Government Agencies

Government Agencies are entities or organizations which are owned and operated by the government for specific purposes such as administration and oversight for specific functions. Government agencies would require accounting information from the financial statement from Continental Limited to find out about the business activities of the company for the allocation of resources and also to compile data for national statistics.

2.1.2 Five Regulatory Characteristics of Financial Statements

Reliability

The reliability of a financial statement is extremely important for a company when it comes to decision making and making comparisons. The reliability of a financial statement would mean the faithful representation where the information is free of error, bias and is fairly or consistently present about the performance and financial position of an organization. If the financial statement is reliable then the user will be confident as the financial statement would provide financial information which is not misleading or is assembled specifically in a way that would being biased towards any entity, hence the reliability is a very important factor.

Accuracy

The accuracy of a financial statement is another major factor in providing useful data to the user. This is because with accuracy, the financial statement will be able to help the company to increase its profitability by providing the necessary financial data to ensure efficient operation Besides that, a financial statement with an accurate and complete records will allow the user to effectively identify all the assets, liabilities, expenses and incomes within the business. With all these information, the user is able to compare it against the industry average to gauge which areas of the business is doing well or vice-versa.

Understandability

The understandability of a financial statement is a crucial criteria which extremely important for the comprehension of the document to the user. This being said, the financial statement should be readily comprehensible by the user, allowing the user to have a clear understand just by reading the financial statement. Other important factors is that the financial statement must be readily comprehensible to users who are not professional accountants and that complex information which is not absolutely necessary should be excluded from the financial statement to prevent misunderstanding or confusion.

Relevance

The relevance of a financial statement is very important as if it is relevant, that financial statement will be very valuable when it comes to the economics decision making needs of the users. The relevancy of the financial information is able to influence the economic decisions of the user; hence it makes a difference in the overall decision making process. The relevancy of a financial statement is dependent on whether the information obtained would affect the economic decisions made by the user and also on the nature of the information itself. With relevant accounting information, a user is able to evaluate whether he has made the right decisions and choices for economic purposes.

Comparability

The comparability of the financial statement would be how effectively the information can be compared against accounting information from financial statements derived from previous accounting periods. With high comparability, the financial statement can be easily compared with previous financial statements within the company, allowing the users of the information to easily identify trends in the performance of the company and also to gauge the financial position of the company as a whole. Because of this, the comparability of financial statements is very important to the user to assess whether the performance of the company is improving or getting worse.

2.1.3 Conclusion

A company's financial statement can be used by both internal and external users to derive financial information, where the internal users would be made up of the people within the organization such as the manager and employees of the company and shareholders, while external users would then be the people outside the organization such as the tax authorities and government agencies. To ensure that useful information is provided to the user, financial statements need to fulfill distinctive criteria such as Reliability, Accuracy and Understandability. As if these criteria are not fulfilled, then the financial account information then would not be suitable enough for decision making by the user as the user may misinterpret the data and make wrong decisions.

Income statement and balance sheet of Continental Limited for internal usage:

2.2.1 Working for Task 2

Closing stock will be recorded the amount which is lower.RM 65000

Cash account

RM RM

Sales (Different) 5000 Purchase 4000

Stationery 700

Electricity 300

5000 5000

The receipt has no recorded from cash sales, therefore Sales, Purchase and Office electricity & Water from Trial Balance will be making some adjustment and record in income statement. Adjustment working below:

Sales: RM360000+RM5000=RM365000

Purchase: RM200000+RM4000=RM204000

Stationary: RM 700

Office electricity & water: RM 7000+RM 300=RM7300

Accrued for Sales commission: RM 18000 current amount from TB + RM1500 accrued at the end of the years (recorded as Current liability in balance sheet) = RM 19500 (recorded as expense in P/L account of income statement).

Prepaid office salary: RM 28000 current amount from TB - RM 2000 prepaid at the end of the years (recorded as current asset in balance sheet) = RM 26000 (recorded as expense in P/L account of income statement).

Debtor Account

2010 RM RM

Dec 31 Balance b/d 75000 (-) Bad debts 5000

Balance c/d 70000

75000 75000

2011

Jan 1 Balance b/d 70000

Bad debt account

RM RM

Debtor 5000 P/L account 5000

Provision for bad debt closing balance =10 % x Debtor closing balance RM 70000 = RM 7000

Provision for bad debt account

2010 RM 2010 RM

Dec 31 Closing balance c/d 7000 Jan 1 Opening balance b/d 5000

Increase different 2000

7000 7000

2011

Jan 1 Balance b/d 7000

e& f. Vehicles account

RM RM

Balance b/d 300000 Vehicle disposal a/c (cost sold ) 50000

Balance c/d 250000

300000 300000

Balance c/d 250000

Provision for depreciation on vehicle account

RM 2010 RM

Vehicle disposal account 12500 Jan 1 Opening balance b/d 60000

(cost sold RM 50000x5%x5 years Depreciation as expense record 12500

From 1 Jan 2005 to 1 Jan 2010) in P/L account

(Vehicle closing balance

RM250000x5 %)

2010

Dec 31 Balance c/d 60000

72500 72500

2011

Jan 1 Balance b/d 60000

Vehicle disposal account

RM RM

Vehicle cost sold 50000 Provision for depreciation 12500

on vehicle sold

Proceeds from disposal of 35000

vehicle

Different for loss on disposal 2500

Of vehicle (As expense)

50000 50000

Provision for depreciation on premises account

RM 2010 RM

Balance c/d 54000 Jan 1 Opening balance b/d 40000

Depreciation as expense record 14000

in P/L account (Premises cost from TB

RM350000x 4%)

54000 54000

Balance b/d 54000

(As fixed asset in balance sheet)

Taxation charge RM 15300 is deducted from net profit at the bottom of income statement and will be recorded as accrued taxation RM 15300 as the current liability in balance sheet.

Proposed divided which will be deducted from net profit at the bottom of income statement = 2%x RM 500000 Share capital from TB = RM10000 (recorded as current liability in balance sheet)

2.2.2 Income statement:

Income statement of Continental Limited for year ending 31 Dec 2010

RM RMRM

Sales (refer to working for note (b)) 365000

Less return inwards 10000

Net sales 355000

Less Cost of sales:

Opening stock 50000

+Purchase (refer to working for note (b)) 204000

-Return outwards (15000)

+Carriage inwards 5000 194000

Less closing stock (refer to working for note (a)) 65000 179000

Gross profit 176000

Add Income:

Divided received 5000

181000

Less Expenses:

Stationery (refer to working for note (b)) 700

Office electricity & water (refer to working for note (b)) 7300

Office salaries (refer to working for note (c)) 26000

Sales commission (refer to working for note (c)) 19500

Bad debt (refer to working for note (d)) 5000

Increase in provision for bad debts (refer to working note (d)) 2000

Loss on disposal of vehicle (refer to working for note (e & f)) 2500

Depreciation on vehicle (refer to working for note (e & f)) 12500

Depreciation on premises (refer to working for note (e & f)) 14000

Vehicle expenses 12000

Interest charges 3000 104500

Net profit 76500

Less taxation charge (refer to working for note (g)) 15300

Less proposed divided (refer to working for note (h)) 10000

Profit for the year 51200

Add retained earnings brought forward 100000

Retained earnings carried forward 151200

(Put under reserve added to share capital in balance sheet)

2.2.3 Balance sheet:

Balance sheet of Continental Limited as at 31 Dec 2010

RM RM

Fixed assets/ Non-current assets

Office premises at cost 350000

(-) Provision for depreciation on premises 54000 296000

Vehicle at cost (refer to working for note (e & f)) 250000

(-) Provision for depreciation on vehicles 60000 190000

Long-term investments 100000

586000

Current assets

Closing stock (refer to working for note (a)) 65000

Debtors (refer to working for note (d)) 70000

(-) Provision for bad debt 7000 63000

Bank 42000

Prepaid office salary (refer to working for note (c)) 2000172000

758000

Issued share capital

Share capital 500000

Add Reserve

Retained earnings carried forward 151200

Shareholder's equity 651200

Add Long-term liabilities/ Non-current liabilities

Loan 55000

Add Current liabilities

Creditors 25000

Accrued sales commission 1500

Accrued taxation 15300

Proposed dividend 10000 51800

758000

2.2.4 Conclusion

The Income statement and Balance sheet are documents which provide financial information and are used internally within the company by the company directors and management. The Income Statement which is also known as the profit and loss statement is a document which shows the how the revenue in a company is turned into the net income and is used by managers and investors to identify whether money was made or lost by the company during that particular accounting period. A balance sheet is the document which summarizes the financial balances of a company or an organization such as the assets, liabilities and the ownership equity of that particular company at a given period of time. A balance sheet can be used by both internal users such as the owner of the company for inventory management and external users such as a banker or investor to assess the risk and collateral issues. Hence, the balance sheet is very important to gauge a company or an organizations overall health.

2.3 Income statement and balance sheet of Continental Limited for external usage

2.3.1 Working below is taking from task 2:

Distribution costsAdministrative expenses

RM RM

Stationery - 700

Office electricity & water - 7300

Office salaries - 26000

Sales commission 19500 -

Bad debts 5000 -

Increase in provision for bad debts 2000 -

Loss on disposal of vehicle 2500 -

Depreciation on vehicles 12500 -

Depreciation on premises - 14000

Vehicle expenses 12000 -

Total 5350048000

2.3.2 Income statement of Continental Limited for year ending

31 Dec 2010 for external reporting

RM RM

Turnover (Net sales from income statement of task 2) 355000

Cost of sales (179000)

Gross profit 176000

Distribution costs 53500

Administrative expenses 48000 101500

Operating profit 74500

Dividend received 5000

79500

Interest charges (3000)

Profit on ordinary activities before taxation 76500

Taxation charge (153000)

Profit on ordinary activities after taxation for the year 61200

Proposed dividend (10000)

Retained profit for the year 51200

Retained profit brought forward 100000

Retained profit carried forward 151200

2.3.3 Balance sheet of Continental Limited for the year ending

31 Dec 2010 for external reporting

RM RMRM

Fixed assets

Tangible Assets:

Premises (after deducted provision for depreciation 296000

from balance sheet of task 2)

Vehicle (after deducted provision for depreciation 190000 486000

from balance sheet of task 2)

Investment:

Long term investment 100000

586000 Current Assets

Stock 65000

Debtors (RM70000-RM 7000) 63000

Prepaid office salary 2000

130000

Cash at bank 42000

172000

LessCreditors: Amounts Falling Due Within One Year

Creditors 25000

Accrued sales commission 1500

Accrued taxation 15300

Proposed dividend 10000

(51800)

Net current Assets 120200

Total Assets Less Current Liabilities 706200

Less Creditors: Amounts Falling Due After More Than One Year

Loan (55000)

651200

Capital and Reserves

Called up share capital 500000

Profit and Loss account 151200

651200

2.3.4 Conclusion

Financial documents such as the balance sheet and income statement are prepared by companies for the purpose of reporting their business information to external observers such as potential investors and financial lenders like banks and financial institutions. In order to convey the right information to the public and external users, these financial documents need to present an accurate and highly comprehensible image of the company's financial situation.

The accounting ratio for Continental Limited:

The accounting ratio is a method of calculating the relationship of one accounting results in comparison with another for the intention of measuring how efficient and profitable is the company based on the financial report. The accounting ratio which is also known as financial ratio is used for fundamental analysis and to interpret financial information of a company. Basically accounting ratios utilize data from the balance sheet to provide quantitative financial information for a company. The accounting ratio is able to provide the liquidity, asset turnover and profitability ratios of a company, allowing the business owners to make specific decisions to improve their company's performance.

Table of ration calculation

Ratio with formula

Ratio calculation of year 2010

Industry average

Percentage of gross profit on sales:

Gross Profit

Net of sales X 100

176000

355000 X 100

= 49.58%

>

30%

Percentage of operating profit on sales:

Operating profit

Net sales X 100

74500

355000 X 100

= 20.99%

>

18%

Return on capital employed (ROCE):

Net profit before interest and taxation

Capital employed X 100

76500+3000

758000-51800 X 100

=11.26%

>

9%

Current ratio:

Current assets

Current liabilities X 100

172000

51800 = 3.32:1

>

2:1

Stock turnover period:

365days/12 weeks/12 months

Stock turnover in number times

Stock turnover:

179000

(50000+65000)/2

=3.11 times

Stock turnover period in days:

365 days/3.11 times= 117.36 days

>

90 days

Debtors collection period:

Debtor ratio x 365 days/ 52 weeks/ 12 months

Debtors ratio:

63000 = 0.117 :1

355000

Debtor collection period in days:

= 0.117 x 365 = 64.6 days

>

45days

Creditor payment period:

Creditor ratio x 365 days/ 52 weeks/ 12 months

Creditor ratio:

25000 = 0.132: 1

(204000-15000)

Creditor payments periods in days:

= 0.132 x 365 =48.18 days

<

60 days

2.4.2 Profitability of Continental Limited

Based on the table above, the Gross profit margin of Continental Limited has decreased from 49.58% to 30% and there is a decrease in the operating profit margin from 20.99% to 18 % as compared with the industry average, indicating that Continental Limited has lower gross profit earned from the sales made and engages a higher cost of purchase by making the purchase from the suppliers. This shows that company is ineffective and inefficient in purchasing from suppliers and also ineffective in the usage of material and labor in order to reduce its production cost causing a reduction in the gross profit. Therefore, the ineffective and inefficient control in the area of material and labor usage during the production stage, indicates that lower net profit is generated from capital employed due to the ineffective usage of capital employed in the production process and poor business activities will result in a reduction in production and salesvolume which will eventually lead to a general decline in the net profit earning as well. This can be seen through the decrease in the return on capital employed from 11.26% to 9% as compared with the industry average.

2.4.3 Liquidity of Continental Limited

The current ratio of Continental Limited has decreased from 3.32:1 to 2:1which is equivalent to the ideal ratio of 2:1 when compared with the industry average based on the table above; this indicates that Continental Limited is financially stable because it has a large amount of current assets which enables it to finance the current liabilities and to finance its short-term debts.

On the other hand, the creditor payment period has increased from 48.18 days to 60 days, indicating that Continental Limited has obtained longer credit time for owing and repayment to the creditor. Therefore, the creditor allows Continental Limited to accumulate a larger sum of credit which is not payable in short term in order for Continental Limited to avoid a short-term financial problem.

The stock turnover period of Continental Limited has decreased from 117.36 days to 90 days as compared with the industry average, indicating a slow stock turnover in business where the goods purchased are kept for a long time and then slowly taken out for resale. Therefore, the accumulated stock might eventually lead to a tie up in cash-flow which will cause short-term financial problems. The decrease in the stock turnover period was due to a decrease in the debtor collection period indicating that Continental Limited has given shorter credit time to allow debtor owing. Therefore, Continental Limited is able to collect money from debtor within a shorter time frame causing the debtor balance to not accumulate at the same time, hence preventing money from being tied up with the debtors. This can be seen in the decrease in debtor collection period from 64.6 days to 45 days.

2.4.4 Conclusion:

The accounting ratio is a method of calculating the relationship of one accounting results in comparison with another for the intention of measuring how efficient and profitable is the company based on the financial report. The accounting ratio which is also known as financial ratio is used for fundamental analysis and to interpret financial information of a company. Basically accounting ratios utilize data from the balance sheet to provide quantitative financial information for a company. The accounting ratio is able to provide the liquidity, asset turnover and profitability ratios of a company, allowing the business owners to make specific decisions to improve their company's performance.

3.0 Conclusion

A company's financial statement can be used to derive financial information by different users such as the managers and employees of a company or external users such as government agencies and tax authorities to fulfill their needs. Hence, financial statements need to have Reliability, Accuracy and Understandability in order to provide useful information to the users. An income statement is a financial document that allows the investors and creditors to gauge the financial performance of a company and to also to forecast future performances of the company allowing it to generate future cash flow. A balance sheet is a financial document which contains the assets, equity and liabilities of a company at a given period of time. The balance sheet can be used with another balance sheet of a different period of time for comparison and is used to provide data for calculating the accounting ratios. Both of these financial documents are used internally within an organization by the company directors and management to monitor the overall performance of the company or organization. Financial documents such as the balance sheet and income statement are prepared by companies for the purpose of reporting their business information to external observers such as potential investors and financial lenders like banks and financial institutions. An accounting ratio is a fundamental analysis method to measure how profitable or efficient a company based on the data from the balance sheet. It is used to interpret financial information by the business owners and as a source of quantitative financial information which can be used to make business decisions.

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