Fundamentals Of Accounting And Financial Management Assignment Sample

Introduction to Understanding the Fundamentals Of Accounting And Financial Management

This report aims to provide a complete summary of the objectives of the company GBP. By analyzing the company's background, the report will lay the basis for understanding the context in which its goals are followed. This report also aims to provide a straightforward analysis of the goals that are set by the management based on the financial reporting of the company. The task has focused on analysing the financial performance of the company by using financial analysis techniques. This report will also propose helpful insights for stakeholders and assist GBP Company in making informed and structured decisions for its future development and success.

GBP Company was established in 2005. It is considered a foremost leading company in the technology sector, specializing in software development as well as IT solutions. With being a global company and having a diverse portfolio of products and services, the company has proved itself to be a trusted provider of cutting-edge technology resolutions to a broad capacity of industries.

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1. Concept of financial statement and usage of the financial statements to report concerning the company

Financial accounting is a department of accounting analysis that focuses on the preparation and reporting of financial statements for its external stakeholders. The external stakeholders of the company are its investors, creditors, and regulators. It conducts the periodic recording, summarizing, and communication of financial statements about an organization's actions, performance, and financial situation. The primary purpose of financial accounting is to generate suitable and reliable attributes of the financial position of the company to help external stakeholders make informed judgments regarding investments. This information and the analysis of the financial statement are later proposed in the form of financial statements, which are formulated by expert accountants. The preparation of the financial statement also includes observing the designated accounting principles and standards.

Financial reported includes

• Income statement- It is also viewed as a Profit and Loss Statement of the company. The income statement generates an overview of the company's “revenues, expenses, gains, and losses” for the specific timeline (Atukalp 2023).
• Balance sheet - It includes the asset, shareholders' equity, and liabilities of the company. This helps to provide an overview of the financial position of the company (Jeenas 2019).

III. Cash flow statement- The inflow and the outflow of the cash are recorded in the cash flow of the company.

2. Elaborate on the key elements of the financial statements

Financial statements are critical tools used by the company to examine the financial analysis as well as the position of a company (Wahlen et al. 2022). It provides an in-depth understanding of a company's financial performance and status. “Direct costs, gross profit, indirect costs, and operating profit” help evaluate the profitability that is generated by the company's operations.

Examples of these key contents

• Direct costs- These refer to costs that instantly contribute to the production or purchase of goods or services. For example, in a manufacturing company, the “cost of raw materials, direct labor, and direct overhead costs” would be regarded as direct costs (de et al. 2021). Gross profit is computed by subtracting direct costs from the revenue yielded from the sale of goods or services.
• Indirect costs- These are also known as overhead costs. The expenses are not directly connected to a specific product or service (Rosslyn et al. 2020). These costs contain “rent, utilities, administrative salaries, and advertising expenditures”. Operating profit is acquired by deducting both direct and indirect costs from gross profit. It describes the company's profit before taxes and interest.
• Assets- This represents the resources possessed or owned by a company. “Current assets” are those that are anticipated to be transformed into money in a year, such as “cash equivalent, accounts receivable, and inventory”. “Non-current investments” are long-term resources, such as property, plant, and equipment (Charfeddine et al. 2020). For example, a case study could apply here in a software company with current assets like cash and accounts receivable, and non-current assets like computers and academic property rights.
• Liabilities- These are the debts or commitments of a company. “Current liabilities” are those that are predicted to be paid in a year, such as “accounts payable and short-term loans” (Kevorkova et al. 2019). Owner's equity defines the owner's investment in the company and is computed by subtracting total liabilities from total assets. In a real-life scenario, a retail store may have “current liabilities like unpaid bills and loans”, while owner's equity would contain initial investment by the owners.

3. Evaluate the usage of the financial statements by the relevant stakeholders.

Financial statements play an important role in delivering helpful data about the financial performance and status of a company. As per the view of NGUYEN and NGUYEN (2020), the financial statements have been including the “balance sheet, income statement, and cash flow statement”. The stakeholders relying on financial statements include owners, managers, as well as external parties such as “suppliers, banks, and tax administrations” like HMRC.

• Owners- The owners as stakeholders hold a substantial stake in the financial statements of a company. As opined by Lestari et al. (2021), they also specify the financial health of the company and make structured decisions about purchasing or selling shares. They are mostly encouraged by maximizing their finances and assembling investment judgments based on the financial status of the company.
• Managers- According to Mukhtaruddin et al. (2021), Managers are responsible to use the financial statements to evaluate the financial position of the company, assess its performance, and assemble strategic decisions. They are encouraged by maximizing profits, fully utilizing the resources, and providing the long sustainability of the organization.
• Banks and financial institutions- They use financial reports to assess the credit worthiness of a company when assessing loan applications. By examining financial statements, The banks are able to assess the ability of the company to repay its loans, its collateral worth, and financial strength (Hay and Cordery, 2021).
• Suppliers- Suppliers usually rely on financial reports to evaluate the financial health of their customers. By examining a company's financial reports, suppliers can consider the credit worth and payment ability of the customer (Xu et al. 2020). The assessment can enable them to structured decisions about expanding their credit duration or establishing appropriate credit limitations.
• Tax authorities- The taxation administration like HMRC uses financial reports to assure obedience to tax laws and restrictions (Hadipryanto et al. 2023). They examine financial reports to demonstrate and verify the accuracy of reported “income, expenses, and taxes paid”.

4. Defining the term financial management and financial connection “marketing, production, and Human resources”.

Definition of the Finance function

The finance function is the function that helps an organization manage and acquire financial resources for attaining or gaining profit. The finance function is involved in making decisions and justification about whether an organization should raise investment in fixed assets or not.

Role of Finance Function

The finance function generally helps the business in planning and making decisions according to the finance or budget of the firm. The finance function involves providing information about cost, cash flow, revenue, break-even point, profit and loss of the business, and performance of the business regarding finance.

The connection of the financial function-

• Marketing- Finance and marketing are interdependent via diverse elements. Firstly, finance generates the required funds for marketing actions such as advertising campaigns, market analysis, and product advancements (García et al. 2019). The finance function helps the organization assess the profitability and feasibility of the implemented marketing initiatives. This will ensure that resources are allocated equally or effectively to yield a maximum return on investment. Further, finance investigates the financial effect of marketing efforts, allowing it to estimate the success of campaigns and select their assistance to the organization's overall financial performance.
• Production- Finance plays a substantial role in production by handling the costs and financial resources involved with the process of production. It provides sufficient funds that are required for developing “raw materials, maintaining inventory, and managing production operations” (Lanza et al. 2019). Finance also assesses the financial strength of production projects, considering aspects such as ROI, cost-effectiveness, and profitability. By cooperating with the production process, finance enables production procedures to be financially endurable and the resources are fully utilized by the company, and the resources are distributed effectively.
• Human Resource Management- Finance and “human resource management” are interdependent in various ways. At First, finance supervises the budgeting and distribution of funds for human resource training such as hiring, training, and employee advantages. It assures that HR units are financially achievable and aligned with the organization's strategic purposes. Finance also cooperates with HR to handle compensation of the employee, payroll, and budgeting related to employees and expenses (Anwar, and Abdullah, 2021).

5. Calculating and interpreting financial ratios

“Profitability Ratio”:

The profitability ratio refers to the ratio of financial metrics which are used to evaluate the ability of the business in generating profit (Husain et al. 2020). It is termed an important financial metric for analyzing and measuring the financial health of the business.

Figure 2: “Calculation of Profitability ratio”

(a) “Gross Profit Ratio”:

It is termed the financial ratio that helps in measuring the profitability of the enterprise by evaluating the “gross income compared to total income”. The gross profit of the firm GBP Limited has been ascertained as “31% in 2020, 30% in 2021, and 31% in 2022. The computed value for the Gross profit has adequately interpreted that the profit made by the company after the deduction of the direct cost is effective as the ratio has increased by 1% from the year 2021. (b) “Operating Profit Margin Ratio”:

It is termed as a financial ratio that helps in outlining the “efficiency ratios” of the business by dividing operating profit by total revenue. “The Profit margin ratio” of the firm “GBP Limited” has been ascertained as “10% in 2020, 7% in 2021, and 5% in 2022”. The evaluated value has implicated that the position of the company has changed ineffectively as the operating profit margin is reduced each year.

(c) “Net Profit Margin”:

It refers to the financial ratio that helps in evaluating the efficiency of the business by dividing the “Net income by Total income”. “The net profit margin” of the firm GBP Limited had been ascertained as “8% in 2020, 7% in 2021, and 5% in 2022”. The Net profit margin ratio has also been deducted from the past year which has clearly reflected that the company has less cash for new investment.

“Efficiency Ratio”:

“Efficiency ratio” is termed as a ratio that helps in evaluating the efficiency of a business in using its resources wisely (Hariani et al. 2020). Managers use this kind of ratio for improving insights in operational activity as well as asset management. The use of the efficiency ratio can mainly help company in measure the strategy to use available resources in an adequate manner.

Figure 3: “Calculation of Liquidity, Efficiency, and Gearing Ratio”

(a) “Assets Turnover Ratio”:

It refers to a matrix that helps in measuring the efficiency of a business about how efficiently the resources are used in accumulating revenue or sales. It had been identified that a good “assets turnover ratio” is 2.5 or more. The ratio that had been ascertained is “1.7 in 2020, 1.4 in 2021, and 1.3 in 2022”. The Company has evaluated its efficiency ratio in terms of asset turn over which has decreased in each consecutive year from 2020 to 2022. It has implicated that the company is not using adequate strategy to use available resources to generate a high range of revenue.

“Liquidity Ratio”

It is termed as a matrix that helps in measuring the company's ability to meet or pay the debts quickly. It has been identified that a higher ratio indicates towards efficient payoff of debts. It involves computing the liquidity of the company. The company can mainly use its liquidity ratio to measure required performance to meet short-term obligations and maintain its position in the market.

(a) “Current ratio”:

“Current ratio” is termed as a matrix that is being used by the firm in measuring the ability of the company to pay off the short-term debt within one year. The “Current Ratio” that have been ascertained is “1.03 in 2020, 0.72 in 2021, and 0.62 in the year 2022”

(b) “Quick ratio”:

“Quick ratio” is termed as a matrix that is derived by dividing the quick assets of the business to the current liabilities. The “Quick Ratio” has been derived by the firm as “0.71 in 2020, 0.51 in 2021, and 0.62 in 2022”.

“Gearing Ratio”:

“Gearing ratios” are termed as the ratio that is derived by dividing the Total Debts by the Total equity of the firm. The “Gearing ratio” of the firm is “0.42, 0.30, and 0.43”.

The computed ratio as Current ratio, Quick ratio and Gearing Ratio has adequately implicated that the ratio is consecutively decreased which has reflected the ineffective position of the company to meet the short-term obligation in a required time period.

6. Elaborating the demerits of financial ratio analysis that are being used by different kinds of stakeholders

Limitation of Ratio Analysis:

Ratio Analysis is termed the analysis of the financial statement of the firm for evaluating the performance and position of the organization (Haralayya, 2021). It involves accumulating the financial statement of the company regarding improving insights through preparing various kinds of ratios.

(a) “Only based on Historical”:

It had been analyzed that the information that is used to prepare ratio analysis is ascertained from historical results. Ratio analysis is prepared from the financial statement of the firm which is a part of the historical information of the firm.

(b) “Changes in accounting policies”:

It had been analyzed that if the firm will change its accounting policies, then it will give an impact on the financial reporting system. In this case, the metrics that the businesses are using are altered and the results that are recorded will not be the same as before.

(c) “Inflationary effects”:

It had been identified that the financial statement of is released periodically over the end of each year. Therefore, if any kind of inflation occurred in the middle of the year then the financial statement would be different in terms of the price of the products and services.

(d) “Company Strategy”

It had been analyzed that it can be dangerous for preparing a ratio analysis for comparing the two companies that are using two different kinds of strategies. For instance, if one company is using a strategy for enhancing its market share and another is focusing on a customer service strategy.

7. Elaborating the concept of Budgeting and evaluating its role in controlling, planning, and decision-making

Definition of Budget:

Budget refers to the amount of money that a firm creates regarding making investments for plans or projects. It also involves spending on business activities for attaining the financial goal of the organization (Oluyisola et al. 2020). Budgeting helps a business in planning or estimating the expenses towards reaching the goal of the business and tracking the performance according to the budget estimated.

Figure 4: “Derivation of three responsibilities of management”

(Source: Oluyisola et al. 2020)

Role of budgeting in controlling, planning, and making decisions:

It had been analyzed that budgeting plays a vital role in planning, controlling and making decisions for the organization. Implementation of the strategic plan in business is taken by the managers according to the budget. It had been identified that planning is termed as developing or creating a plan for attaining or reaching the object of the business. Controlling is termed as the process involved in monitoring the plan. The budget plays a vital role in planning as it identifies the cost, revenue, and potential cash flow that are necessary for the implementation of the plan. Controlling involves controlling the budget and monitoring the cost and revenue as well as reviewing the plan and actual performance within the determined budget. The Role of Budgeting in making decisions involves assisting the managers in making decisions regarding raising investment on the projects within the budget that will result in attaining the goal of an organization.

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Summary

It had been concluded that budgeting plays a vital role in controlling, planning, and taking decisions according to the business. It had been identified that the budget evaluates the targeted sale, inventory, and staff planning so it made it easy for the managers regarding with making decisions and estimate of cost that would be spent on performing specific tasks. It had been identified that ratio analysis is a useful technique for making assumptions about the financial position of the firm but it has certain limitations. The findings of the company state that the financial status of the company is increasing year by year. The company must focus on investment and try to pursue projects that can help the company to enhance its financial position in the market. The calculation of the ratio analysis states that the company has a strong financial position and competitive edge in the market.

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