Financial InformationPURPOSE FOR DEVELOPING AND PRESENTING FINANCIAL INFORMATION
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Financial Information
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PURPOSE FOR DEVELOPING AND PRESENTING FINANCIAL INFORMATION
International Accounting Standards 1(IAS1) prescribes precisely the basis of
development, presentation and the purpose of financial statements of any business entity whether
profit making or non-profit making. IAS 1 requires the preparation and presentation of the
common financial statements which comprise of the income statement, statement of financial
position, and the statements of retained earnings. Additionally, it requires the preparation of
statement of equity as well as the notes supporting those statements at the end of every fiscal
year. Therefore, the paper analyzes the purpose and the presentation of financial information
from the perspective of various stakeholders. Evaluate how the financial statements should be
developed and presented o support financial planning and decision making. Finally, evaluate
whether effective and appropriate judgments support the financial information.
Task 1: Financial information from the perspective of different stakeholders
Financial statement analysis and scrutiny provide the primary foundation for evaluating
the economic performance of any business enterprise. In this regard, the managers and the
shareholders should have the requisite skills and experience to analyze and interpret the
information contained in those financial statements.
The Financial Information
Financial information usually relates to the financial position and activities of an entity
and is normally presented in an understandable and structured manner to its intended users.
Financial information can be analyzed, summarized and presented in the form of cash flow
statements, balance sheets, statement of changes in equity, and income statements depending on
Financial Information
the intended users. Two accounting approaches are used to analyze and present financial
information: Financial and Management accounting.
Financial Accounting
This accounting field deals with the presentation of analysis and summaries, and reports
on financial transactions in the business. It comprises of preparing financial statements to be
used by different stakeholders including employees, shareholders, banks, and government
agencies to make various decisions (Minnis, and Sutherland, 2017, p. 200-225). It is mainly
concerned with presenting financial information to external stakeholders usually not involved in
the company’s day to day management. Information presented is historical and used to show
users how the company performed in the period being reported.
Management Accounting
Unlike financial accounting, this field of accounting deals with the presentation of
financial information to those involved in running the business (managers) to help them make
better management decisions (Martínez‐Ferrero, et al., 2015, p. 45-62). Information supplied is
used for risk management, performance management and strategic management of the business.
The information presented is mainly projections and predictions.
The analysis and the presentation of the financial statements/information, from both
management and financial accounting, provides essential information to various users in the
economy(internal and external stakeholders), who have direct and indirect interests in the
performance of the business entity.
Internal Stakeholders
Managers of the business require information contained in the Financial Statements to
control and manage the affairs of P& S Ltd, by assessing its financial position and performance.
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Using the financial information, the managers can conduct cost-volume-profit (CVP) analysis to
find the correlation between the variable and fixed costs, sales volume and profit margin
resulting from sales (Martínez‐Ferrero, et al., 2015, p. 45-62). Also, the managers conduct
contribution analysis which allows them to determine the pricing of the goods and reducing or
increasing the costs of variable costs. Break-even analysis by managers is made possible by the
use of financial information. For instance, the managers can use analysis sales volume at which
the profits gains exceed operational costs.
Employees use information of Financial Statements of P&S Ltd to determine the
company’s profitability index of the company and the market it operates and its consequence on
future remuneration on the employees. Since employees are concerned with job security, they
will always assess whether the company profits are enough to allow it to operate as going
concern. The bank overdraft figure 75,000 will form the basis of their analysis as they might
want to determine whether the profits of the company are either low or insufficient to pay the
salaries.
Shareholders who are the owners of the P&S Ltd require information from the company
financial statements to assess the risk as well as the return on their investment (Martínez‐Ferrero,
et al., 2015, p. 45-62). The analysis allows them to take appropriate action on when to buy and
sell their shares in the company. For instance, shareholders will consider earning per share (EPS)
and the dividend payout ratio to determine the value of their investment in P&S Ltd.
External Stakeholders
Financial Institutions such as banks use information in the P&S ltd Financial Statements
to determine whether it is creditworthy to grant bank overdraft to the company. These lending
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institutions must assess the financial health of P&S Ltd to determine the company ability to
repay its loans when they fall due (Minnis, and Sutherland, 2017, p. 200-225). Also, the banks
consider the company the availability of sufficient collateral security and liquidity of those assets
used as collateral when securing any loan from the bank. The P&S Ltd suppliers need the
company Financial Statements to assess the creditworthiness of the company to pay goods
supplied on credit.
The general public and the government also have interest in the information contained in
the Financial Statements of P&S Ltd. The public interest is on the company performance impact
on the growth of the economy, an environment where it operates and the local community at
large (Dumay, 2016, p. 170-182). On the other hand, the government needs the Financial
Statements of P& S Ltd to determine whether the company remits the correct amounts of tax
returns and determine whether the financial information incorrectly presented without
manipulation.
Task 2: How and Why financial information should be developed and appropriately
presented to support financial planning and decision-making
The central duty of managers of a company is creating value for money and other
resources allocated to the entity. To generate value, executive menders charged with the
responsibility of managing the entity must in a position to evaluate the impact of the financial
decision made in the entity. Such decisions require the managers of P& Ltd to have proper
understanding and application of financial analysis techniques together with the computerize
valuation methods (Adams, 2015 p.24). Developing appropriate financial information for the
P&S ltd is essential to the success of the entity both in the short-run and long-run. Due to its
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significance in determining the allocation of resources in various departments and operational
areas of the entity, care, and due diligence is necessary for achieving the required objectives.
First, setting the standards that the financial information to address in the financial
statements regarding the company. Giving priority in core areas that determine the success of the
company such as fixed assets, cost of operation and the capital required by the company must be
adequately reported in the financial statements to reduce financial misguidance (Adams,, 2015,
p. 36). Second, provide a proper framework for disclosing the financial information of the P&S
Ltd to fulfill the requirements of IAS1 and International Financial Reporting Standards
concerning the preparation of company financial statements. Ensure adequate discloser of all the
information of various items of the P&S ltd in its financial statements to enable comparability of
the performance of the company on various financial periods.
Financial metrics remain the viable and most accurate standards for assessing company
performance. Balanced scorecard tool supports the role and significance of finance in
establishing as well as monitoring specific financial goals of any business entity that operates
with the intent of making a profit (Lahmiri, 2016, p.269). For this reason, financial information
ought to be developed and appropriately presented for various reasons in decision making and
planning.
Analysis and interpretation of financial statements are fundamental when future decisions
of the company are to be made. A manager and another executive member of P&S Ltd would
analysis the net book values of fixed assets and fair value of intangible asset provided in the
financial statements before making a decision (Lahmiri, 2016, p.272). When making decision
and plans on asset management of the company, the management team will depend on the
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financial information of the current assets such as accounts receivable, closing inventory and
accounts payable of the company also sales volume to enhance management of the entity
working capital as well as cash conversion cycle (Rezaee,et al., pp 170-167). The income
statement of P&S ltd shows that accounts receivable is higher than sales and this requires the
company through its management team to decide on proper financial planning on how to
improve cash conversion cycle.
Financial decision and planning on the capital structure of P&S Ltd require proper
preparation and analysis of the information presented in the financial statements. Obtaining
optimal capital structure of the company is essential in minimizing the entity cost of capital. The
optimal capital structure determines the company’s capacity dependent on debt and equity capital
in financing its operations. In the case of P&S Ltd, the level o bank overdraft used to pay
company wages should under control to avoid causing financial distress to the company. The
decision to use retained earnings to finance the company operations should be more beneficial.
Therefore, developing and proper presentation of financial information in the financial
statements are essential in financial planning and decision making.
Task 3: Evaluation of financial information supported by effective and appropriate
judgments
Evaluation of financial information for P&S Ltd is essential since it enables the managers of the
company and other users of such information to gain a better understanding of the company
financial position. This requires review, analysis, and comparison of the various items appearing
in the company income statement. Liquidity ratios of the P& S Ltd measures precisely the
company’s ability to converts its current assets into cash to finance current financial obligations.
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For example, the P&S Ltd has high current asset ratio which means the entity is in position to
meet its maturing short-term financial obligations. For example, the liquidity position of the P&
S Ltd at the end of financial 2017 is as the computation below.
Current ratio = Current asset/current liabilities
= 2,550,000/ 1775,000
=1.4:1.
The computation indicates the company has slightly stronger liquidity position since it can pay
its maturing short-term financial obligations using the current assets. Analysis of P&S Ltd
efficiency ratios indicates how the entity utilizes its assets to generate sales revenue. Inventory
turnover indicates the rate of inventory or stock conversion to sales within the financial year. In
the case of above company, inventory turnover is computed as follows:
Inventory turnover = cost of sales/average stock
= 1,750,000/500,000
=3.5
The high ratio shows that P&S Ltd has better sales of its stock during 2017fiscal year.
Conclusion
In conclusion, the analysis of the financial statement of P& S Ltd assists the management
team and other stakeholders charged with the responsibility of management where the company
has shown efficiency and areas that require improvements. The income statement of the above
company indicates that management needs to improve on their debt collections from the
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accounts receivable to reduce the possibility of the company having bad debts in the future. The
company to improve on its financing strategies such as revenue collection from sales to reduce
the bank overdraft figure.
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References
Dumay, J., 2016. A critical reflection on the future of intellectual capital: from reporting to
disclosure. Journal of Intellectual capital, 17(1), pp.168-184.
Lahmiri, S., 2016. A variational mode decompoisition approach for analysis and forecasting of
economic and financial time series. Expert Systems with Applications, 55, pp.268-273.
Libby, R., 2017. Accounting and human information processing. In The Routledge Companion to
Behavioural Accounting Research (pp. 42-54). Routledge.
Martínez‐Ferrero, J., Garcia‐Sanchez, I.M. and Cuadrado‐Ballesteros, B., 2015. Effect of
financial reporting quality on sustainability information disclosure. Corporate Social
Responsibility and Environmental Management, 22(1), pp.45-64.
Minnis, M. and Sutherland, A., 2017. Financial statements as monitoring mechanisms: Evidence
from small commercial loans. Journal of Accounting Research, 55(1), pp.197-233.
Rezaee, Z., Sharbatoghlie, A., Elam, R. and McMickle, P.L., 2018. Continuous auditing:
Building automated auditing capability. In Continuous Auditing: Theory and Application
(pp. 169-190). Emerald Publishing Limited.
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