Financial Reporting

Introduction

Financial reporting refers to the process of recording finance related information in the final accounts of an organisation. These accounts are income and expenditures statement, balance sheet and cash flow statement. It is very important for the organisations to generate financial statements as these are required to analyse performance and financial strength of a company. All the external stakeholders such as customers, government, suppliers, investors and creditors monitor the statements and than analyse actual position of the organisation (Al-Matari, 2013).

If the accountants of the company are not able to make effective decisions than it may result in improper financial statements and may not be able to show the actual position of the business enterprise. Organisation chosen for this report is Marks and Spencer and it is based in UK. Various topics are discussed under the assignment that are financial accounting and its purpose, requirement of regulatory framework, stakeholders of the organisation, value of financial reporting in meeting organisational objectives and growth, formulation of different financial statements to determine organisation's current position. Difference between IAS and IFRS and benefits of IFRS have also been covered under this report.

Main Body

Q1 Financial reporting and its purpose

Financial reporting:

It refers to the process of formulating different type of statements that are income statement, balance sheet and cash flow statement. External stakeholders may analyse organisational performance with the help of these statements. It is very important for the companies to conduct financial reporting for a certain period of time so that market image, position and competitive advantage can be determined. According to law all the business enterprises like Marks and Spencer have to prepare their all the statements every year so that companies may analyse their yearly performance (Chae and Oh, 2016). All type of business information is recorded in the final accounts of a organisation which is required to analyse financial strength. Proper and transparent data can help the shareholders to make effective decisions for investment and they also analyse that their money is used by the business appropriately or not which is possible with the help of financial statements. Importance and purpose of financial reporting for  Marks and Spencer are as follows:

Importance of financial reporting:

  • Financial reporting is very important for Marks and Spencer to provide information of organisational position to its stakeholders.
  • It helps to make appropriate decisions and effective financial planning for the future period so that all the long term goals can be achieved (Duncan, 2014).

Purpose of financial reporting:

  • Main purpose of financial reporting is to analyse that Marks and Spencer is performing well or not.
  • Provide accurate and transparent information of business to the stakeholders so that higher funds can be raised.
  • Marks and Spencer create final accounts to analyse financial health of the business.
  • To provide business information to the managers so that they may take effective decisions for Marks and Spencer according to its current position.

Q2 Examination of conceptual and regulatory framework and their purpose and principles

Regulatory and conceptual framework: 

Both are required to prepare all the financial statements effectively and to assure that all the transparent information is recorded in the reports. Conceptual framework guides the companies to follow all the relevant accounting standards that are followed while recoding financial informations in the books and accounting. IASB is the regulatory authority who have introduced different type of standards for the companies to formulate appropriate financial statements. Some selected principles are as follows:

IFRS (International Financial Reporting Standards): 

These are the standards that are introduced by IASB (International Accounting Standards Board) for all the organisations who are conducting financial reporting every year. It is required by the businesses to follow all the standards while creating final accounts (IFRS, 2018).

  • IFRS 9: It was introduced by IASB and includes requirements for acknowledgement and measurement, modification, de-recognition and broad protection accounting related rules and regulations for the organisations.
  • IFRS 10: According to this standard business entities are required to formulate their financial statements in consolidated form.

Purpose:

  • Purpose of regulatory frameworks is to guide organisation while formulating financial statements.
  • All the frame works are induced by the regulatory authority in order to facilitate businesses in the process of financial reporting.

Qualitative characteristics of financial information:

  • Qualitative features of informations can help to identify relevant data which is mainly required to be recorded in the final accounts.
  • When the information in easy to understand to all the stakeholders than it may help to enhance their interest and funds.
  • If the financial information is comparable than it may help the customers, investors and shareholders to analyse actual performance of the company.

It is very important for Marks and Spencer to follow all the rules and regulations of the government so that business can be executed effectively. If the business enterprise is not able to precede the standards of regulatory authority than strict actions can be taken for the company by the government (Eker and Aytaç, 20167).

Alos Read: Unit 3 Understanding Financial Statements Sources for the Collection of Data

Q3 Main stakeholders of an organisation and they way in which they benefit from financial information

Stakeholders are the external independent parties of an organisation who have right to get the exact information of financial strength. These are internal and external stakeholders such as customers, government, investors and shareholders. Financial information may benefit them because it may help them to analyse actual performance of the and also determine the financial strength of the organisation with whom they are related. Following are the internal and external stakeholders of  Marks and Spencer:

External stakeholders:

Customers use financial information to analyse that market image of Marks and Spencer  is good or not and it helps to satisfied them with the proper and accurate information.

Investors are the individuals who invest money in Marks and Spencer but they invest money for the purpose of getting higher returns on their investment. They get benefited by accurate financial information because it helps to them to assure that they will get good returns on their profits by evaluating the effectiveness of the business entity (Elbayoumi and Awadallah,  2017).

Creditors are the persons who provide goods to the company on credit. Transparent financial information help them to analyse that Marks and Spencer is able to pay the money back or not.

Government will also be benefited with the help of appropriate financial information because this will help the legal authority to analyse that Marks and Spencer is paying appropriate taxes or not. It also help to assure that organisation is not hiding any information to save tax.

Internal stakeholders:

Shareholders who are internal stakeholders of Marks and Spencer, who also use financial information to determine that their money is used by the business entity effectively or not. This also help them to analyse the possible returns that may be acquired by them in future.

Managers evaluate the financial information to formulate effective strategies which is required to improve the organisational performance. It facilitate the managers to make appropriate decisions for Marks and Spencer so that business can be operated effectively.

Q4 Value of financial reporting for meeting organisational growth and objectives

Financial reporting helps an organisation to to meet all its goals and objectives and grab the growth opportunities so that a successful business can be established. In  Marks and Spencer financial reporting is done in an effective manner so that all the stakeholders may get the actual information of the company. If the process of reporting is appropriate and the information is accurate than it may help to attain all the organisational goals like attracting investors and sales maximisation. It is very important for the managers and accountants of Marks and Spencer to record appropriate information in the final accounts so that all the goals can be achieved. It may also help to identify growth opportunities in the market that may facilitate  Marks and Spencer to expand its business to different location (Formisano, Fedele and Calabrese, 2018). It is possible with the help of increased sales and number of customers who get attracted toward the organisation with the help of good market image. Bad market image reduce the number of growth opportunities as in this condition it is impossible to attract new customers and the old one will also switch to other companies.

Objectives may be achieved if the organisation is following right principles and legal regulations for financial reporting as appropriate records may help attract new investors for the company. They may analyse financial statements and make their decision to invest or not to invest in the organisation. There are three main components of financial reporting that are as follows:

Income statement: 

All the expenses and incomes are recorded in income statements that are related to a specific period of time. It helps to stakeholders to evaluate that organisation is able to bear all its expenses and the costs. Profit for a particular period of time is calculated with the help of this statement.

Balance sheet: 

Assets and liabilities are recorded in balance sheet that depicts actual performance and financial health of the company. Stakeholders collect informations from different sources of balance sheet to measure effectiveness of the business (Guo, 2018).

Cash flow statement:

Cash inflows and outflows on a particular period is recorded in cash flow statement. It helps to determine liquid strength of the company. Monetary resources are recorded in three different types of categories like operating, investing and financing activities.

Q5 Formulation of financial statements of the organisation

A: Statement of profit and loss:

Particular

Amount

Sales

285100

Less: COGS

191700

Gross profits

93400

Rental income

1600

Loss on revaluation of investment property

3300

Loss on sale of inventory

400

Operating expenses

43100

Profit from operation

44600

Bank interest

1030

Preference dividend

1330

 PBT

42240

Tax expenses

12000

Profit after tax for equity shareholders

30240

 

Working note:

Calculation of Depreciation:

Amount

On Land and property:

 

Property

4000

Plant and equipment 48000-22400*12.5%

3200

Total

7200

Charged to cost of sales

3600

Charged to operating expenses

3600

B: Statement of equity:

Statement of change in equity

 

 

 

 

 

Particulars

Ordinary capital

Retained earnings

opening balance

26700

23300

Dividend paid

 

-5340

Profit from current year

 

30240

Closing balance

26700

48200

 

C: Statement of financial position:

Statement of changes in financial position

Particulars

Amount

Current Assets

 

Inventory

12930

Trade receivables

18000

Bank

-530

Total current assets

30400

Non Current Assets

 

Investment property

18000

Land and property

80000

Plant and equipment

22400

Total non current assets

120400

Total assets

150800

Liabilities and equities:

 

Current liabilities

 

Trade payables

15700

Provision for tax

12000

Deferred taxation

6900

Total liabilities

34600

Equities:

 

Revaluation reserves

28000

Retained earnings

48200

Ordinary shares

26700

10% redeemable preference shares

13300

Total equity

116200

Total equities and liabilities

150800

Profit and loss of the organisation depends upon the sales which is 285100, Company made gross profit of 93400 in 2018. The rental income is 1600 whereas loss on revaluation of investment property &sale of inventory is 3700. Operating expenses of company are 43100 and profit from these operations is 44600 along with the bank interest of 1030. Tax  expenses of company are 12000 whereas the profit after paying taxes for equity stakeholders is 30240. Property, plant and equipment amount of company are total of 7200 which is charged to cost of sales and operating expenses. Opening balance of capital for the company is  26700 along with retained earning of 23300 and divided paid by company is 5340 which is a negative value.

From these capital and retained earning, the closing balance of the company is 26700 whereas the retained earnings rises to 48200. Company owns current assets of 30400 and total non current assets of 120400 which together becomes 150800 value of total assets (Haneef and Smolo, 2014). The total liabilities of the company is 34600 whereas the total equities and liabilities are 150800. These financials will help the management in improving the company where changes are required or the growth is going down. Company should adopt necessary policies and strategies for improving these financial which are going down and hindering the productivity and performance of the company. Investor and financials auditor should keep a close eyes on the change of these records as they are a integral part of the company and the performance and growth of the company is measured by this data.

Q6 Interpretation of organisation's last two year's financial statements

As analysed from the financial statements of Marks and Spencer that, revenues of M&S in 2018 are 10698200 which is quite high then the previous year revenues that are 10622000. This state that the company is growing at a slow pace. Whereas the expenses of company in 2018 is 6745600 and the total profit made by company is 3952600 in 2018 which is comparatively low than 2017 gross profit. The operating expenses of the company are comparatively low in the 2018 than the 2017. The total operating expenses of the company in 2018 is 10020800 which is more than the 9914700 in the year of 2017. The net income made by company after all taxes and expenses in 2018 is 25700 which is far less than 117100 in 2017. This indicates that the cost of company is rising due to various factors which leads to less net income. M&S current assets are 7550200 which is again low than the 2017 assets 8292500. Total current liabilities of M&S in 2018 are 1826000 which is less than 2368000 in 2017.

The tangible assets of company in 2017 was 2447300 which is more than present year assets. Treasury stock and  other stockholder equity stocks are in negative  in both years which shows that the change in assets were very low. Minority interest of M&S is also in negative for both years.

All this financial data is analysed so that the investor and management can track the financial stability as well as performance of the company. The data interpreted here shows that the revenue of company is increasing in 2018  Whereas the expenses,  total profit,  total operating expenses,  cost are not  performing good due to the barriers in development by different factors.

Q7 Difference between IAS and IFRS

IASB (International ) is the board who is responsible to introduce different accounting and reporting standards for the businesses so that appropriate information can be recorded in the books of accounting. Two main standards are introduced by this board that are IFRS and IAS. IFRS is international financial reporting board in which different standards are introduced by IASB that direct organisations while formulation of financial statements (Hassaan, 2012). IAS is international accounting standards that are introduced to guide the companies follow all the accounting standard while recording transactions in to different accounts. A few differences between IAS and IASB are as follows:

IFRS

IAS

Full form of IFRS is international financial reporting standards.

Full form of IAS is international accounting standards.

It was introduced by International Accounting Standards Board in year 2001.

It was published by International Accounting Standards Committee in year 1973.

IFRS were published to resolve the contradictions in the IAS.

IAS was introduced to provide basic accounting standards to the organisations.

All IFRS related decisions are taken by IASB.

IASC is responsible for all the actions of IAS.

 

Q8 Evaluation of benefits of IFRS

International Financial Reporting Standards are vital for all the organisation to follow so that financial information can be recorded appropriately. All the standards are the set of rules and regulations that are required to be followed by the companies as it may help to analyse the actual business performance. If the organisations are not following all the rules than it is not possible to operate business effectively because the government will not allow to execute business activities if proper rules and regulations are not followed. Attractive financial statements can attract more and more investors toward the company and also increase their interest in the business. There are various benefits of financial reporting that are as follows:

  • Appropriate use of all the financial reporting standards help a company to contribute toward the development of the economy with the help of the growth of business and its operations.
  • As all the standards are related to internation financial reporting than it may help to attract foreign investors to enhance foreign capital of the country.
  • Investors of such companies who are using all the IFRS can be assured and better understand the right investment opportunities so that they may take right decisions about the investment.
  • It helps the organisation to increase funds from foreign markets at lower cost.
  • It helps the accounting authorities to evaluate the financial statements of the companies effectively and easily as all same standards are followed all around the world.
  • IFRS also helps to establish a global language that may direct to establish good relations with the investors who are from different regions (Nakashima and Okuda, 2016).

Q9 Identification of the varying degree of compliance with IFRS

International Financial Reporting Standards are the regulations that are imposed by IASB  for all the companies to be followed at the time of recording information in financial statements. These are such type of regulations that are followed by each and every company whether it is a small or large.

Marks and Spencer is also following all the rules in order to provide appropriate information to its stakeholders to enhance their interest in the company. Efficient use of all the standards can help the company to generate more profits as an outcome of all its actions. With the help of proper formulation of financial statements an organisation may attract international investors to enhance foreign investment.

For example, all the countries are having their own accounting rules and regulations for accounting process that may have different types of problems and issues. All of them may affect the investor's decision of investment as they may not be able to analyse the financial statements of the organisation (Zhao, 2017).

As Marks and Spencer is operating business in UK where the government has implemented different rules and regulations for financial reporting that are required to be followed by the company. Organisation is operating business in different countries hence it is not possible to follow different accounting rules so the company should use IFRS so that the information can be maintained properly. Accountants use IFRS to attain competitive advantage at global level.

Conclusion

From the above project report it has been analysed that financial reporting is very important fro an organisation as it may help to attain all the organisational goals by properly formulating all the financial statements. There are three different types of statements that are used by stakeholders to analyse organisation's performance. These are income statement, balance sheet and cash flow statement.

References

  • Al-Matari, Y. A. A. T., 2013. Board of Directors, Audit Committee Characteristics and The Performance of Public Listed Companies in Saudi Arabia (Doctoral dissertation, Universiti Utara Malaysia).
  • Chae, S. J. and Oh, K., 2016. The Effect Of Family Firm On The Credit Rating: Evidence From Republic Of Korea. Journal of Applied Business Research. 32(6). p.1575.
  • Duncan, K., 2014. Relationship between the audit function and effective governance.
  • Eker, M. and Aytaç, A., 2016. Effects of interaction between ERP and advanced managerial accounting techniques on firm performance: Evidence From Turkey. Muhasebe ve Finansman Dergisi. (72), pp.187-210.
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