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Issues of finance and economics of all countries in the world in itself is a one joint structure thought we may be divided by boundaries, borders, factors like sex, creed, language etc but the real fact is that all of it is bound in one common structure and that is ‘need’. For example, a professor needs stationery for teaching his various students. Now this stationery shall be procured from several suppliers. These suppliers would procure them from manufacturers national or international, the essence of this example is that need of the professor and his students is indeed the inception of this hierarchy of inter dependence for satisfying there need. This has led to national and international financial transactions. The concept of globalisation has further fuelled this need based orientation of financial and economical transactions intra country (Hussain 1989). Seeing the rise in transactions and the sectors of the society, which are the ultimate receivers of benefits have came in several statutory and regulatory bodies which are concerned with safeguarding of the interest of the bona fide end stakeholders and the society at large. The society expects transparency in operations because they allow business to use their resources i.e. either in form of investments or inputs. The regulatory bodies thus, enact towards ensuring the same.
The best medium of communicating or dissipating information about any organisations operational activity is its financial statements. The financial statements depict the overview of the organisations activity and the impacts of the same in monetary terms. Thus, there are several statutory guidelines which monitor the preparation of these financial statements so as to ensure that interests of stakeholders are never ever compromised. An organisation operating in UK needs to adhere to regulations for preparation and representation of financial statements set out by,
This further needs to be stated that the regulations as set out by the monitoring and issuing agencies varies upon the size and nature of the business organisation like, a sole proprietorship firm, a partnership firm and companies (listed and non listed) formed under the companies act, 2006. To further understand the impact and extent of these regulations we shall take an insight into the guidelines set out by the regulatory bodies.
Regulatory guidelines issued by Companies act, 2006:
For Sole Proprietorship firm: The companies act, 2006 does not sets out any specific regulation with regards to preparation of financial statements by the sole proprietorship firms. The companies act gives leverage to the owners and managers of such entities to choose and keep whatever accounting records suiting them. Howsoever, if a sole proprietor firm is registered for Value Added Tax they will need to keep adequate records that satisfy the requirements of the same. They in that case would also need to maintain proper financial statements as they would have to file tax returns and should also be able to furnish the details of the same to HMRC. (Rice 2011) Sole proprietors would be required to include any profit due to them (from their business) on their own personal income tax return. Thus most businesses have to keep some basic accounting records and to compile a profit and loss account once a year. The choice of format and content of such records remains at their disposal.
For Partnership firms: Partnership firms are also not strictly regulated under any specific norms set by the companies act, 2006. Howsoever, they are also required to maintain same records as sole proprietorship firms in cases where they are registered with VAT and are required to file individual tax returns.
In case of the limited liability partnership, the scenario is quite different and the preparation of accounts for such organisations is somewhat similar to companies registered under companies act, 2006.
For Companies: Companies registered under companies act, 2006 are required to maintain accounts and records as specified in part 15 of the act. The act classifies companies into ‘small’, ‘medium’ and ‘large’ categories. This classification is based on a requirement to satisfy two out of three criteria: turnover, balance sheet totals and number of employees. The actual figures are also prescribed in the act but they are subject to amendments from time to time.
The act for the purpose of setting out the specific guidelines for preparation of accounts, classifies guidelines on the basis of,
Role and regulations set out by the UK accounting standards: The UK accounting standards are issued by the Accounting standards board of the Institute of Chartered Accountants in England and Wales. The accounting standards board was established to develop regulations and guidelines that could enable preparation of accounts which keeps into accordance the benefit of users, prepares and auditors of financial information. The accounting standards board operates under the monitoring and funding of the financial reporting council. The accounting standards issued by the ASB are called financial reporting standards and ASB has issued 30 financial reporting standards till date. These are designed to facilitate adequate and proper reporting of financial information by the organisation which is expected to prepare the financial statements (Fraser and Orminston 2010).
Role of International accounting standards board: Globalisation has given a wing to the way organisations work throughout the globe. It has created a sort of network amongst the nations trading and thus has created a new pool of stakeholders internationally as well. Thus, it becomes important to ensure that their expectations too are properly taken heed of. To ensure uniformity in arena of financial reporting, was established the International accounting standards board, which aims at developing uniform and unilateral accounting standards that could ensure uniformity of financial information’s amongst organisations operating anywhere around the globe.
The financial standards issues by the IASB are known as International financial reporting standards (IFRS) and since 2005 the EU in approach towards international harmonisation in matter pertaining to transparency and uniformity of financial statements has mandated the usage of IFRS for listed and publicly traded organisations operating in the EU howsoever these regulations are only statutorily applicable while preparing group financial statements, they are free at their will to choose the adequate standards while preparing individual standalone reports. While in case of non public trading organisations, these organisations are not compulsorily bound to adhere to IFRS in any scenario howsoever they are permitted to use the same.
Differences between the UK accounting standards and IFRS:
Since, we have already discussed about the applicability of the financial accounting standards and the IFRS in applicable scenarios, it still is a matter of discussion to understand the fundamental differences between UK accounting standards and the IFRS,
The role of accounting and reporting standards in dealing with laws and regulations: In our analysis so far, we have been able to understand the implications of regulatory and legal influences upon financial statements. Now it is worth mentioning that, the influences in it have helped in creation of standards that satisfy the legal and regulatory requirements. For an instance, as stated above in the case of companies, the Companies act 2006 requires preparation of accounts in accordance to section 15. Citing the same the regulatory bodies designed Conceptual framework standards which guide principles of preparation of accounts.
It needs to be understood that all the accounting standard framing bodies discussed above are into existence only because they need to ensure that organisations are reporting in a form which helps in dealing with laws and regulations. They achieve this by framing appropriate standards.
Conclusion: After having an in depth analysis of regulatory and legal influences upon financial reporting. It may be said that the regulations set out in this regard are a better source of ensuring transparency and stakeholder accountability. Legal provision like that set out in FRS 1 which requires organisation to prepare a cash flow statement is a perfect example to explain how these regulations impact financial reporting, obviously for the good reasons.
As already discusses about the inter dependency of different bodies in order to satisfy their ‘needs’ it remains to be stated that there does exists ‘need’ for all the parties involved in a business transaction howsoever their nature and way differs in a large extent. The same logic applies to the financial statements as well wherein the financial statements which are prepared by an organisation under strict guidelines for ensuring better transparency and intimation of relevant and meaningful information to the stakeholders of the organisation. Howsoever the type of information needed by the various stakeholders differs to a great extent and the same is being analysed underneath,
A. Ella’s income statement for the year ended 30th June, 2011
Ella's Jewelers Shop
For the year ending 30 June 2011
Less: Cost of Goods Sold (Refer Working Note)
Rent Stall License
Depreciation (Refer Working Note)
Insurance Expense (Refer Working Note)
Computation of Cost of Goods Sold
Cost of Goods Sold = Opening Stock + Purchases - Closing Stock
|Nil + 54140 - 7120|
Computation of Depreciation Expenses
Depreciation on Motor Van
Depreciation on Display Equipment
Less: Prepaid Insurance
Total Insurance Expense
B. Ella’s financial statement for the year ended 30th June, 2011
Display Equipment (Net)
Motor Van (Net)
Statement of Owner Equity:
Add: Net Profits
A. Income Statement for the year 31 January 2011:
For the year ending 31 January 2011
Add: Non Operating Profits
Profit on Revaluation of Property
Interest on Debentures
Payment of Dividend to Preference Shareholders
Payment of Dividend to Ordinary Shareholders
Provision on Taxation
A. Statement of Comprehensive Income for the year ended on 31 January 2011
Statement of Comprehensive Income
For the year ending 31 January 2011
Other Income: Profit on Revaluation of Property
Profit for the Year
C. Statement of financial position and Statement of changes in Equity
Plant and Equipment
Provision for Taxation
4% Preference Shares
For the year ending 31 January 2011
Ordinary Shares of 1 each
Add: Retained Profits
Add: Profits for the year 2011
Add: Share Premium
D. Impact of issuance of 10 million shares at £ 1.5 each, upon:
Consolidated Profit Loss Account
Less: Cost of sales
Consolidated Balance Sheet of H Plc with Y Plc Ltd. As at 31 Mar 2010
Equity And Liability
Consolidated Retained Profits
Less : Contra
Less : Depr.
Less : Unrealized Profit
Less : Contra
Less : Cheque in Transit
Cheque in Transit
Cost of capital:
Less: Share capital
Less: Pre acquisition profits
Consolidated Retained profits:
Share of H PLC
Add: Post acquisition profits
Less: Unrealised profit
Analysis Of profit
Add: Interim dividend
Less: Interim dividend
Add: Revaluation Profit
A. Determination of ratios for Ager Limited for the year ended 30th September 2013
= 43.48 Days
Where, Cost of Sales = Purchases + Opening Stock – Closing Stock
= 612,000+ 82,000- 98,000
The major ways which Ager can adopt to sort this state of negative bank balance may be,
Thus, if organisation is able to properly manage the activities, it shall certainly be able to manage its counterfeits and manage the problems concerned with liquidity risk management.
Computation and analysis of Ratios:
Dividend Yield Ratio: Dividend yield ratio depicts that how much an organisation pays out as dividend in relation to its share prices. It is computed as follows,
= (Annual Dividends Per Share)/(Price Per Share)
= 7p/ £3.5
= 0.02 or 2%
The dividend yield represents how much yield is being generated out of every pound invested on the equity position.
Dividend Cover Ratio:Dividend cover ratio depicts the relationship between company’s earning over the dividend paid to shareholders. It is computed as follows,
=(Earnings Per Share)/(Dividend Paid to Ordinary Shareholders)
Dividend cover ratio depicts that a healthy company will have a high coverage ratio, indicating its ability to pay off its dividends. In this case where dividend cover ratio is21, it depicts that Hedge limited has sufficient earning to pay dividend equivalent to twice the present dividend declared.
Earnings per Share: Earnings per share represent the profit of the company allocated to each outstanding share of a common stock. It is an indicator of organisation’s profitability. It is computed as,
=(Net Income-Dividends on Preffered Stock)/(Average Outstanding Shares)
= 70,000- (Nil) / 500,000
= 0.14 or 14p
EPS serves to be one of the most crucial variables in deciding the price of a share. Hedge limited’s EPS is determined to be 14p.
Price Earnings Ratio:
Price earnings ratio is the most tried and tested methodology for organisation’s valuation. A price earnings ratio depicts the relationship between the current share price and the per share earnings. It is computed as,
=(Market Value Per Share)/(Earnings Per Share)
=£ 3.5/ 0.14p
P/E is one of the most popular stock analysis metrics (Watson and Head 2013).
The P/E ratio for Hedge Limited is observed to be 25. This suggests that, investors in the stock of Hedge limited are willing to contribute £ 25 for every £ 1 of the income generated by the stock.
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