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BBFA1103
INTRODUCTORY ACCOUNTING
QUESTION 1
INTRODUCTION
The purpose of financial statement analysis is to examine past and current financial data
so that a company’s performance and financial position can be evaluated and future risks and
potential can be estimated. Financial statement analysis can yield valuable information about
trends and relationships, the quality of a company’s earnings, and the strengths and weaknesses
of its financial position. According the International Accounting Standard Board (IASB), the
objective of financial reporting is “to provide information about the financial position,
performance and changes in financial position of an enterprise that is useful to a wide range of
users in making economic decisions.” Financial statement analysis begins with establishing the
objectives of the analysis. For example, is the analysis undertaken to provide a basis for granting
credit or making an investment? After the objective of the analysis is established, the data is
accumulated from the financial statements and from other sources. The result of the analysis are
summarized and interpreted. To evaluate financial statements, a person must be acquainted with
business practices, understands the purpose, nature, and limitations of accounting, be familiar
with the terminology of business and accounting, and be acquainted with the tools of financial
statement analysis.
tools for analyzing financial statements. Financial ratios establish relationships between various
items appearing on financial statements. Ratios can be classified into liquidity ratios, activity or
turnover ratios, profitability ratios and coverage ratios.
Financial statements are the reports of an entity’s financial transactions and event, and
they are prepared and used for many different purposes. There are three main types of financial
statements. Financial statements provide information about the results of operations, financial
position, and cash flows of an organization. These information are used by the readers of
financial statements to make decisions regarding the allocation of resources. The four main areas
of financial statements are income statement, balance sheet, statement of cash flows and retained
earnings. Financial statements are used by shareholders, executives, employees, investors,
potential lenders such as banks or vendors, and any other person or institution that needs to
analyze a company. All public companies are required to issue an audited set of general-purpose
financial statements by the Public Company Accounting Oversight Board. Most public
companies issue quarterly earnings reports as well as annual financial statements. This gives
potential investors more financial information about the company to base their decisions on.
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The Income Statement is one of a company’s core financial statements that shows their
profit and loss over a period of time. The profit or loss is determined by taking all revenues and
subtracting all expenses from both operating and non-operating activities. The income statement
provides the revenues, expenses, and profits (or losses) of an entity over a specific period of time
(usually quarterly or annually). Income statement inform the readers about the ability of an entity
to generate a profit. It reveals the volume of sales the nature of the various types of expenses,
depending upon how expense information is aggregated. The information can also be used to
analyze trends in the results of the company’s operations. The income statement is one of the
three statements used in both corporate finance (including financial modelling) and accounting.
This statement is a great place to begin the financial model, as it requires the least amount of
information from the balance sheet and cash flow statement. Thus, in terms of information, the
income statement is a predecessor to the other two core statements.
A balance sheet provide the readers about the current status of the business as the date
listed on the balance sheet. The balance sheet displays a snapshot of assets, liabilities, and net
worth (book value) of a company at a specific point in time (for example Dec. 31, 2017). These
information is used to estimate the liquidity, funding and debt position of an entity, and is the
basis for a number of liquidity ratios. It is the best accounting statement for analyzing the
financial position of an individual or company. It is also used alongside other important financial
statements such as the income statement and statement of cash flows in conducting fundamental
analysis or calculating financial ratios.
In financial accounting, a cash flow statement, also known as statement of cash flows, is
a financial statement that shows how changes in balance sheet accounts and income affect cash
and cash equivalents, and breaks the analysis down to operating, investing and financing
activities. The cash flow statement shows where an entity’s cash is coming from and where it is
going to. This statement separates the cash flow from operations, investing, and financing
activities in a consolidated statement. The statement of cash flows is to show the nature of cash
receipts and disbursement, by a variety of categories. As a group the entire set of financial
statements can also be assigned several additional purposes. Lenders use the entire set of
information in the financials to determine whether they should extend credit to a business, of
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restrict the amount of credit already extended. Investors use the information to decide whether to
invest, and the price per share at which they want to invest. An acquirer uses the information to
develop a price at which to offer to buy a business. Government entities may tax a business
based on its assets or income, and can derive this information from the financials. A union can
base its bargaining positions on the perceived ability of a business to pay; this information can be
gleaned from the financial statements.
Once liabilities and assets are known and a balance sheet is created, it is known whether
or not the shareholders have a positive or negative earnings. Retained earnings are broken down
and explained in the statement of retained earnings. This statement reveals what the company
keeps and does not distribute to the owners and how that amount changes over the reporting
period. Losses are called accumulated losses, retained losses or accumulated deficit.
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CONCLUSIONS
Once a set of financial statements are prepared they can be used for loan applications,
fund-raising or to place a value on a business. But they are typically used for making business
decisions that will affect operations. The numbers and calculations in the financial statements are
also used to calculate ratios and make further analysis. Common figures derived are operating
margins, debt-to-equity ratio, working capital and inventory turnover.
No one statement provides sufficient information for company financial analysis. But by
putting together the three financial statements, the analyst has the information needed to
understand the financial position, profitability, and operating, investing, and financing activities
of a company. All three company financial statements are connected. The profit or loss from the
income statement will be reflected in the assets and liabilities of the balance sheet. Changes in
cash flow will be displayed in both the balance sheet and income statement and vice versa.
In short, the financial statements have a number of purposes, depending upon who is
reading the information and which financial statements are being perused. Financial statement
are best means to determine what happened in the past and gauge current trends. Understanding
the purpose of company financial statements, and how each of the three relates to one another,
provides important information for company financial analysis. So we can conclude from the
above points that financial statements is very important from various stake-holders point of
views. At times large organizations it becomes very complex but the benefits are far more than
such complexities. We can say that financial statements contains reliable and relevant
information which are used by multiple stake-holders for various purposes. A sound and robust
financial reporting system across industries promotes good competition and also facilitates
capital inflows. This in return helps in economic development.
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QUESTION 2
General Journal
Date Accounts & Particulars Ref. Debit Credit
July
2018 RM RM
1. Cash 500,000
Capital 500,000
(Opening capital)
2. Motor Vehicle 60,000
Cash 60,000
(Buy a motor vehicle, paid by cheque)
3. Inventory 30,000
Cash 30,000
(Bought inventory, paid by cheque)
4. Cash 65,000
Inventory 30,000
Sales Revenue 35,000
(Inventory sold in cash) 65,000 65,000
5. Inventory 100,000
Account Payable 100,000
(Purchased inventory on credit)
6. Account Receivable 80,000
Inventory 50,000
Sales Revenue 30,000
(Inventory sold on credit) 80,000 80,000
7. Account Payable 30,000
Cash 30,000
(Payment to supplier)
8. Cash 40,000
Account Receivable 40,000
(Payment received from customer)
9. Drawings 10,000
Cash 10,000
(Neeta withdrew cash for personal use)
10. Motor vehicle's maintenance expenses 2,000
Cash 2,000
(Paid motor vehicle maintenance by cheque)
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Capital
Date Particulars Amount Date Particulars Amount
2018 RM 2018 RM
July Balance c/d 500,000 July Cash 500,000
August Balance b/d 500,000
Cash
Date Particulars Amount Date Particulars Amount
2018 RM 2018 RM
July Capital 500,000 July Vehicle 60,000
Inventory 65,000 Inventory 30,000
Account Receivable 40,000 Account Payable 30,000
Drawings 10,000
Motor vehicle's
Maintenance
Bank Loan 100,000 Expenses 2,000
Insurance Expenses 15,000
Balance c/d 558,000
705,000 705,000
August Balance b/d 558,000
Motor Vehicle
Date Particulars Amount Date Particulars Amount
2018 RM 2018 RM
July Cash 60,000 July Balance c/d 60,000
August Balance b/d 60,000
Inventory
Date Particulars Amount Date Particulars Amount
2018 RM 2018 RM
July Cash 30,000 July Sales 30,000
Account Payable 100,000 Sales 50,000
Balance c/d 50,000
130,000 130,000
August Balance b/d 50,000
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Sales Revenue
Date Particulars Amount Date Particulars Amount
2018 RM 2018 RM
July Balance c/d 65,000 July Inventory 35,000
Inventory 30,000
65,000 65,000
August Balance b/d 65,000
Account Payable
Date Particulars Amount Date Particulars Amount
2018 RM 2018 RM
July Cash 30,000 July Purchases 100,000
Balance c/d 70,000
100,000 100,000
August Balance b/d 70,000
Account Receivable
Date Particulars Amount Date Particulars Amount
2018 RM 2018 RM
July Sales 80,000 July Cash 40,000
Balance c/d 40,000
80,000 80,000
August Balance b/d 40,000
Drawings
Date Particulars Amount Date Particulars Amount
2018 RM 2018 RM
July Cash 10,000 July Balance c/d 10,000
August Balance b/d 10,000
Insurance Expenses
Date Particulars Amount Date Particulars Amount
2018 RM 2018 RM
July Cash 15,000 July Balance c/d 15,000
August Balance b/d 15,000
Bank Loan
Date Particulars Amount Date Particulars Amount
2018 RM 2018 RM
July Balance c/d 100,000 July Cash 100,000
August Balance b/d 100,000
Less: EXPENSES
Motor Vehicle's Maintenance
Expenses 2,000
Insurance Expenses 15,000
Motor Vehicle Depreciation Expenses 6,000 (23,000)
Net Profit 39,000
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CURRENT LIABILITIES
Account Payable 70,000
NON-CURRENT LIABILITIES
Bank Loan 100,000 170,000
Net Assets 529,000
OWNER'S EQUITY
Opening Capital 500,000
Add: Net Profit 39,000
539,000
Less: Drawings (10,000)
Closing Capital 529,000
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REFERENCES
http://bizfluent.com/about-5047231-purpose-financial-statements. html
http://www.arborinvestmentplanner.com/purpose-financial-statements-analysis/
https://www.edupristine.com/blog/financial-reporting
http://www.eagletraders.com/advice/securities/financial_statements_analysis.php
https://www.wikiaccounting.com/purpose-financial-statements/
https://www.accountingtools.com/articles/what-is-the-purpose-of-financial-statements.
html