Accounting Assignment 1 Pyae Sone Ko Ko

Question : Explain how users can obtain benefit from reviewing financial statements. Evaluate
the financial statement of company using suitable financial ratio. (Appendix 1)

Financial Statements

Financial statement is a formal record of the financial activities and position of a business,
person or other entity. The objective of financial statements 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 such as owner, manager, shareholders, prospective investors, financial
institutions (eg. Bank), suppliers, customers, employees, competitors, public and government in
making economic decisions. Financial statements should be understandable, relevant, reliable
and comparable. It includes balance sheet, income statement, statement of changes in equity and
cash flow statement.

 Balance Sheet
The balance sheet provides an overview of assets, liabilities and stockholders' equity as a
snapshot in time. The date at the top of the balance sheet tells us when the snapshot was
taken, which is generally the end of the fiscal year.

 Assets : Something a business owns or controls (e.g. cash, inventory, plant and
machinery, etc.)
 Liabilities : Something a business owes to someone (e.g. creditors, bank loans,
etc.)
 Equity : it is what the business owes to its owners. This represents the amount of
capital that remains in the business after its assets are used to pay off its
outstanding liabilities. Equity therefore represents the difference between the
assets and liabilities.

 Income Statement (Profit and Loss Statement)

Unlike the balance sheet, the income statement covers a range of time, which is a year for
annual financial statements and a quarter for quarterly financial statements. The income

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Accounting Assignment 1 Pyae Sone Ko Ko

statement provides an overview of revenues, expenses, net income and earnings per
share. It usually provides two to three years of data for comparison.

 Statement of Changes in Equity

Statement of Changes in Equity, also known as the Statement of Retained Earnings,
details the movement in owners' equity over a period. The movement in owners' equity is
derived from the following components:

 Net Profit or loss during the period as reported in the income statement
 Share capital issued or repaid during the period
 Dividend payments
 Gains or losses recognized directly in equity (e.g. revaluation surpluses)
 Effects of a change in accounting policy or correction of accounting error

 Cash Flow Statement

Cash flow statement presents the movement in cash and bank balances over a period. The
cash flow statement merges the balance sheet and the income statement. Due to
accounting convention, net income can fall out of alignment with cash flow. The cash
flow statement reconciles the income statement with the balance sheet in three major
business activities. These activities include operating, investing and financing activities.
Operating activities include cash flows made from regular business operations. Investing
activities include cash flows due to the buying and selling of assets such as real estate and
equipment. Financing activities include cash flows from debt and equity.

Benefits of reviewing financial statements

Financial statements are essential for a business to understand the financial situation of that
business. There are a lot of benefits when enterprises take care and review their financial
statements. Some important benefits from reviewing financial statements are –
1. Understanding the financial status of our business

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One of the main purposes of doing business is to get profit. Therefore, every business
needs to know their financial status to determine whether getting profit or loss. We can
change our business strategy when we realize our business didn’t get enough profit after
reviewing our financial statements. Furthermore, we can understand the condition of our
financial position from data of financial statements.

2. Helping to make decisions for business

Business is about making decisions. Every business is making decision for their business
processes from day to day. Financial statements help business firm to make their decision
effectively. By reviewing financial statements, we can see the direction of our business
whether our firm is going on the right or wrong way. Then, the business owner can adjust
and make their decision through financial statements’ information.

3. Knowing how to allocate the budget

Every firm needs to adjust their budget according to their objective and financial status. If
the budget is enough and the target to reach our firm’s objective is still far, we can raise
our budget. When our budget is limited, we can adjust our objective in accordance with
our budget. To allocate our budget wisely, we need to know clearly about the financial
statements such as balance sheet, income statement and cash flow statement of our
business.

4. Providing financial information to stakeholders

Financial information is needed for stakeholders of a business such as owners, managers,
employees, investors, shareholders and government. A business firm needs to provide
information of financial statements to stakeholders to get trust and connection with them.
We can review our financial statements to know about profit or loss, equity changes,
assets and liabilities and share with our stakeholders to find better solution for our
business.

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Accounting Assignment 1 Pyae Sone Ko Ko

Financial statement of company using financial ratio

Profitability (%) 2014 2013

1 Gross Profit Gross Profit/Sales 33,000/150,000=22% 24,200/110,000=22%

Margin

2 Net Profit Net Profit/Sales 10,500/150,000=7% 6,500/110,000=6%

Margin

Return Ratio (%) 2014 2013

3 ROCE EBIT/(equity + Non 16,250/(95,000+55,000) 9,500/(90,000+5,000)

Current Liabilities) =11% =10%

Liquidity Ratio 2014 2013

4 Current Ratio Current Assets/ 27,000/25,000= 25,000/15,000=

Current Liabilities 1.08 : 1 1.67 : 1

5 Acid Test Ratio (Current Assets- (27,000-15,500)/ (25,000-12,000)/

Stock)/ (21,000+4,000)= (13,000+2,000)=
Current Liabilities 1:0.46 1:0.87

Gearing Ratio 2014 2013

6 Gearing Ratio Long term 55,000/ 5,000/

loan/Shareholder’s 95,000=58% 90,000=6%
Equity

Financial Efficiency Ratio 2014 2013

7 Total Assets Sales/ Total Assets 150,000/175,000= 110,000/110,000=

Turnover 0.86 time 1 time

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