Unit 5 Accounting Principle: Financial Reporting Guide Assignment Sample

1: Introduction

This report will focus on financial reporting and presentation of statements in which the main organisation concerned is Better Furniture. First part of this report will provide a critical evaluation of accounting roles in which purpose, ethical and regulatory constraints and multiple roles of accounting will be evaluated. The second part of this report will offer coverage for preparation and presentation of financial statements where income statements and balance sheets will be considered. Application of ratio analysis will be the third part executed in this report in which comparative trend analysis for multiple periods will be considered. Budgeting will be the fourth part in this report where preliminary emphasis will be offered to present a cash budget while subsequent detailing will be offered for identifying benefits and limitations of budgets. Discussion on identification and justification on corrective budgetary planning actions accompanied with solutions and impacts will also be conducted in this part of the report.

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2: Critical evaluation of accounting role

The role of accounting is identified as a crucial strategic framework for an organisation whose primary intention is associated with reporting actual figures based on annual performances achieved. The accounting role also serves the purpose of maintaining integrity for all major accounting functions of an organisation due to which sustainability is appropriately maintained. As per critical observations of Grossi and Argento (2022), the accounting role is also intended to primarily record transactions which can however be manipulated due to extensive internal influence. Hence, accounting roles are often subject to criticism due to which extensive independent and external influence is required for organisations to accurately project annual financial results. Accounting roles can be further conceptualised on the basis of defining the purpose of the accounting function which is elaborated as follows.

2.1: Purpose of accounting function

The purpose of accounting functions predominantly involve financial management, maintaining parity with ancillary organisational operations and strategic decision making. These purposes are further individually discussed as follows which is applicable to Better Furniture.

Financial management

Financial management is the primary purpose of the accounting function in which Better Furniture is needed to correctly identify how future sustainability is to be maintained from available current parameters. Financial management can be conducted based on creating more investment opportunities or by considering market and industrial expansion into broader geographical territories. Kraievskyi et al. (2020), illustrated that financial management as an accounting function can aid an organisation by creating more financial channels and resources through which surplus reserves can be held at all times.

Maintaining parity with ancillary operations

Maintaining parity with ancillary operations is the second purpose of accounting function in which Better Furniture is required to appropriately mobilise other operational areas from available financial resources. This can potentially include expanding more budgetary allocation towards critical organisational activities such as recruitment and corporate governance due to which future productivity can be maximised. Parity with ancillary operations is an important part of the accounting function due to which all departments and branches can efficiently perform to its full capacity and potential due to which higher external interest can be generated.

Strategic decision making

Strategic decision making is the third purpose of accounting function in which Better Furniture can incorporate and take proactive business decisions which replicate towards continual growth. Strategic decision making as part of accounting function prioritises on collaboration and communication where extensive coordination among internal and external stakeholders is needed to be facilitated. As per critical opinions of Battilanaet al. (2022), strategic decision making is therefore prone to vulnerability and can lead to conflicts between stakeholders due to which implementation of a particular plan or strategy can get deferred or shelved. 

2.2: Ethical and regulatory constraints

Ethical and regulatory constraints associated with accounting function mainly include consistency, timelines and materiality which are individually elaborated as follows.

Consistency

Consistency is the first ethical and regulatory constraint applicable to Better Furniture where a consistent approach is needed to be followed irrespective of changes experienced in organisational structure. The consistency constraint is largely applicable for following a specific and a singular accounting approach where preferably the accrual concept must be followed for preparing financial statements (Paisey and Paisey, 2020).

Timeliness

Timeliness is the second ethical and regulatory constraint where frequency of releasing financial results is needed to be determined by Better Furniture. The timeliness constraint can be a vulnerable proposition as the majority of organisations publish results in an annual as well as in a quarterly or half-yearly basis. As critically opined by Austin et al. (2021), due to multiple result publications, originality of results is often compromised due to which auditory lapses are visible and can relegate stakeholder association for an organisation.

Materiality

Materiality is the third ethical and regulatory constraint applicable for Better Furniture in which adherence to provide material financial information is needed to be obligated and disclosed in favour of stakeholders. Materiality is a crucial constraint in order to ensure rationality and coordination with external stakeholders due to which productive long-term financial decisions can be undertaken.

2.3: Role of accounting in meeting organisational needs

Role of accounting in meeting organisation needs of Better Furniture is mainly associated with identifying the proportion of profits that are generated from operational and financial activities conducted. The additional role of accounting to meet organisational needs also involves identifying the proportion of assets and liabilities as well as to determine organisational net worth generated during a financial calendar. These roles are identified to be crucial in complex and challenging environments in order to ensure stability and industrial durability. Additional importance can also be offered to incorporate subtle structural changes which benefit an organisation with more financial rewards in the near and distant future (Olojede and Erin, 2021).

2.4: Role of accounting in meeting stakeholder and wider societal needs

The role of accounting in meeting stakeholder and wider societal needs is mainly associated with an organisation making informed decisions due to which stakeholder and societal integrity is given the utmost importance. Perhaps, stakeholder and societal integrity can be compromised when an organisation faces a turbulent and challenging environment in which survival is only considered and scope of returns is rationed. As per critical expressions of Nicholls (2020), rationing of stakeholder and societal needs can contribute to passive participation due to which an organisation is expected to suffer from continuity. Hence, it is imperative that extensive financial planning is conducted by Better Furniture to ensure harmony with stakeholders and societies despite prevailing challenges.

3: Financial Statements

Involving the proper accounting principles, traditions, and measures is essential to producing an income statement and balance sheet for the year concluding April 5, 2024, and providing the required modifications accurately recollect the company's interpretation and financial quality.

3.1: Income Statement

The income statement provides a summary of the company's sales, costs, and payments for the accounting duration, periodically reaching the profit and loss information. Choosing the company's profitability for the fiscal year is the primary objective of the income statement. As cited by Olayinka (2022), the title of all income references is the first stage in the innovation of this information, and then costs and payments are deducted. The company's sales income for the year ending April 5, 2024, is £30,000. According to the accrual declaration, which documents capital as affected regardless of when cash is accepted, sales remuneration is acknowledged.

Figure 1: Calculations of Profit and Loss Statement

Finding the “Cost of Goods Sold (COGS)” is the next stage in creating the income statement. The direct expenses incurred in manufacturing the products that the business sells throughout the fiscal year are represented by COGS (Weetman, 2019). It consists of the year's acquisitions, the initial stock, and the ending stock less one. The initial stock for this year is £2,050, and the total amount of purchases made is £10,800. The closing stock of £1,250 is subtracted, bringing the total COGS down to £11,600. The matching declaration, which ensures that costs are documented at the exact time as the earnings they helped create, is observed in the calculation of COGS.

Subtracting the COGS from the total sales amount yields the gross profit for the year is £18,400. The term "gross profit" refers to the company's earnings before deducting interest, taxes, and operating expenditures but after subtracting direct costs (Augustyniak, 2020). The consistency principle, which guarantees that the same accounting procedures are used consistently between periods, is in the recording of these costs. The business's operating costs for the year ending April 5, 2024, are as follows: rent and rates (£1,400); “wages and salaries (£8,520);” utility bills (£1,750); depreciation on the van (£375); interest on the bank loan (£270); insurance premium (£700); and petrol and repairs (£530).

The straight-line technique, which distributes the asset's cost uniformly across its useful life, is used to compute depreciation. For example, the depreciation on machinery and equipment is £1,300 for the year, with an initial value of £15,000, a residual value of £2,000, and a useful life of ten years. The prudence principle, which makes sure that assets are not overvalued and that proper allowances are made for their wear and tear over time, is applied to depreciation (Arya and Nagar, 2021). Similarly, the vehicle has £375 annual depreciation expenditure; it is priced at £1,500 and has an anticipated four years of useful life.

3.2: Balance Sheet

The balance sheet, which details the company's “assets, liabilities, and equity,” provides a quick summary of its economic circumstances after the fiscal year. The computation formula, which leads to “Assets = Liabilities + Equity”, is used to generate the balance sheet. As opined by Hasanaj and Kuqi (2019), to guarantee the accuracy and completeness of the company's financial accounts, this equation has to balance.

Figure 2: Calculations of Balance Sheet

There are two categories for assets: current and fixed which is current assets include things like inventories, cash and cash equivalents, and debtors (accounts receivable) that are expected to be utilised or transformed into currency within a year. £1,250 is the closing stock value of the corporation, and it is shown as a current asset. Conversely, fixed assets are long-term investments that yield returns for the business over some years (Fagereng et al. 2021). These consist of the vehicle, which is worth £1,125 after depreciation, and the machinery and equipment, which is valued at £13,000 after depreciation. The corporation has £14,250 worth of assets in total.

There are two categories of liabilities: current and long-term and liabilities classified as current include debts and short-term loans that have a one-year maturity date. Long-term liabilities are debts, like long-term loans, that have a maturity date longer than a year (Xing et al. 2020). The establishment’s net assets, or the shareholders' equity, are then computed by removing the total liabilities from the total assets. Equity, usually comprehended as shareholders' equity, is the owners' insistence on the business's investments upon the accommodation of all obligations. Moreover, it consists of the proprietor's actual capital acquisition; any additional capital counted throughout the year, and retained payments, which are constructed up of the net profit for the current year plus the incremental earnings from previous years.

4: Application of ratio analysis

Examining a combination of financial measurements is compulsory to consider a company's economic performance and situation objectively. These ratios help statements on the business's profitability, liquidity, efficiency, and investment recoveries, among other specialties. The generalisations are around the company's functional effectiveness and financial strength by comparing the ratios over a period and against suitable prototypes.

Figure 3: Calculations of Financial Ratios

4.1: Profitability

Indispensable identifications of a business's capability to construct profits affecting sales, assets, and equity are profitability percentages. The gross profit margin and net profit margin are the two consequential profitability ratios which are calculated below:

Gross Profit Margin

The instructions for computing GPM is (gross profit / net sales) * 100 and the company's gross profit margin for 2024 is 61.33%, meaning that after subtracting the “cost of goods sold (COGS),” it keeps £61.33 from every £100 in sales. As stated by Nariswari and Nugraha (2020), if Better Furniture is outperforming its competition or has improved its cost management, this ratio can be compared to the prior year or industry benchmarks.

Net Profit Margin

(Net Profit / Net Sales) * 100 is the formula for calculating the net profit margin, which is 11.85% in 2024. The ratio shows the portion of sales that, after subtracting all expenditures like taxes, interest, and operational expenses, converts into profit. With a net profit margin of 11.85%, the business is considered to be fairly lucrative, making a profit of £11.85 for every £100 in sales. The profit margin is good, sometimes business also shows how non-operational costs affect profitability as a whole (Handayani and Winarningsih, 2020). This may be compared to industry norms to see how well the business is managing its finance and overhead expenses.

4.2: Liquidity

The capacity of the business to pay short-term debts without having to raise more cash is gauged by liquidity ratios. The current ratio and the quick ratio (also known as the acid test ratio) are the two main measures of liquidity and are calculated as follows.

Current Ratio

As (Current Assets / Current Liabilities), the current ratio is calculated and the corporation has 2.95 current assets for every £1 in current liabilities as of 2024, or a current ratio of £2.95. As opined by Husna and Satria (2019), the business appears to be in a good position to meet its “short-term obligations” with its “short-term assets,” as indicated by this ratio, which is a strong sign of liquidity.

Acid Test Ratio

A stricter indicator of liquidity is the “Acid Test Ratio”, which is computed as (Current Assets - Closing Stock) / Current Liabilities. In the quick ratio, the firm has adequate liquid assets to pay down its short-term debts, indicating a strong liquidity position (Shkurti et al. 2021). With a Quick Ratio of 2.57 for 2024, the interaction can spend its bills proper away without maintaining to sell any inventory.

4.3: Efficiency

Efficiency ratios evaluate a company's ability to maximise earnings and create sales by efficiently allocating its assets and liabilities. The inventory turnover ratio and asset turnover ratio are important to successfully controlling major business opportunities and is calculated as follows. 

Inventory Turnover Ratio (ITR)

The formula to compute the ITR is (COGS / Average Inventory) and the ratio for 2024 is 4.34, meaning that the business rotates its inventory about 4.34 times a year. Understanding this ratio is important to calculating how successfully the corporation manages its inventory statuses. A heightened ratio usually indicates that inventory is governed better actually, which lowers obsolescence risk and maintains expenses (Amanda, 2019). On the other hand, an excessively increased ratio might recommend that the interaction is not controlling adequate inventory on hand to complete the directive, which could result in stock outs and misplaced income.

Asset Turnover Ratio (ATR)

The procedure to choose the ATR is (sales revenue / total assets) and with a ratio of 1.23 in 2024, the company is predicted to create £1.23 in sales for every £1 in support. This ratio estimates how well the company develops income from its investments. A more pleasing benefit of assets to facilitate sales is demonstrated by a more excellent ATR (Patin et al. 2020). The balance for the Better Furniture indicates the rather efficient usefulness of assets, yet there could be freedom for expansion. It is possible to demarcate if a Better Furniture is maximising its asset possibility for its competitors by benchmarking this ratio against industry standards.

4.4: Investment

Return on Investment (ROI)

ROI has been calculated as 24.49% in 2024 for Better Furniture and the formula is (net profit / total equity) * 100. This substantial (ROI) demonstrates that the corporation is making acceptable usage of its equity foundation to turn earnings, which constructs it a desirable acquisition. A greater return on investment (ROI) in comparison to prior years or industry standards may be a sign that the business is becoming more profitable and efficient and, as a result, offering investors better returns.

5: Budgeting

5.1: Cash Budget

Figure 4: Cash Budget

From the above figure of cash budget, it is determined that the net cash movement from January to June has been measured as GBP -4,210, 1,290, -2,710, 1,290, 10,106 and GBP 606 respectively. Based on the above calculations, it is determined that surplus cash is observed for the months February, April, May and June while adverse cash movement is observed for January and March. As per opinions and views of Oktari et al. (2020), a surplus cash balance is considered to be an advantage for an organisation due to which more activities can be fed with financial inputs to enable mobilisation.

5.2: Benefits of cash budget, budgetary planning and control

The benefits of cash budget, budgetary planning and control predominantly include the ability to maximise our liquidation due to which more expenses can be covered without major disturbances. Cash budget, budgetary planning and control are also beneficial for Better Furniture to strategically spend in order to ensure alignment with budgeted spending that is being predetermined. As per statements and expressions of Namazi and Rezaei (2024), cash budget and budgetary planning is also beneficial for a company to project near accurate future forecasts due to which target planning and necessary to-do-lists can be prepared. Fund management can also be conducted in a reliable manner when Better Furniture initiates strategic implementation of cash budget, budgetary planning and control.

5.3: Limitations of cash budget, budgetary planning and control

The main limitation of cash budget, budgetary planning and control applicable to Better Furniture involves extensive time consideration required to appropriately prepare and present budgets. As per critical narratives and views of Lord (2023), high time consideration in budgetary preparation is likely to reduce organisational productivity due to which strategic alignment and mobility is likely to suffer. Additional limitations include unrealistic goals and objectives determined through budgets which can become a burden for stakeholders to meet and facilitate. This is likely to upset active participation particularly from internal stakeholders due to which organisational credibility of the company is bound to be impacted. 

5.4: Identification and justification on corrective actions for budgetary planning

Problems identified

Problems identified with respect to the above cash budget mainly include lack of purchases considered for May as well as lack of merger initiated for redundant or non-important cost items. The lack of merger for redundant cost items especially considering exclusion of utility expenses as part of marketing expenses has led to high cash payment obligations for Better Furniture due to which surplus balances have significantly lowered. As per critical views of Carolina (2020), lack of purchases is considered to be a demerit due to which production capacity and output generation opportunities are expected to suffer.

Corrective actions and solutions suggested

On the basis of the above problems identified, corrective actions and solutions suggested predominantly involve detection of more sources through which cash receipts can be magnified. This is to be exercised if individual cost items are needed to be kept separate for ensuring higher cash available to Better Furniture for encouraging financial mobility. Additional solutions involve revision needed to be carried out in budgetary planning in which appropriate forecasts are drawn to ensure sustainability in the long run.

Impacts on organisational decision making

The expected impacts on organisational decision making predominantly involve favourable characteristics if implemented in a proper mannerism by the managerial concern of Better Furniture. The favourable characteristics could possibly involve better financial planning that can be initiated in the long run due to which operational coordination and profit maximisation can be thoroughly achieved. The adverse impacts however could lead to increase in future costs if initiated plans are not executed in a perfect order. This can compromise future longevity and stability of Better Furniture in the markets and industries and can also reduce future stakeholder participation. 

6: Conclusion

Based on the above context it can be concluded that the use of basic accounting principles, conventions. In response to question 2, accounting's goals are to monitor, record, and evaluate financial transactions to support compliance and decision-making. Stakeholders may make informed judgments by thoroughly comprehending the company's financial performance and status in question 3 with the aid of these financial statements. Through the examination of these financial statistics, several inferences on the performance of the Better Furniture in 2024 may be made.

The profitability ratios in question 4 indicate that the company is maintaining a strong gross profit margin; nevertheless, net profit margins might be raised by controlling non-operational expenses. The firm appears to have a good buffer of liquid assets and a strong capacity to satisfy its short-term commitments, based on the liquidity ratios. Efficiency ratios show that the business is effectively using its assets to produce sales and manage its inventories, yet there may be room for improvement in this area. While a 6-month cash budget in question 5 can help with short-term financial planning, it may not account for long-term trends or unforeseen costs. 

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