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Finance assignments

Executive summary

The “Financial statement” is the statement which shows and determines the financial position of a business. In this study, the three statements which are considered necessary are discussed. The income statement of given company John Spalding is prepared, and the concept is discussed. It helps in evaluation of company performance. The company balance sheet is also prepared, which states the financial condition of business. The topic of profitability ratio is also discussed as the comparison for FY 2018 and 2017 is done based on ratios. The ratio of gross profit and ratio of net profit is discussed mainly. Analysis of the same is done, and it is observed that company is performing well in 2018 compared to last year. The ratio has increased considerably, which shows a positive return in a company.

Table of Contents

Introduction 3
“Financial statement” 3
Income statement 3
Balance Sheet 5
Analysis 6
Conclusion 8
Reference list 10
Appendices 11

Introduction

“Financial statement” of an organisation comprises of a business report which is significant for the company. The “Financial statement” of company consists of three stories which help the analyst to determine the financial status of business organisation. The reports which are referred to as “Financial statement” are income statement, balance sheet and “cash flow statement”. The analysis of this statement describes the position of business. The report which is prepared based on accounting information determines all the cash inflow in the business along with outflows. “Financial statement” is essential for stakeholders and investors because it determines profitability. Efficiency and liquidity of the business are determined by “Financial statement”. The analysis of “Financial statement” describes the capacity of to pay its financial obligation, and it further describes the problems which company is facing currently. In the preparation of annual report, this “Financial statement” s is used for correct estimation of profitability or loss. “Financial statement’s are used for internal as well external purpose when it is used for external purpose; it is formatted according to accounting framework. The “Financial statement” is used to analyse profitability of “John Spalding”. The analysis of company’s profitability is done for better understanding of “Financial statement”.

“Financial statement”

Income statement

Paticulars Amount
$
Revenue:
Sales revenue 76552
Income from other sources 6900 83452
(-) Cost of sales 29611
Gross Profit 53841
(-) Operating Expenses:
Advertising 686
Freight and delivery outward 959
Depreciation expenses- office machinery 1555
Depreciation expenses - motor vehicles 2388
Salaries 21899
electricity 581
telephone 334
insurance 820
Bank fees 161
Motor vehichles expenses 2896
Doubtful debts expenses 208 32487
Operating Income 21354
(-) Interest on Bank loan 1080
Discount allowed 367 1447
Net income 19907

Balance Sheet

Liabilities Amount Amount Assets Amount Amount
($) ($) ($) ($)
Capital 58377 Cash at bank 22327
(-) Drawing 3175 55202 Accounts Receivable control 11484
Accounts payable control 4081 (-) provisions for doubtful debts 420 11064
GST clearing( Payable) 1100
Accrued expenses 3565 inventory 6057
Bank loan 24000 prepaid expenses 2230
Net profit 19907 Office machinery 59000
(-) Accumulated depreciation on Office machinery 15213 43787
Motor vehicles 22000
(-) Accumulated depreciation on motor vehicles 6600 15400
Investment in shares in public companies 7000
Total Liabilities 107865 Total Assets 107865

Analysis

A profitability ratio is used in the business organisation to measure the revenue of the business. The ratio states the overall condition and status of a firm. In the profitability ratio, the evaluation of business performance is done based on revenue generation (Kieso et al. 2016). In the calculation of profitability ratio profits is considered along with the expenses company is incurring. A profitability ratio is classified in parts which is not same, which are “Profit margin ratio” and “rate of return ratio”. The “Profit margin ratio” comprises of “gross profit margin”, “net profit margin” and “operating profit margin” (Al Attar and Jordan, 2016). The ratio of profit margin depicts a relationship between sales and profit made from the sales. The return ratio is related to investment and the return which they get from that particular investment. The entire ratio is calculated with help of “Financial statement”.

[Referred to Appendix 1].

“Gross profit margin” is type of profitability ratios. It is used for calculating sales percentage, which is above the "cost of goods sold" (Albrecht et al. 2015). The main aim of this ratio is for calculating efficiency rate of business organisation. The company uses raw materials and labour for production purpose; if these are used efficiently, the gross margin is estimated to be high for the company (Amiram et al. 2015). “Gross profit margin” measures the efficiency of firm in resource allocation and labour and sales for the motive of revenue generation (Choi et al. 2019). The ratio is considered necessary for investors and management. The management uses this ratio in knowing the profitability of the venture activities. It helps the investors determines real situation of company. Sometimes the net income, which is stated in “Financial statement” is high, but ratio of gross profit is low.

“Gross profit = Total sales - cost of goods sold”

“Gross profit margin = Gross profit / sales*100”

53841/76552*100 = 70.33 %

The total sales of venture and COGS are availed from income statement of firm. COGS is divided into small portion like labour and material. The formula of gross profit margin is COGS minus total sales divided by sales and multiplied by 100.

“Net profit margin = Net profit/ sales* 100”

19907/76552*100 =26%

”Net profit margin ratio” is also referred to as net margin. In the business operation, production of products or sales is done for the motive of revenue generation. The net margin calculates how much profit company is earning from the sale of a single unit of utility or product. The management, stakeholders and investors use this ratio for determining the functioning of company (Di Tella, 2017). Net margin describes the company management scenario; it reveals how company is administered and forecast. Net margin is used by investors to determine amount of operating expenses along with amount of non-operating expenses. It also depicts the amount which is used for paying shareholders of firm and the amount which will be used for reinvestment (Guay et al. 2016). The high amount of net margin is always preferable that the low margin. The high margin is better as it shows amount of sales in venture are turned into profits. The net margin tends to change frequently (Reis, 2015). The net margin doesn't mean that industry is less profitable than other industry (econstor.eu, 2019).

The formula for ”Net profit margin” :

"Net profit margin = net profit/ total sales."

The total profit and sales is amount which is earned by company from its activities during its financial year. The sales or total revenue is mostly inserted in the first column of income statement.

Profitability ratio for the year 2017

Gross profit: 55%

“Net profit ratio” is 12 %

In FY 2017, the ratio of gross profit is 55 %, and in FY 2018, the ratio is stated as 70 %. The gross profit of business organisation is used for measuring profitability of the business. This particularly calculates the marginal benefit which company is earning from additional sales of products. The ration is also used in measuring revenue generated from segments. The high amount of ratio is always right for the company. According to high ratio of gross profit, financial position of venture is good. From the above calculation, it is observed that the 2018 FY is more profitable for the business as there is a considerable increase in the ratio of gross profit from the past year. It can be noticed that company has maintained to increase the ratio of gross profit by 15 % in FY 2018 (bdc.ca, 2019).

In the FY 2017 net margin is 12 % and for FY 2018 it is recorded an amount of 26%. The Ratio of net profit is used in companies for evaluating and measuring the overall profitability of organisation. In the calculation of net profit, indirect cost is considered in addition to direct cost. The net ratio, which is high, is considered as better for company. It shows that the returns of company are positive and business is performing well. It can be observed that ratio of net profit is increased from last year that is 2017. The net margin was recorded as 12 %, which increased by 14 % in 2018. From this ration, it can be stated that company was performing good in 2018, and there is development of overall organization.

Conclusion

The above study is about the “Financial statement” and its contents. “Financial statement” represents the financial position of organisation by depicting its financial values related to expenses and revenue generation. The main components of “Financial statement” are balance sheet, income statement and “statement of cash flow”. In this report income statement for the company, John Spalding is prepared. In the preparation of income statement revenue of firm from all activities are taken. The calculation of gross profit is done in the income statement by deducting COGS from total revenue. The net profit is calculated by deducting all the expenses and interest of the loans which company has taken. The next statement which is prepared in this report is balance sheet. The balance sheet depicts all the asset of business along with its liabilities. This helps the analyst in determining the financial condition of company. The profitability ratio, which is discussed in this study, is related to profit margin of business operation. Discussion about ratio of gross profit and ratio of net profit is done in the study. The analysis is done on these two ratios and comparison of two years is done. The analysis states that the company is performing well and is increasing its profitability considerably. The analysis shows the amount by which profits of company is increased, which further indicates that company is in good condition.

Reference list

Books

Kieso, D.E., Weygandt, J.J. and Warfield, T.D., 2016. Intermediate Accounting, Binder Ready Version. US: John Wiley & Sons.

Journals

Al Attar, M. and Jordan, J., 2016. Corporate governance and “Financial statement” disclosure quality in Jordanian commercial banks. International Journal of Economics and Finance, 8(10), pp.192-205.

Albrecht, C., Holland, D., Malagueño, R., Dolan, S. and Tzafrir, S., 2015. The role of power in “Financial statement” fraud schemes. Journal of Business Ethics, 131(4), pp.803-813.

Amiram, D., Bozanic, Z. and Rouen, E., 2015. “Financial statement” errors: Evidence from the distributional properties of “Financial statement” numbers. Review of Accounting Studies, 20(4), pp.1540-1593.

Choi, J.H., Choi, S., Myers, L.A. and Ziebart, D., 2019. “Financial statement” comparability and the informativeness of stock prices about future earnings. Contemporary Accounting Research, 36(1), pp.389-417.

Di Tella, S., 2017. Uncertainty shocks and balance sheet recessions. Journal of Political Economy, 125(6), pp.2038-2081.

Guay, W., Samuels, D. and Taylor, D., 2016. Guiding through the fog: “Financial statement” complexity and voluntary disclosure. Journal of Accounting and Economics, 62(2-3), pp.234-269.

Reis, R., 2015. Comment on: "When does a central bank’s balance sheet require fiscal support?” by Marco Del Negro and Christopher A. Sims. Journal of Monetary Economics, 73, pp.20-25.

Online article

econstor.eu, (2019), Balance Sheet, Available at https://www.econstor.eu/bitstream/10419/173824/1/IDB-WP-740.pdf [Accessed on 15.03.19]

Website

bdc.ca, (2019), Income statement, Available at: https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/glossary/pages/income-statement.aspx [Accessed on 15.03.19]

Appendices

Appendix 1: “Financial statement”.

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