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Financial Statements Elements and Financial Statement Analysis

2059 words (8 pages) Essay in Accounting

08/02/20 Accounting Reference this

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Introduction

Financial Statements are Ceremonial records of the Financial act and position of business, person, or any institution. The good and positive Financial Statements reflects how successful is business or company. Market can be on favour of the company if business have a communitive and powerful financial statement.

On this project Segment A consist of detail information of financial analysis, calculation of income and earnings are made on Segment B and judgement of Balance sheet of the given companies are performed in Segment C.

 

                                       Segment A

Segment A consist of financial ratios of the year 2018 and 2019 for the company Big Bang pty Ltd. Following ratios have been mentioned in this segment;

                                                 Current Ratio

  Current ratio is a liquidity ratio that measures company’s capacity to pay short term liquidity (will Kenton 2019). The current Ratio of the company was 2.74 and 2.08 in the year 2018 and 2019 respectively.

                                        Quick Ratio

Quick ratio measures financial ratio of the company. Quick ratio tells us that that company can clear its current liabilities with its current assets.

Year 2018 had 0.89 and year 2019 had 0.84 Quick ratio.

                   Accounts Receivable Turnover Ratio

This specify company’s debt collection planning. It shows that in the year 2018 7.10 times and 51.41 days and year 2019 shows 9.69 times and 37.67 days.

Inventory Turnover Ratio

It indicates company’s ability to sell its Products (Harold Averkamp 2019).

1.79 times and 204.4 days was in the year 2018 and 2.07 times and 176.21 days in 2019.

 

For the year of 2018

Current Ratio

Current assets / Current Liabilities

(Cash + Accounts Receivables + Inventory) / Current Liabilities

(12000+60000+150000)/81000

2.74

Quick Ratio

(Cash + Accounts Receivables) / Current liabilities

(12000+60000)/81000

0.89

Average accounts receivable

(Accounts receivable at the beginning +

Accounts receivable at the end) / 2

(78000+60000)/2

69000

Accounts receivable turnover

(Net credit sales / Average accounts receivable)

(490000/69000)

Times

7.10

(365/7.10)

Days

51.41

Average inventory

(Inventory at the beginning +

Inventory at the end) / 2

(130000+150000)/2

140000

Inventory turnover

(Cost of goods sold / Average inventory)

(250000/140000)

Times

1.79

Days

(Average inventory / Cost of goods sold) * 365

(140000/250000) *365

204.4

 

                                 Table 02: Ratio analysis for the year 2019

                                        (Source: self-made)

Short-term Solvency Ratio attempt to calculate the ability of a company to meet its short-term financial liquidity (Mark A. Lane 2019). Company is standing on a Bright side because its significantly lower for the company. In the year 2019 receivable transaction ratio was more for a company then the year 2018. According to the survey company has a higher inventory turnover.

 

Section B: Income and Revenue Identification

Income statement

for the year ended on 30 June

Particulars

Amount $

Amount $

Sale of

Software

25000000

Download

income

3000000

 

Operating

income

28000000

Interest

income

50000

Discount

received

2000

Other incomes

48000

Net income

28048000

 

                                 Table 3: Income Statement

                                       (source: self-made)

Income statement is used for reporting company’s financial performances. It is one of the three important financial statement. Operating income is when income is received from sale and download of the software. Received discount will not be called as a income.

Section C: Collation of Balance Sheet

ABC Company

Current ratio

(Current assets / Current liabilities)

0.14

Total debt to total asset ratio

(Total debt / Total assets)

0.51

XYZ Company

Current ratio

(Current assets / Current liabilities)

2.17

Total debt to total asset ratio

(Total debt / Total assets)

0.16

 

                                        Table 04: Loan Acceptances

                                                     (Source: Self-made)

The loan Application of the XYZ Company will be surely granted because of the Company’s higher current ratio of 2.17 to 0.14 of ABC company. ABC company has the higher financial risk then the ABC company because ABC company has a more debt than the assets.

By the end of the year 2020 ABC company will have a liability of $52800 where as a XYZ company will have total liability of $12000. Looking from a business perspective view XYZ company will be on the priority to be bought.

Conclusion

Therefore, it proves that the purpose of financial statements is to assist creditors and investors to make a decision. Its main purpose is to give detailed financial information. It helps in a ratio analysis for the investor and creditors.

References

  • will Kenton (2019) ,Harold Averkamp (2019) Mark A. Lane (2019)
  • Clarke, E. (2011). Accounting: an introduction to principles and practice. South Melbourne, Vic.: Cengage Learning Australia
  • König, P.J. and Pothier, D., 2016. Too much of a good thing? A theory of short-term debt as a sorting device. Journal of Financial Intermediation26, pp.100-114.
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