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Financial statement is to calculate and record the financial activities in the business. Financial statement also use to see what should the company do in the future like invest more, extend business, cut cost or cut budget. In this assignment, Continental Limited will need a financial statement to provide useful information to the users. Beside, question is also requiring including the five different users and regulatory characteristic which is management, owner as investor, employees, lender and customers.
Balance sheet will come after income statement. Balance sheet is we use end of the year. The function of balance sheet is to do a final check and also to know the business is in loss or profit. So the company will do the final decision based on the balance sheet result.
Every business organization will need a financial statement to continue the business. The important of financial statement beside to know profit and loss, will also give others important information to the management officer. The important information included business plan work well or invested in the right way? The management of an organisation is a group of people who need and use financial statement. They are 5 types of people in the management of an organisation which is management, employees, customers, suppliers and investors. Every different type of people will get the information that they want from financial statement.
2.2 Answer for task 1
The financial statement is the most important tools for this group of people. Management will collect the information from financial statement after that from the information management will make judgement and final decision. To make a big decision and judgement management need as much as possible of information to support their plan and decision to present to the owner.Financial statement will also give information to support on how the plan goes well and how it works better than the previous. Financial statement will lead the company to the right way beside it will also help the management people perform better plan than without any information.
2.2.2 Owner of investor
If the owner is the one who make decision like CEO, manager or else upper higher occupation officer than they no need to worry about barrier to blocking them to get the further or deeper information. Owner can give the financial statement to the investor or customer. Because financial statement will show how well is the company running now. Profitable or loss will show in the financial statement so the investor can know is the company potential to invest or not. Usually the sole proprietorship and partnership will be the CEO and the decision position, so if the high positioning worker also as an owner it got an advantage. Example like owner know well the company situation and how they company running, so when they do any investment or expanding they will know how much is the risk taking and also how much the return they will gain. For others like limited company, they got a lot of shares besides they got over 100 of worker so the company will more complicated than the small company. In this situation, income statement will help the owner invest or not to invest. It also helps the investor to pull the business selling the shares or buy more shares.
Employee will also concern about the result of the financial statement. Because if the business go well, the employee will be gain, Company goes well employee will get extra bonus, incentive, leave or even retirement benefit. Even the retired workers also will pay concentrate to them because if the company gain more the retired worker will also get extra pension in particular month.If the income statement result is good, employee will benefit by depending on what the level position, amount of salary, occupation or working position. Beside this maybe the company will also employ more worker or more facilities in the company to let the worker to enjoy, like more security guard, locker to store personal things, better working condition and others benefits. So the employ are also a group of people who care financial statement.
Supplier will be another group to concern about the financial statement result. If a company are earning they will save and confirm they can get back the money they have been supplied. Supplier will put more effort to financial statement because suppliers are the most dangerous group if the company get bad return. If financial statement in bad result, the issue that they have to face like the company can't afford to pay them back, the company will stop ordering any raw material or order any goods from the company and others risk. So before the supplier do any business to the dialler, they will do much research like checking the financial statement to confirm to company will able to pay back the fund.
Customer also will play a role in concerning financial statement. The customer will also want to know, some of them will buy the public shares from the public shares market. The financial report result will influence the shares price increase or decrease. Besides than consumer will hope the company offer or celebrate they got the good result in the past year. Some of them will hope the company to grow bigger, so mass production will decrease the producing price at the same time the selling price will also decrease.
2.3 The 5 characteristic
The financial account is creating according to accounting concept and policies. And beside is how we relate to financial information. This could be influence the economic decision of the users,
Before we relevant the financial information to the decision making of users, we should also depend on timing. If timing shows in time to let the people get information it will be perform well. Oppositely if the financial information is providing after the decision make, it will be useless for people. If the accounts are prepared to provide require information in time, it is not relevant to the decision making of the user.
Accuracy will be important for the financial information. Accurate information will lead the company make good decision and will lead the business into a good way. Oppositely if the financial information is not accurate, it will lead the decision into the wrong way and make will make the company goes to the bad way.
The financial account should be able to compare with the other competitor or others company. Besides that the financial account should also be compare with the previous year financial account.
The financial accounts should be always be understand by everyone. And also have to reasonable, knowledgeable, and can be explainable.
2.4 Short summary
The 5 characteristic relevance, timely, accuracy, Comparability and understability and the 5 users management, employees, customers, suppliers and investors who use the financial statement and balance sheet
In task 2, income statement and balance sheet are requiring for continental Limited for end of the year 31 Dec 2010. And it's for internal use by the company higher level employee or owner. It will never for external use, so the income statement and balance sheet will not record any for external.
2.6 Answer for Task 2
Closing stock should be recorded at cost or net resale value which one is lower.
Since cost RM65000< net resale value RM70000, the cost RM65000 should be closing stock value record in the trading account of income statement and will be under the current asset in the balance sheet.
Sales in trading account of income statement = Rm360000 from TB + RM5000 = RM365000
Purchase in trading account of income statement = RM200000 from TB +RM4000 = RM204000
Stationery as expense put in P/L account of income statement = RM700
Electricity & water in P/L account of income statement = RM7000 from TB +RM300 = RM7300
Sales commission as expense put in P/L account of income statement
=RM18000 paid from TB + RM1500 accrued at end of year = RM19500
Then, accrued sales commission RM1500 is recorded under the current liability in balance sheet
Office salaries as expense put in P/L account of income statement
=RM28000 paid from TB- RM2000 prepaid at end of year = RM26000
Then, prepaid office salary RM2000 is recorded under the current asset in balance sheet
Balance b/d(from TB)
(-) Bad debts
(debtor put under current asset in balance sheet)
(Bad debts as expense put in P/L account)
Provision for bad debts closing balance= 10% x Debtor closing balance RM70000=RM7000
Provision for Bad debt account
31 Dec 2010
Closing balance c/d (from calculation)
1 Jan 2010
Opening balance b/d(From TB)
Increase in difference(as expense put in P/L account)
1 Jan 2011
Deducted from debtor under current asset in balance sheet
Balance b/d (from TB)
Vehicle disposal a/c (cost sold)
(vehicles at cost put under fixed asset in balance sheet)
Vehicle disposal account (cost sold RM50000 x 5% x 5 years from 1 Jan 2005 to 1 Jan 2010)
1 Jan 2010
Opening balance b/d (from TB)
31 Dec 2010
Depreciation as expense put in P/Laccount(Vehicles closing balanceRM250000x5%)
1 Jan 2011
(Deducted from vehicle cost under fixed asset in balance sheet)
Vehicle cost sold
Provision for depreciation on vehicle sold
Proceeds from disposal of vehicle (TB)
Difference for Loss on disposal of vehicle( as expense put in P/L account)
1 Jan 2010
Opening balance b/d (from TB)
Depreciation as expense put in P/L account ( premises cost from TB RM35000 x 4%)
(Deducted from premises cost under fixed asset in balance sheet)
Taxation charge RM15300 is deducted from net profit at the bottom of income statement. It is also recorded as accrued taxation RM15300 under the current liability in balance sheet.
Proposed dividend to be deducted from net profit at the bottom of income statement
=2% x RM500000 Share capital from TB=RM10000
Then, the proposed dividend RM10000 is recorded under current liability in balance sheet.
Income statement of Continental Limited for year ending 31 Dec 2010 for internal use
sales (refer to working)
Less return inwards (from TB)
Less Cost of sales:
Opening stock (from TB)
+Purchases (refer to working)
-Return outwards (from TB)
+Carriage inwards (from TB)
Less Closing stock (refer to working)
Dividend received (from TB)
Stationery (refer to working)
Office electricity&water (refer to working)
Office salaries (refer to working)
Sales commission (refer to working)
Bad debts (refer to working)
Increase in provision for bad debts( refer to working)
Loss on disposal of vehicle (refer to working)
Depreciation on vehicle (refer to working)
Depreciation on premises (refer to working)
Vehicle expenses (from TB)
Interest charge (from TB)
Less taxation charge (refer to working)
Less proposed dividend (refer to working)
Profit for the year
Add Retained earnings brought forward (from TB)
Retained earnings carried forward
(put under reserve added to share capital in balance sheet)
Balance sheet of Continental Limited as at 31 Dec 2010 for internal use
Fixed assets / Non-current assets
Office premises at cost (from TB)
(-) provision for depreciation on premises (refer to working)
Vehicles at cost (refer to working)
(-)Provision for depreciation on vehicles (refer to working)
Long-term investment (from TB)
Closing stock (refer to working)
Debtors (refer to working)
(-) Provision for bad debts (refer to working)
Bank (from TB)
Prepaid office salary (refer to working)
Issued share capital
Share capital (from TB)
Retained earnings carried forward (from the bottom of income statement)
Add long-term liabilities/ Non-current liabilities
Loan (from TB)
Add current liabilities
Creditors (from TB)
Accrued sales commission (refer to working)
Accrued taxation (refer to working)
Proposed dividend (refer to working)
2.7 Short summary
In this Task 2, working is required and the working will only work for internal. In another word, this task is only for internal use.
2.8 Define Task 3
The coming will be the balance sheet of Continental Limited for the end of the year 31 Dec 2010 for external use. This income statement and balance sheet are do according Task 2 and included the expenses like stationary, office electricity and water and others. In this part it will be oppositely with the previous one, this will be only for external use and not for internet use.
2.9 Answer for Task 3
From Income Statement of Task 2
Office electricity & water
Increase in provision for bad debts
Loss on disposal of vehicle
Depreciation on vehicle
Depreciation on premises
Income statement of Continental Limited for year ending 31 Dec 2010 for external reporting
Turnover (Net sales from income statement of task 2)
Cost of sales (from income statement of task 2)
Gross profit (as in the income statement of task 2)
Distribution costs (from the above working)
Administrative expenses (from the above working)
Divided received (from income statement of task 2 of from TB)
Interest charges (from income statement of task 2 of from TB)
Profit on ordinary activities before taxation
Taxation charge (from income statement of task 2)
Profit on ordinary activities after taxation for the year
Proposed divided (from income statement of task 2)
Retained profit for the year
Retained profit brought forward(from income statement of task 2 of from TB)
Retained profit carried forward (as in the income statement of task 2)
Balance sheet of Continental Limited for the year ending 31 Dec 2010 for external reporting
Premises (after deducted provision for depreciation from
from balance sheet of task 2)
Vehicles (after deducted provision for depreciation from
from balance sheet of task 2)
Long term investment (from balance sheet of task 2 or from TB)
Stock (from balance sheet of task 2)
Debtors (after deducted provision for bad debts from balance
Sheet of task 2)
Prepaid office salary (from balance sheet of task 2)
Cash at bank (from balance sheet of task 2 or from TB)
Less Creditors: Amounts Falling Due Within One Year
Creditors (from current liability in balance sheet of task 2)
Accrued sales commission (from balance sheet of task 2)
Accrued taxation (from balance sheet of task 2)
Proposed divided (from balance sheet of task 2)
Net Current Assets
Total Assets Less Current Liabilities
Less Creditors: Amount Falling Due After More Than One Year
Loan(from long-term liability in balance sheet of task 2 or from TB)
Capital and Reserves
Called up share capital (from balance sheet of task 2 or from TB)
Profit and Loss account (retained earnings carried forward from balance sheet of task 2) 151200
2.10 Short summary
Task 3 will working require same as Task 2, but the different with Task 2 is Task 3 are use for external use instead of internal use.
2.11 Define Task 4
The last part is the calculation based on income statement and balance sheets that where did at Task 2 and Task 3.And the ratio for the Continental Limited Company compared with average industrial ratios. The ratio should be based on the work that done on Task 2 and Task 3 income statement and balance sheet. The appropriate accounting ratio for year ending 31 Dec 2010 to assess the profitability and liquidity of Continental Limited.
Answer for Task 4
Ratio with formula
Ratio calculated for year 2010
:Percentage of gross profit on sales
= gross profit x 100
176000 x 100
:Percentage of operating profit on sales
= Operating profit x 100
74541 x 100
:Return on capital employed (ROCE)
=Net profit x 100
=Current asset : Current liability
2 : 1
:Stock turnover period
:Debtors collection period
:Credits collection period
Profitability of Continental Limited
Percentage of gross profit on sales = 49.58%
Percentage of operating profit on sale = 20.99%
Return capital employed = 11.26%
Liquidity of Continental Limited
Current ratio = 3.32 : 1
Stock turnover period = 117.36 days
Debtor collection period = 64.6 days
Credit payment period = 48.18 days
2.12 Short summary
Task 4 is also the last Task of the assignment. Task are working required and is working for calculate ratio of the company based on the Task 2 & Task 3 that we done.
In this assignment, statement and balance sheet will be the main question and answer for the entire assignment. Research will be important and helpful because there got a lot information need to write in and explain further. Especially Task 1, The 5 characteristic and the 5 users are needed to be explaining with clearly. Besides clear, it should be also explained or it's function. Task 2, are calculation and how to calculate the financial statement and balance sheet and it's use for internal. Task 3 is similar to Task 2 but Task 2 is use for internal use and the Task 3 is use for external use. And the last part Task 4 is half theory and half calculation needed.
4.0 Harvard Referencing
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