A.

From the sets of comparative financial statements that will be given to you, provide sufficient evidence on the following: 1. Explain the purposes of the main financial statements. (4.1)

The existence of financial statements is to inform the management of the business the results of its operations over a period of time and to determine its worth at a specific date. Financial statements are used and prepared by business people in evaluating their financial condition and their decision making. Business financial

statements are sometimes necessary to be provided at the request of a banker or supplier for tax returns or loans. A basic set of financial statements will consist of an Income Statement, which shows the profit or loss over a period of time, and a Balance Sheet, which is a summary of the Assets, Liabilities and Equity of the business at a specific date. Sometimes, a Statement of Cash Flows may be prepared, which summarizes the receipts and disbursements of cash during the period. This is often a used for management and owners to see where the cash is really going

Describe the accounts presented in the Balance Sheet and the Income Statement. M2 describe the accounts in the balance sheet that Ms. gave

Under the income statement, sales, costs and tax deductions are stated of a company during a certain period of time. Stated on the top is the Net sale of that period of time (time is usually by year or by month). Net sales are basically the number of goods sold multiplied to the price they were sold at. Next are the several different cost occurred with the sales, these are cost of goods sold, selling, general and administrative expenses, depreciation. Cost of goods sold, is the total cost of those goods. Selling, general and administrative expenses are basically the sum of all direct and indirect selling expenses and all general and administrative expenses of a company.

Depreciation is indicates how much of an assets value has been used up within a given period of time of its life value. After deducting all the costs from the earnings before taxes are then presented. Earnings before taxes are basically sales deducted by cost of goods, general and administrative expenses and depreciation. Using the earnings before taxes income taxes is then deducted for the actual earnings after taxes Cash dividends are money that is deducted from the earnings after tax, to be paid to stakeholders of the company, what is left from the earnings after (retained earnings) are profits not used and just kept for future uses of the company. Under the balance sheet, there are two main parts; The assets and Liabilities and Net Worth. Under the Assets part, There are Cash and

Marketable securities Accounts receivables are money owed to a business by customers who have bought goods or

services on credit. They are current assets inventory that continually turn into cash when the customer pays their bill.

Prepaid Expenses are expenditures for an item that will provide future benefits. Accumulated tax payments are federal tax on a companies retained earnings that are considered in excess of what is reasonable. Current Assets are those that form part of the circulating capital of a business. They are replaced frequently or converted into cash during the course of trading. The most common current assets are stocks, trade debtors, and cash. Fixed assets at cost, includes all amounts incurred to acquire the asset and any amounts that can be directly attributable to bringing the asset into working condition. Less accumulated depreciation is basically the total amount of depreciation that has been recorded for an asset since its date of acquisition. Net fixed assets are basically gross fixed assets deducted cumulative depreciation. For example, if the total fixed assets are $500,000 and accumulated depreciation is $100,000, fixed assets net would be $400,000. Investment-long term , represents the investments that a company intends to hold for more than a year. They may include stocks, bonds, real estate and cash. Other assets include, Goodwill and Debenture discount. Goodwill is an intangible asset on the balance sheet because it is not a physical asset such as buildings and equipment. Goodwill typically reflects the value of intangible assets such as a strong brand name, good customer relations, good employee relations and any patents or proprietary technology. http://www.investopedia.com/terms/g/goodwill.asp#ixzz1WbqlqbDs A debenture is type of savings bond which offers a fixed rate of interest over a long period. Debentures are usually issued by a company or a government agency.

Under Liabilities and Net Worth, here is located all the debt, future payments and the net worth of the business/organization. Here you can find; Accrued taxes are amount of taxes owed, based on income earned or a property value assessment, but not yet paid. Other accrued liabilities are other amounts owed but not yet paid; does not necessarily indicate a default or delinquency. Current liabilities is a debt due the year, they include accounts payable, short term loans from financial institutions, current maturities of long-term debt, dividends declared but not paid, and expenses incurred but not paid. Bank Loans and notes payable are basically money lent by either the bank or an outside lender and evidenced by a written promise of payment. Accounts payable is money a business owes to others. These are current liabilities incurred when a firm purchases goods and services with the understanding that the payment is due on a later date. Long-term debts are loans or financial obligations due over one year or more time. Stockholders equity represents the capital received from investors in exchange for stock, donated capital and retained earnings. Capital surplus, are stockholder contributions that are in excess of a stocks stated or par value. Retained earnings are the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business or to pay debt.

2. Describe the differences between the formats of financial statements for different types of business. (4.2) Illustrate and attach examples of each of the formats for Balance Sheet and Income Statement. M1 There are three main different formats of financial statements; these are the income statement, balance sheet and cash flow statement. These statements are understood by a business in order for them to manage their money efficiently and successfully. Income statements show how the money received from the sale of products and services before expenses are taken out, the revenue, is transformed into the net income. The net income is the result after all of the expenses and revenues have been taken into consideration and accounted for. Income statements display the revenues for a specific period of time as well as the cost and expenses that were charged against these revenues. These will mainly include write offs and taxes. Income statements are used to show investors and managers whether the company has made a profit or loss during a certain period of time. There are two formats for an income statement, these are the single step and multi-step method. Single step statement, according to moneyinstructor.com, is a recording of two groups of information: income and expense and the net result.

The example above is a single-step income statement. It consists of just two sections: revenues and expenses. Expenses are deducted from revenues in a single-step to find net income or loss. http://accountingaide.com/examples/incomestm t.htm In a single-step statement, data is recorded into Revenues which consists of operating revenues and other revenues and gains and expenses which consist of cost of goods sold, operating expenses, and other expenses and losses. http://www.accounting-tutorial.com/single-step-income-statement-definition-example Multi step statement, according the to

moneyinstructor.com,

provides

more

useful information simply because it separates the operating and non-operating activities and classifies revenue and expense accordingly. There are three benefits to using a multiple-step income statement instead of a single-step income statement: 1. The multiple-step income statement clearly states the gross profit amount.

2. The multiple-step income statement presents the subtotal operating income, which indicates the profit earned from the company's primary activities of buying and selling merchandise. 3. The bottom line of a multiple-step income statement reports the net amount for all the items on the income statement. Basically If the net amount is positive, it is labeled as net income. If the net amount is negative, it is labeled as net loss. Balance sheets are used to give a summary of the financial balances of a company, business partnership or sole proprietorship. All of the liabilities, ownership equality and assets are listed as of a specific date. This date is usually the end of a financial year or a business quarter. A balance sheet is used to provide a snapshot of a company's financial condition. It focuses on a single point in time rather than a period. The main parts of a balance sheet are assets, liabilities and then ownership equity.

There are two formats or ways to present an Balance Sheet, these are account form (horizontal presentation) and the report form (vertical presentation). Horizontal Presentation - The format of the balance sheet present assets on the left and liabilities and
equity on the right. The model is extremely useful for analysing the effects of a single event on the

financial statements.

Vertical Presentation shows the assets followed by liabilities and equity directly below the assets.

Cash flow statements are used to show how any changes that have occurred in a balance sheet account and how income has an effect on cash equivalents. This statement will break down the analysis into investing, financing and operating activities. The basic definition of a cash flow statement is of a statement that is

concerned with the flow of cash that comes in and out of a business. It is useful for determining the short term capability of the

company that, in turn, can help determine whether it can pay bills and its costs. http://www.blurtit.com/q6985223.html Example of an Cash Flow Statement; http://business-accounting-guides.com/sample-cash-flow-statement/

Other sources
http://www.jpec.org/handouts/jpec71.pdf http://www.investopedia.com/articles/04/031004.asp#axzz1WOkXEuOQ

http://www.investopedia.com/articles/basics/06/balancesheet.asp#axzz1WOkXEuOQ

Analyse these financial statements using financial ratios, both internal and external (4.3) There are six categories of financial ratios; 1. Common size statements These are normalized balance and income sheets. Balance sheets express accounts as a percentage of total assets and Income statements express all items as a percentage of sales. 2. Internal liquidity (solvency)

Internal liquidity ratios indicate the ability to meet future short-term financial obligations. Current Ratio examines current assets and current liabilities

Current Ratio

Current Assets Current Liabilitie s

Computation 2008 Result Computation Result 2008 2009 2009 2.798358 2.719276

Current Ratio Current Assets Current Liabilities

is

2,196,834 785,044

2,240,890 824,076

Quick Ratio adjusts current assets by removing less liquid assets

Quick Ratio Cash Marketable Securities Receivables Current Liabilitie s
Computation 2008 Quick Ratio Cash Marketable Securities Receivables Current Liabilities is Result Computation 2008 2009 1.166491 Result 2009 1.0387

175,042 740,705 785,044

177,689 678,279 824,076

Cash ratio relates cash (ultimate liquid asset) to current liabilities

Cash Ratio

Cash Marketable Securities Current Liabilitie s

Computation 2008 Result Computation Result 2008 2009 2009 0.222971 0.215622

Cash Ratio Cash Marketable Securities Current Liabilities

is

175,042 785,044

177,689 824,076

Receivables turnover examines the management of accounts receivable

Receivable s Turnover Net Annual Sales Average Receivable s
Computation 2008 Receivables Turnover Net Annual Sales Average Receivables Result 2008 5.244937 Computation 2009 Result 2009 5.627629

3,721,241
709,492

3,992,758
709,492

Inventory turnover relates inventory to sales or cost of goods sold (CGS) Cost of Goods Sold Inventory Turnover Average Inventory
Computation 2008 Inventory Turnover Cost of goods sold Average Inventory Result 2008 1.950288 Computation 2009 Result 2009 2.090971

2,499,965
1,281,844

2,680,298
1,281,844

3. Operating performance

Measures how well management is operating a business, using operating efficiency ratios and operating profitability ratios. Operating efficiency - Examine how management uses its assets to generate sales; considers the relationship between various asset categories and sales Total asset turnover ratio indicates the effectiveness of a firms use of its total asset base to produce sales Net Sales Total Asset Turnover Average Total Net Assets
Computation 2008 Receivables Turnover Net Annual Sales Average Receivables Result 2008 5.244937 Computation 2009 Result 2009 5.627629

3,721,241
709,492

3,992,758
709,492

Net fixed asset turnover reflects utilization of fixed assets

Fixed Asset Turnover Net Sales Average Net Fixed Assets
Computation 2008 Result Computation Result 2008 2009 2009 5.003864 5.368963

Fixed Asset Turnover Net Sales Average Net Fixed Assets

3,721,241
743,674

3,992,758
743,674

Operating profitability - Examine how management is doing at controlling costs so that a large proportion of the sales dollar is converted into profit Gross profit margin measures the rate of return after cost of goods sold

Gross Profit Margin

Gross Profit Net Sales

Computation 2008 Result 2008 0.328191 1,221,276 1,312,460 Computation 2009 Result 2009 0.32871

Gross Profit Margin Gross Profit Net Sales

is

3,721,241

3,992,758

Operating profit margin measures the rate of profit on sales after operating expenses
Operating Profit Margin Operating Profit Net Sales
Computation 2008 Result 2008 0.083457 Computation 2009 Result 2009 0.078713

Operating Profit Margin Operating Profit Net Sales

310,564 3,721,241

314,282 3,992,758

Net profit margin relates net income to sales

Net Profit Margin

Net Income Net Sales

Computation 2008 Result Computation Result 2008 2009 2009 0.037116 0.037712

Net Profit Margin Net Income Net Sales

138,118 3,721,241

150,574 3,992,758

Return on total capital - Return on total capital relates the firms earnings to all capital invested in the business

Return on Total Capital

Net Income Interest Expense Average Total Capital

Computation 2008 Result Computation Result 2008 2009 2009 0.064951 0.073688

Return on Total Capital Net Income Interest Expense Average Total Capital

138,118 69,764
3,200,614

150,574 85,274
3,200,614

Return on Total Equity - indicates the rate of return earned on the capital provided by the stockholders after paying for all other capital used
Return on Total Equity Net Income Average Total Equity
Computation 2008 Result Computation Result 2008 2009 2009 0.078146 0.085194

Return on Total Equity Net Income Average Total Equity

138,118
1,767,433

150,574
1,767,433

Return on Owners Equity - can be computed for the based only on the common shareholders equity
Return on Owner' s Equity Net Income - Preferred Dividend Average Common Equity
Computation 2008 Result Computation 2008 2009 0.072676 Result 2009 0.07923

Return on Owner's Equity Net Income minus Preferred Dividends Average Common Equity

138,118
-7% 0.93 1,767,433

150,574
0.93 1,767,433

4. Risk analysis

 Business risk Financial risk External liquidity risk