Explain the purpose of keeping accurate financial records.

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Financial Accounting

E1

Explain the purpose of keeping accurate financial records.

Keep stakeholders informed

Controlling and planning the activities of a business such as SPA Ltd is a critical concept of a business succeeding internally and externally. The financial situation of any business such as SPA Ltd must be monitored and handled effectively, taking considerations of information being accurate and well planned for presentation. Without, SPA Ltd having accurate financial information, the business may not perform effectively internally and externally and may incur problems suffering from financial position and legal status.

There are many purposes of which accurate financial records are kept. One of the main particular records is used to present information to inform the stakeholders of SPA Ltd, which it is legally entitled to present accurate financial position at a certain time. The whole purpose of presenting the current financial status of SPA Ltd to its stakeholders is to inform them of how well the company has progressed through the year.

As SPA Ltd is a large company business, with a large yearly revenue, it has many stakeholders connected to the business internally and externally.

Internal stakeholders

These are stakeholders of SPA Ltd, where they contribute on expanding its efficiency and yearly financial revenues.

  • Employees- Employees of SPA Ltd play a major role within the company, to make it run efficiently on a daily basis. They may want to be informed or to keep track of SPA Ltd financial position to see if there may be wage increase rises. On the other hand, to see if there is a job security if the finance of SPA Ltd is exceeding or meeting its expectations.

  • Manager- The managers need to be informed because they will assess the financial documents’, to see what needs to be improved and in what situations to get rid of, to improve SPA Ltd as a company. From the analysis of the financial documents a prediction can be made to see if , new recruitment is needed, making employees redundant, decreasing wages or increasing wages.

  • Directors- The directors will need to be informed of the financial situations as they will assess and make appropriate decisions as to where the strong and weak points lye. They will also conduct their affairs with the managers to try and improve the situation and in some circumstances ask questions of the managers’ position, to see if they are doing their jobs properly and their decisions.

External Stakeholders

  • Bank- They may look into SPA Ltd situation financially, to see how long it will to get there money back, or on the other hand to see if it is appropriate to loan, overdraft or mortgage them any money.

  • Customers- They will want consider SPA Ltd; situation financially to see if they can provide more efficient products and services.

  • Creditors- They will take interest into the financial position of SPA Ltd to see, how it will take to receive their money back.

  • Debtors- They will enquire into SPA Ltd, situation financially to see if it may be possible to extend the date of paying money back.

Assess its financial position

To make sure financial information is provided accurately and clearly to its stakeholders, it must first make sure its initial data is correct. The starting point at which the information needs to be accurate is from the ledgers e.g. sales, purchases returns etc… In order to make sure that the profit loss and balance sheet and other initial documents are correct. If one financial document is incorrect then this will follow through the accountancy process unless it is detected, and this misrepresentation will lead to a wrong evaluation of SPA Ltd. This is why it is so important to have accurate information.

There are many portfolio documents which make up the financial records. These include:

  • Profit and Loss Account
  • Balance Sheet
  • Cash Flow Sheet
  • Ratio Analysis

These are the main types of documents which are used to accurate identify the financial position of SPA Ltd. The process of the ratio analysis will follow the evaluation process of SPA Ltd Company and its final financial status.

Profit and Loss Account

This is a financial statement which represents the revenue that a business such as SPA Ltd may have received over a period of time, and the corresponding expenses which have been paid.

The profit and loss account shows the profit and the uses to which the profits have been put. By law SPA Ltd does not have to put every detail of overheads incurred. Moreover, the law tats that companies such as SPA Ltd must follow one or two standard formats set out in the Companies Act. Here is a basic format which is used by SPA Ltd and other companies:

 

This is the basic format which may be used by companies such as SPA Ltd to present their financial information to the stakeholders. However, as SPA Ltd is a limited company, by law they must produce financial results of any changes to the structure of the company. This is stated in the (FRS 3 Reporting Financial Performance). Moreover, it states that the statement must produce the losses and gains of a company and the changes of its shareholders.

Balance Sheet

This is a statement of a firm such as SPA Ltd’s assets, liabilities and owners equity at a specific date in time. Basically this gives a snapshot of which direction SPA Ltd is heading.

From the balance sheet when the liabilities and owners equity is added, it represents the sources of capital and the assets represent the uses of the capital. In addition, the two sides of the accounts must balance as every penny made as capital has been used for some purpose.

In a balance there are formats and layouts which are used to present the information. Unlike the profit and loss account document, there are different terms for which the balance sheet consists of. These include:

Assets

Items which can be described a value which can bring value to a company such as SPA Ltd. Assets can be known as resources belonging to SPA Ltd.

  • Fixed asset
  • Current asset

Current Assets

Current asset is the operating cycle at which assets of SPA Ltd may change within the periods of 12 months.

  • Bank
  • Cash
  • Debtors
  • Stock etc…

Fixed Assets

Fixed assets are owned by a company such as SPA Ltd to help them produce goods over a period of time.

  • Tangible assets
  • Intangible assets
  • Financial assets

Liabilities

This is where a business is responsible to pay money with no obligations

  • Current Liabilities
  • Long term liabilities

Current Liabilities

This is where a company owes money to another company, an d that sum will be paid off within 12 months.

  • Bank overdraft
  • Creditors
  • Accruals
  • Corporation tax
  • Dividends

 

Long term liabilities

These are borrowings which a company has agreed and this is included in the balance sheet for more than 12 months.

  • Bank loans
  • Mortgages
  • Debentures

As you

As you can see this is a typical format of a balance which will be presented. Under the companies Act 1895 the balance sheet must also identify any losses or gains and any changes of trends.

From the two financial documents, the difference between both are that the Profit and Loss account presents how much capital has been made at the end of the year, and what expenses have been incurred. In the case of balance sheets, it shows a company’s assets, liabilities and owners equity at a specific date in time. Basically the profit and loss is created at the end of the year, to show how much capital is made. Whereas a balance sheet can be produced at any time to give an overview of how well the company’s assets, liabilities and owners equity are running.

Cash flows

This is the most liquid of all the assets of a company such as SPA Ltd. It represents the bank balance and the cash that the company has available on the premises.

Cash flow refers to the differences between cash flowing into the company and out of the company. The main positive fact of the cash flow is to have a positive figure of revenue for survival of the company.

Ratio Analysis

For any company such as SPA Ltd it must undergo how well the company is running. This procedure is gone through a ratio analysis consideration, where a selective amount of ratios are used to come up with an outcome of analysis and evaluation of the position of the company. There are three main types of ratios which must b considered, these are:

Profitability Ratios

This examines the relationship between gross and net profits with sales, assets and capital employed.

  • Gross profit margin
  • Net profit margin
  • Return on capital employed

Gross profit margin

The ratio looks at the relationship between the gross profit and the sales of the company. It expresses how effective the business is trading.

Gross profit margin= Gross profit       * 100  

                                        Sales      

Net profit margin

This has the same principles of the gross profit but, it is calculated by net profit against sales. The ratio expresses, if the company is controlling their expenses efficiently.

Net profit margin= Net profit

                                                     *100                              

                                   Sales

Return on capital employed

This ratio measures the efficiency of funds invested in the company at generating profit. Basically, it measures how much profit is made at the end of the year.

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ROCE=       Net profit

                                                        * 100

              Average capital

Average Capital = opening capital = closing capital

Performance Ratios

Assesses the performance of the company and gives a prediction of how much it costs a company to make sales and how hard its assets are working with its credit controlling. For all these ratios the higher the percentage number, the ...

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