Financial Aspects of Business: An Overview - Assignment Example

?Financial aspects of business: An overview Table of Contents Table of Contents 2 Question1 3 Question 2 3 a Trading Account 3 a.2) Profit and Loss Account 4 b)Balance Sheet as on 31st December 2012 4 c)Importance of double entry book keeping 4 Question 3 6 Works Cited 9 Name of the Student: Name of the Professor: Name of the Course: Date: Question1 Sole trading is the simplest form of any business structure. It is easy and less expensive to maintain the business of sole trading. Most of the sole traders continue their businesses in their own name and others choose for registering the business name. In case of sole trading there remains no distinction between the business and personal assets. For sale traders, the liability is unlimited and the personal assets can be used to repay the liabilities of the business. It is important for sole traders to maintain their accounts in order to have an idea about the performance of the business. It would enable the owner to have an idea about the present debt condition of the business. It would also enable in keeping a track on the total sales and purchases of the goods and services. It is essential to keep and maintain accounts because it helps in maintenance of transparency of the business transactions. It also reduces the existence of flaws in any decision making by the trader. Partnership business is conducting business activities together by two or more partners and earning and sharing the profit earned from the business operations. In case of partnership business, the company needs to maintain its book of accounts in order to have a clear and transparent disclosure of all the business activities to all the business partners. It would also enable assessment of profitability of the company followed by its division among all the business partners. It is very important to keep a track on all the financial transactions of the partnership business in order to maintain its stability. A partnership business is based upon some agreements and terms that have been made by the business partners. It is also important to maintain the books of accounts in order to keep a note on the fact that whether the business operations are taking place in accordance to the terms and conditions of the partnership deed. A company is a separate business entity having a complex business structure. There are a large number of complex financial transactions taking place every day. It is very essential to keep a track on each and every transaction taking place (Glynn ?and Murphy 22). Thus, the significance of maintaining accounts by a company is very high. It would display the exact financial position of the company in the market and disclose the profit or loss incurred by it. It would also help in keeping a track on the total assets and liabilities of the company. Question 2 a.1) Trading Account Trading Account Debit Credit Particulars Amount (in ?) Particulars Amount (in ?) To opening stock 2000 By Sales 95414 To Purchases 57580 By Closing Stock 2745 To Wages 11438     To Gross Profit 27141     Total 98159 Total 98159 a.2) Profit and Loss Account Profit and Loss Account Debit Credit Particulars Amount (in ?) Particulars Amount (in ?) To rent 2650 By Gross Profit 27141 To heat and light 3698     To sundry expenses 950     To Net Profit 19843     Total 27141 Total 27141 b) Balance Sheet as on 31st December 2012 Balance Sheet Liabilities Amount (in ?) Assets Amount (in ?) Capital 24770 Fixed Assets   (+)Net Profit 19843 Premises 35000 (-)Drawings 2000 Oven and Equipment 9560   42613 Delivery Van 9580 Long term Debt 20440   54140 Current Liabilities   Current assets   Creditors 2000 Debtors 3098     Bank 620     Cash 4450     Closing Stock 2745       10913 Total 65053 Total 65053 c) Importance of double entry book keeping Double entry book keeping suggests that there should be double entry for each and every transaction into the books of accounts (Miner 21). This method of book keeping helps in dealing in a special way with the opening as well as closing balances at the beginning and end of every year. The double entry book keeping helps in arithmetic checking on the book keeping as the total number of debit entries will have to be equal to the total number of credit entries. It helps in displaying the financial position of the business in much more transparent manner using the concept of double entry for every transaction ( Hanaford and Payson 48). The double entry book keeping helps in making the accounts at the end of the year much easier. Scientific The double entry book keeping method implements a scientific system for book keeping where it has own set of rules, regulations and principles. Under these set of principles, both the aspects for each and every transactions are taken into record. Systematic It follows a systematic pattern while recording the financial transactions in the double entry book keeping method. The financial transactions are recorded in chronological and systematic order with appropriate narration for every financial transaction. Complete The double entry book keeping system forms a complete system for the book keeping purpose. It not only maintains records for every financial transaction of the business but also keeps a record on both the aspects of those transactions. Accuracy The double entry principle states that each debit transaction has one corresponding credit transaction. This method of consequent debit and credit transaction will help in ensuring arithmetic accuracy for all the financial transaction that has been recorded. Profit or Loss The double entry book keeping method helps in ascertaining actual profit or loss associated with any business by forming the profit and loss account for a particular period. Financial Position The double entry book keeping method helps in revealing information related to the financial position of the business by means of preparation of another statement called the balance sheet. Control The double entry book keeping method helps in keeping a detailed record of all the financial transactions. The recording of all the financial transactions in the books of accounts help in providing important information associated with cost control methods. Decision making The double entry book keeping method helps in communicating such financial information which is very important for making various decisions by the business enterprise. This method gives important information to various users like the managers, business owners, creditors etc for their decision making purpose. Question 3 a) Analysis of the financial performance of any business is done by means of evaluation of the accounting information using various accounting tools (Wyatt 67). It can also be described as the procedure of evaluating relationship in between two different components in the financial statement for the purpose of having a clear understanding related to the position and performance of the business (Megginson and Smart 31). Ratio analysis is one such accounting tool which helps in assessing the performance and the position of an organization (Ehrhardt 120). Analysis of data available in the financial statement followed by its interpretation facilitates the management of an organization in reaching to any concrete decision. Any decision that is taken by the management via intuitions increases the possibility of flaws. In order to avoid such faulty decision making, it is necessary that the analysis and interpretation of such analysis are done in an appropriate manner. In such case analysis using accounting tools such as financial ratios help in analyzing the quantitative data in a systematic manner (Brigham 117). It prevents an organization from taking any misleading decision by assessing the financial statement in raw form. Ratio analysis is a procedure by which the financial information of any organization is presented in organized, systematic and summarized manner. It measures the liquidity position, soundness, efficiency and profitability of an enterprise and establishes relationship between different financial factors present in the business (Geltner, Miller, Clayton, and Eichholtz 265). The advantages of analyzing the financial performance of an organization by means of ratio analysis are that: It helps in simplifying the financial statements. It helps in performing the comparative analysis of companies which differ in sizes from each other. It helps in performing trend analysis involving comparison of the performance any particular organization for consecutive years. It reflects vital information necessary for the decision making purpose in much simple form. The user can judge the performance of a company by viewing the ratios rather than reading entire financial statement. Limitations There are various limitations of using ratio analysis. Some of them are: The environmental conditions in which different companies operate are entirely different including factors like market structure, regulation etc. These factors are very important while comparing the performance of the companies (Gallagher and Andrew 121). Financial management; Principles and practice.. Only calculation of the quantitative data excluding these factors might give a misleading result. The financial accounting information is often affected by assumptions and estimates. The accounting standards provide various accounting policies which enhances the comparability (Sinha 56). It is because of this reason that the ratio analysis becomes useless in this respect. The ratio analysis establishes relationship based on the past information available whereas the users remain concerned about present and future information. b) Ratios of Delta and Sigma Ratio Business Particulars Delta Sigma Current ratio 2 1.6 Quick assets 1.7 0.7 Return on Capital Employed 21% 17% Debtors collection period 56 days 22 days Creditors payment period 48 days 43 days Gross Profit Percentage 40% 15% Net Profit Percentage 11% 12% Stock Turnover 50 days 26 days The ratios state that the current ratio of Delta is higher than Sigma. It signifies that Delta is utilizing its current assets in an effective manner for meeting the current liabilities (Besley and Brigham 218; Bhattacharyya 178). The quick ratio of Delta is higher than Sigma, which also indicates that the current assets readily convertible into cash are being utilized more effectively by the company. This means that the liquidity position of Delta is better than Sigma. The debtor’s collection period for Sigma is lower than Delta. This means that the collection of accounts receivables for Sigma requires less number of days as compared to Delta. This is only possible if Sigma implements the approach of competitive prices. In such case, offering competitive price for the products makes it easy for the company to collect the accounts receivable within less time. On the other hand, providing personal services to the customers would involve higher prices comparatively. In such case, in order to increase the reliability of the customers, the companies extend the debtor’s collection period. This means that Delta has implemented the approach of personal service. Moreover, the type of services provided by Delta i.e. personal services to the customers help in extending the creditors payment period as well. It is due to this reason that the creditor’s payment period of Delta is higher than Sigma. The gross profit percentage of Delta is higher than Sigma. It is so because Delta offers personal services to the customers and charges high prices because of the extra facility being provided to the customers which helps in gaining high gross profit even after deducting the cost of production. The gross profit ratio of Sigma is low because it offers competitive prices for its products. This reduces the gross profit of the company after deducting the cost of production. The net profit percentage of Sigma is 1 percent above than Delta. As Delta provides personal services to the customers, so the selling, distribution and administrative expenses of the company are higher than Sigma. It is due to this reason that Sigma has higher net profit percentage as compared to Delta. The stock turnover of Delta is more than Sigma. This means that Delta is taking more number of days to convert its stock into the company’s turnover as compared to Sigma. This is only possible if Sigma adapts competitive prices approach and Delta adapts Personal services approach. The competitive price approach would enable the stocks to be utilized effectively for generating the turnover of the company in lesser time span whereas, personal service approach would require more time to utilize the stocks and generate turnover effectively. Thus, from the above given ratios, it can be concluded that Delta has adopted personal service approach whereas Sigma has adopted competitive price approach for carrying on their business activities. Works Cited Besley, Scott, and Eugene F. Brigham. Principles of Finance. Connecticut: Cengage Learning, 2008. Print. Bhattacharyya, Debarshi. Management Accounting. New Delhi: Pearson Education India, 2011. Print. Brigham, Eugene F. Financial Management: Theory & Practice. Connecticut: Cengage Learning, 2013. Print. Ehrhardt, Michael C. Corporate Finance: A Focused Approach. Connecticut: Cengage Learning, 2013. Print. Gallagher, J. Timothy, and Joseph. D. Andrew. Financial Management; Principles and Practice. New York: Freeload Press, Inc, 1968. Print. Geltner, Miller, Clayton, and Eichholtz. Commercial Real Estate Analysis and Investments. Connecticut: Cengage South-Western, 2013. Print. Glynn, John, and ?Michael Murphy. Accounting for Managers. Connecticut: Cengage Learning, 2008. Print. Hanaford, ? Lyman B., and Jesse W. Payson. Book-keeping, by Single and Double Entry: For Schools and Academies. California: University of California, 2008. Print. Megginson, William L., and Scott B. Smart. Introduction to Corporate Finance. Connecticut: Cengage Learning, 2008. Print. Miner, George W. Bookkeeping: Introductory and Intermediate Course. Charleston: Bibliobazar, 2009. Print. Sinha, G. Financial Statement Analysis. New Delhi: PHI Learning Pvt. Ltd, 2009. Print. Wyatt, Ian. The Small-Cap Investor: Secrets to Winning Big with Small-Cap Stocks. New Jersey: John Wiley & Sons, 2009. Print. Read More