IntroductionFinancial statements are one of the most significant tools that are used to assess the economic
stability and future projection of any business entity. Financial statements provide an essential
platform for stakeholders to be able to understand not only the existing standing of their finances
but also the possibility of growth and sustainability of the business in the future. This report
specifically focuses on Sure Ltd, a newly formed company that has just started its operations in
the month of July 2023, with a very sound financial base and strategic operational plans to
ensure strong financial health and efficacy of the business.
This report has, therefore, gone through the complex process of developing detailed financial
statements for Sure Ltd., which include cash flow statements, balance sheets, and income
statements. Such documents hold immense importance in the capacity of detailed cost benefit
analysis and prudent investment option breakthroughs. We shall go beyond developing these
financial statements towards discussing the key interpretation of data within them that will
facilitate stakeholders in making better decisions regarding the KPIs that include profitability,
liquidity, and solvency, which are the main indicators of the health of a company’s credit position
and overall financial standing.
I-Extracts for preparing financial statements of sole trading firm:
Financial Statements Preparation:
Income Statement for the Year Ending December 31, 2023:
Description
Revenue
Sales Revenue
Cost of Goods Sold
Opening Stock
Purchases
Less: Closing Stock
Total Cost of Goods Sold
Gross Profit
Operating Expenses
Advertising Expenses
General Expenses
Salaries and Wages
Outstanding Wages
Insurance Expenses
Less: Prepaid Insurance
Depreciation on Building
Depreciation on Plant & Machinery
Bad Debts Provision
Total Operating Expenses
Amount (OMR)
7000
700
2500
-375
2825
4175
150
175
1250
500
265
-120
540
11
19
2790
Net Profit
1385
Balance Sheet as at December 31, 2023
Assets
Non-Current Assets
Building
Less: Accumulated Depreciation: Building
Net Building Value
Plant and Machinery
Less: Accumulated Depreciation: P&M
Net Plant & Machinery Value
Amount (OMR)
5400
-790
4610
560
-461
99
Current Assets
Closing Stock (Inventory)
Debtors (Accounts Receivable)
Less: Provision for Bad Debts
Net Debtors
Cash
Prepaid Insurance
Total Assets
Liabilities and Equity
Current Liabilities
Creditors (Accounts Payable)
Outstanding Wages
Amount (OMR)
375
425
-114
311
1920
120
7435
Long-Term Liabilities
Bank Loan
Amount (OMR)
200
Equity
Opening Capital
Add: Net Profit
Less: Drawings
Total Equity
Amount (OMR)
5500
1385
-500
6385
Liabilities and Equity
Total Liabilities
Total Equity
Total Liabilities and Equity
Amount (OMR)
1050
6385
7435
Amount (OMR)
350
500
Ratios
Ratio
Profitability Ratios
Return on Equity (ROE)
Net Profit Margin
Liquidity Ratios
Current Ratio
Acid Test Ratio (Quick Ratio)
Efficiency Ratios
Inventory Turnover
Receivables Turnover
Payables Turnover
Analysis and Recommendations Due to Red Flags
Value
0.217
0.1979
3.21
2.77
5.26 times/year
16.47 times/year
7.14 times/year
Current and Quick Ratios:
• Analysis: The current as well as quick ratios are comfortably above the industry
standard (industry standard is 2 for the current ratio and 1 for the quick ratio). High ratios
indicate that the firm is enjoying great liquidity, and this gives the impression that the
firm may be underutilizing the resources.
• Recommendation: The firm should invest the excess cash in projects where it may get a
better return or would increase operational efficiency. The firm can also use up cash in
short-term investments that would generate extra income for the firm from liquid assets.
Inventory Turnover:
• Analysis: The inventory turnover ratio is average, and it suggests decent inventory
management practices. However, the being average, it is open for the suggesting of
improvements to speed up the release of cash and lower holding costs of the same.
• Recommendation: The firm should release capital across inventory levels by providing
the exact on-demand forecasting through just-in-time inventory practices, which will
effectively lower holding costs.
Receivables Turnover:
• Analysis: A high receivables turnover ratio reflected efficient credit and collection
policies. Still, very stringent credit policies may drive away customers.
• Recommendation: The firm should strike a proper balance in its credit policies—one
that is attractive and customer-friendly. Generous and flexible credit terms could gain
more customers that would increase sales yet continue with efficient collection policies.
Payable Turnover:
• Analysis: The payables turnover is the lowest of all turnover ratios, suggesting that the
firm is making its suppliers wait long for getting paid. Although it helps in maintaining
better control over cash, it should not spoil the relationship with suppliers.
• Recommendation: The company should pay its suppliers on time to have a healthy
relation with them and ensure a stable supply chain. The firm should negotiate better
credit terms with suppliers to ensure good cash flow without affecting the relationship
between the two.
Recommendations for Enhanced Profitability and Level of Assets
Investments in Expansion and Improvement in Operations:
• The company should invest its excess cash, as it has been identified from the high
liquidity ratios, in the development of new projects, technology, or expansion schemes
that will expand its revenue while improving its operational capabilities.
• New partnerships can be formed to enter new markets and introduce new products,
diversifying the revenue stream.
Operations Management in Inventory:
• The company can install a more sophisticated and just-in-time inventory management
strategy with better demand forecasting to decrease holding costs and increase inventory
turnover.
• The supply chain management can be optimized to ensure quicker turnover of inventory
and reduction in obsolescence.
Credit Policy:
• The credit terms can be balanced to make them attractive to the buyers at the same time
maintain an efficient collection system. This can increase sales without a significant rise
in bad debts.
• Discount on early payments may be introduced to turn quicker of the receivable
turnover.
Supplier Relation management:
• The healthy relation with the suppliers is ensured with timely payments. Therefore, this
will also secure the terms of the suppliers.
• Better payment terms can be negotiated to optimize cash flow management without
affecting the supplier’s relation.
Cash Management:
• The extra cash can be invested in short-term low-risk investments to earn extra cash.
• The estimation of cash flow should be reviewed at regular intervals to get the maximum
utility of resources.
II-Extracts for preparing financial statements of partnership firm:
Financial Statements Preparation for Choco Partnership Firm
Based on the trial balance provided for Choco Partnership Firm for the year ending December
31, 2023, let’s prepare the income statement and balance sheet. We will also calculate relevant
financial ratios and evaluate the firm’s performance, fulfilling the requirements set out in the
learning outcomes and assessment criteria.
Income Statement for the Year Ending December 31, 2023:
Description
Revenue
Sales Revenue
Less: Cost of Goods Sold (COGS)
Purchases
Opening Stock
Closing Stock
Total COGS
Gross Profit
Less: Operating Expenses
Administration Expenses
General Expenses
Rent
Commission Paid
Total Operating Expenses
Operating Profit
Add: Other Income
Commission Received
Profit before Tax
Less: Tax
Net Profit
OMR
351381
90000
150000
125000
115000
236381
60000
45900
63000
2300
171200
65281
4319
69600
69600
Appropriation Account Table
Description
Net Profit Before Appropriation
Appropriations:
Interest on Capital – Sharif
Interest on Capital – Naim
Partner Salary – Sharif
Partner Salary – Naim
Total Appropriations
Net Profit Available for Distribution
Profit Distribution:
Sharif
Naim
OMR
69,600
25,000
12,500
10,000
10,000
57,500
12,100
6,050
6,050
Balance Sheet For Choco Partnership Firm
Description
Assets
Non-Current Assets
Land
Machinery
Less: Accumulated Depreciation
Furniture
Less: Accumulated Depreciation
Total Non-Current Assets
Current Assets
Stock
Debtors
Cash
Total Current Assets
Total Assets
Liabilities and Equity
Current Liabilities
Creditors (Accounts Payable)
Total Current Liabilities
Equity
Capital – Sharif
Capital – Naim
OMR
310000
30000
12000
15000
2850
340150
125000
125000
13000
263000
603150
62000
62000
250000
125000
Current Account – Sharif
Current Account – Naim
Net Profit
Total Equity
Total Liabilities and Equity
60000
40000
69600
544600
603150
Profitability Ratios
Ratio
Profitability Ratios
Return on Capital Employed (ROCE)
Gross Profit Margin
Net Profit Margin
Liquidity Ratios
Current Ratio
Quick Ratio (Acid Test)
Value
0.1286
0.6728
0.1981
4.24
2.23
Critical Evaluation and Recommendations for Choco Partnership Firm
The firm’s profitability ratios, including Return on Capital Employed (ROCE) at 12.86%, Gross
Profit Margin at 67.28%, and Net Profit Margin at 19.81%, indicate decent performance but
room for improvement. The liquidity ratios, with a Current Ratio of 4.24 and Quick Ratio of
2.23, suggest excellent liquidity, although excess assets might not be utilized effectively.
To enhance profits and optimize asset utilization, the following recommendations are proposed:
1. Expand Revenue Streams: Explore new markets, introduce product diversification, and
target underserved segments to increase customer base and sales.
2. Cost Optimization: Negotiate better terms with suppliers, implement lean management
techniques, and improve operational efficiency to reduce costs and boost profit margins.
3. Investment in Technology: Invest in automation technologies, data analytics, and process
digitalization to reduce labor costs, increase efficiency, and enhance decision-making.
4. Asset Utilization: Invest idle cash in high-yield investments or business expansion, and
regularly upgrade machinery and equipment to improve productivity and reduce longterm operational costs.
5. Financial Management: Optimize working capital by improving receivables and payables
management, and leverage low-cost debt to finance high-return projects.
6. Employee Training and Development: Invest in skill enhancement programs and
implement incentive programs to motivate employees, leading to increased productivity
and profitability.
7. Marketing and Customer Relations: Develop customer loyalty programs, enhance online
presence, and strengthen digital marketing efforts to retain existing customers and attract
new ones.
III-Extracts for preparing financial statements of Not-for-profit organization:
Balance Sheet
Description
Assets:
Non-Current Assets
Investments
Motorbike
Current Assets:
Cash in Office
Cash at Bank
Subscriptions Outstanding for 2023
Total Assets
Liabilities:
Rent Outstanding for Dec 2023
Stationery Bill Outstanding
Total Liabilities
Capital Fund:
Opening Balance
Add: Surplus/Deficit for the Year
Total Capital Fund
Total Liabilities and Capital Fund
OMR
150,000
10,000
2,700
900
800
164,400
550
175
725
175,600
-11,925
163,675
164,400
Income and Expenditure Account for the Year Ending December 31, 2023
Description
Income:
Subscriptions (Net)
Interest on Investments
Bank Interest
Total Income
Expenditure:
Salaries
Rent (Net)
Printing and Stationery (Net)
Stamps and Postage
Loss on Sale of Car
Motorbike Purchase
OMR
28,200
15,000
200
43,400
30,000
4,850
2,175
1,100
700
10,000
Government Bonds
Total Expenditure
Surplus/Deficit
6,500
55,325
-11,925
Interpretation of Financial Statements
Organization
Not-for-Profit
Organization
Not-for-Profit
Organization
Ratio
Net Profit
Margin (27.49%)
Current Ratio
(4.24)
Description
Profitability after
accounting for all
expenses
Current Assets /
Current Liabilities
Not-for-Profit
Organization
Debt-to-Equity
Ratio (0.44%)
Total Liabilities /
Total Equity
Not-for-Profit
Organization
Income from
Subscriptions
& Investments
(OMR 43,200)
Surplus (OMR
-11,925)
Total income
generated from
subscriptions and
investments
Total Income – Total
Expenditure
Not-for-Profit
Organization
Interpretation
Operating at a deficit,
expenditures exceed income.
Indicates strong liquidity,
suggesting the organization can
cover its short-term liabilities
easily.
Shows low leverage, indicating
the organization has minimal debt
compared to its equity.
Represents a significant portion of
the organization’s income.
Indicates a deficit for the year,
with total expenditures exceeding
total income.
IV-Extracts for calculating, comparing, and evaluating ratios (profitability) using range of
measures and benchmarks (horizontal and vertical analysis) based on financial statements:
Summary of Financial Ratios and Analysis
Category
Gross Profit Margin
Net Profit Margin
Return on Assets (ROA)
Return on Equity (ROE)
Total Assets
Fixed Assets (% of Total Assets)
Current Assets (% of Total Assets)
Key Observations and Recommendations:
Moon Ltd.
20%
56.48%
63.33%
105.89%
OMR 26,750
45.34%
54.66%
Sun Ltd.
40%
46.26%
43.23%
385.50%
OMR 26,750
25.42%
74.58%
• Profitability: Sun Ltd has much higher ROE because of its much lower share capital,
and it, therefore would indicate to high returns on equity invested but also be indicative
of potential higher financial risk or leverage. Moon Ltd indicates better-balanced
profitability and asset utilization.
• Asset Management: Moon Ltd has a higher allocation in fixed assets relative to Sun
Ltd., the latter of which might indicate differences in operational strategies or capital
intensiveness.
• Risks and Opportunities for Growth: While Sun Ltd indicates higher returns, it is also
potentially very highly leveraged, which could be risky in times of financial stress. Moon
Ltd seems to manage a steadier financial base, with its eyes on sustainable growth.
• Investment Considerations: An investor may be more bent towards investing in Sun Ltd.
for capital appreciation reasons but must be warned about the higher risk on capital.
Moon Ltd may appeal to an investor looking for stability and consistent performance
(Palepu Healy, & Peek, 2020).
V-Extracts for preparing cashflows for the six-month period ending 31st Dec 2023:
Cash Flow Statement for the Six-Month Period Ending December 31, 2023
Particulars
July
Opening Cash
Balance
Cash Inflows
Sales Receipts (100%
collected)
Sales Receipts
(Discount)
Share Capital
0
Total Cash Inflows
Cash Outflows
Purchases (on credit)
Augu
st
485,0
00
Septemb
er
294,000
Octob
er
81,000
Novemb
er
-158,000
Decemb Total
er
-375,000
140,0
00
0
150,000
0
0
0
290,000
144,000
150,000
0
456,000
540,0
00
540,0
00
0
0
162,00
0
0
0
0
540,000
140,0
00
294,000
162,00
0
150,000
0
1,286,0
00
0
0
164,000
188,000
120,000
644,000
55,000
55,000
55,000
330,000
0
0
136,000
0
272,000
0
0
55,00
0
136,0
00
0
0
172,00
0
55,000
300,000
0
0
0
0
0
0
0
300,000
0
55,00
0
191,0
00
519,000
227,00
0
379,000
175,000
1,546,0
00
0
0
Salaries
55,00
0
Utilities (Bi-Monthly) 0
Equipment Purchase
Depreciation
(Estimate)
Total Cash Outflows
Net Cash Flow
485,0
00
51,00
0
-225,000
65,000
-229,000
-175,000 260,000
Financial Statement Analysis for Sure Ltd.
Cash Flow Analysis
The cash flow budget reveals potential cash flow deficits in the months of September (OMR
225,000), October (OMR 65,000), and November (OMR 229,000) primarily due to high
purchase costs and a significant equipment purchase in September. The presence of these deficits
in Sure Ltd.’s budget indicates a need for improved scalability and financial management.
Scalability refers to the organization’s capacity to handle increasing levels of work or demand.
Effective scalability demonstrates how well a business can manage growth and respond to
changing needs.
However, there still are surpluses forecasted for July (OMR 485,000) and December (OMR
29,000) because of the initial capital injection and higher sales collections, mainly with the
discounts being offered for advance payments. This itself goes to show the critical necessity of a
right and well-articulated cash flow plan so that there will be enough to meet the financial
obligations during at least the first six months of operation.
Recommendations
Look for Short-term Financing
• Sure Ltd. should arrange for short-term credit facility or loan against possible deficit
period, that is the month of September, when the cash flow deficit is high. This would help in
managing high outflows because the liquidity is available in the company.
Extended Credit Terms:
• Develop supplier relationships to facilitate negotiation for an extension of credit terms,
thereby allowing an easing of pressure on cash flows. Payment terms may now be matched
against cash inflows from sales so that they would be able to pay for the outflows from
purchases.
Delay Non-essential Purchases:
• To stockpile cash reserves for very important expenses, postpone all other expenditures.
Shape spending priorities based on immediate operational needs.
Optimize Receivables
• Discounts can be offered for early settlement of invoices. This will push for faster cash
inflows, thus keeping the liquidity in a better state.
Ongoing Monitoring
• Monitor cash flows continuously against the budget, ensuring that any variance is
identified as early as possible along with subsequent measures. Proactive monitoring allows for
problems to be foreseen and acted on before they become too severe.
Benefits and Limitations of Budgets
Benefits:
•
Better Financial Control and Planning: Budgets help in anticipating future financial
needs and planning accordingly, ensuring that resources are allocated efficiently.
•
Proactive Cash Flow Management: Identifying potential cash flow challenges early
allows for timely corrective actions, maintaining financial stability.
•
Resource Allocation: Budgets enable informed decisions regarding the allocation of
resources, optimizing their use to achieve organizational goals.
•
Performance Measurement: Budgets provide a benchmark for evaluating actual
performance, facilitating performance monitoring and improvement.
Limitations:
•
Dependence on Estimates: Budgets are based on forecasts and estimates, which may not
always be accurate. Unexpected changes can disrupt planned budgets.
•
Unforeseen Events: External factors such as market conditions, economic changes, and
unforeseen events can impact the budget.
•
Need for Continuous Monitoring: Budgets require ongoing review and adjustments to
remain relevant and accurate, demanding continuous attention and resources.
Corrective Actions and Budgetary Control
To address the identified cash flow deficits, Sure Ltd. can implement several corrective actions:
•
Negotiate Extended Credit Terms: Extend payment terms with suppliers to better align
with cash inflows.
•
Delay Non-essential Expenditures: Postpone purchases and expenses that are not
immediately necessary.
•
Seek Short-term Financing: Obtain short-term loans or lines of credit to cover periods
of cash shortfall.
•
Offer Early Payment Discounts: Encourage customers to pay early by offering
discounts, accelerating cash inflows.
Effective budgetary control involves regularly comparing actual cash flows against budgeted
amounts and making necessary adjustments. This ensures that Sure Ltd. stays within its financial
plan and uses resources efficiently.
Justification of Budgetary Control Solutions
Implementing effective budgetary control measures assists Sure Ltd. in making informed
decisions regarding resource allocation, identifying areas for cost savings, and optimizing cash
flow management. These practices ensure efficient and effective deployment of resources,
contributing to the overall success and sustainability of the company. By maintaining strict
budgetary control, Sure Ltd. can navigate financial challenges, capitalize on opportunities for
growth, and achieve its operational objectives.
References
1. Brigham, E. F., & Ehrhardt, M. C. (2017). Financial Management: Theory & Practice
(15th ed.). Cengage Learning.
2. Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting (16th
ed.). Wiley.
3. Palepu, K. G., Healy, P. M., & Peek, E. (2020). Business Analysis and Valuation: IFRS
Edition (4th ed.). Cengage Learning EMEA.
4. Penman, S. H. (2017). Financial Statement Analysis and Security Valuation (6th ed.).
McGraw-Hill Education.
5. White, G. I., Sondhi, A. C., & Fried, D. (2018). The Analysis and Use of Financial
Statements (3rd ed.). Wiley.
AP, A2 Firas Haider, ST11989,
F.docx
by Firas AL BULUSHI
Submission date: 24-May-2024 05:54PM (UTC+0400)
Submission ID: 2387256172
File name: AP_A2_Firas_Haider_ST11989_F.docx (39.85K)
Word count: 2931
Character count: 17603
No template page and table of content
Need citations
10
1
Introduction to : Sole Trader is required with clear citations.
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Have two columns : refer to LO2 notes
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This is an income: need to add
to gross profit
need two columns
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wrong figures
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No relevant at all
Critical Evaluations are required for the findings derived
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give a brief introduction to: partnership
1
wrong figures
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need recalculations
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add two columns here
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Not required- need suggestions depending on your findings.
1
1
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wrong figures
1
1
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wrong
1
1
Need vertical analysis
1
1
3
Wrong
figures: refer
to assignment
brief and LO4
notes
3
1
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Do not write anything in general
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Need task-wise conclusions
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AP, A2 Firas Haider, ST11989, F.docx
ORIGINALITY REPORT
21
%
SIMILARITY INDEX
6%
INTERNET SOURCES
1%
PUBLICATIONS
20%
STUDENT PAPERS
PRIMARY SOURCES
1
Submitted to College of Banking and Financial
Studies
16%
Student Paper
Submitted to International American
University
1%
3
www.slideshare.net
1%
4
jbitdoon.edu.in
1%
5
Submitted to University of Sunderland
1%
6
Submitted to West Thames College
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