Case_of_a_Company

Summary This case will explain how financial reporting affect the business decision making of a company. Financial reporting provide: 1. the necessary information for enterprise managers in daily operations and management; 2. usful information for investors and lenders to make decision; 3. information of funds and enterprise solvency for creditors; 4. management and supervision of enterprises of the information for the financial, commercial, taxation and other administrative departments; 5. the necessary information for internal auditors, external audit inspection, supervision of production and business activities. Profit and loss account based on the matching concept, it reports income and expenses within a certain period. Matching concept is the accounting principle that requires the recognition of all costs that are directly associated with the realization of the revenue reported within the income statement. Profit and loss account balance also reportes the difference if income over expenses, the difference is called net profit or net income, if the costs exceed the income, the difference is called net loss. Retained earnings statement is a process which reflects economic entities changed the amount of retained net income as net income and its distribution has changed in a certain accounting period. In the company, investemt by shareholders could increase shares capital, and pay dividends to the shareholders will reduce retained earnings, while net income or net loss for each accounting period, are reflected in the increase or decrease of retained earnings. The data of retained earnings and current dividends of, can’t be found from the working papers but in the retained earnings account records. Balance sheet is an itemized statement that lists the total assets and the total liabilities of a given business to portray its net worth at a given moment of time. The amounts shown on a balance sheet are generally the historic cost of items and not their current values. The balance sheet reflects the company statement of financial position at a specific date. According to the accounting equation “Assets = Liabilities + Owner's equity”, order assets, liabilities and owner's equity by certain criteria and classification them. It provides assets, liabilities and owner's equity and their relationship to financial position information of the company at the given moment of time. Balance sheet is one of the main financial statements, each accounting principal must be scheduled in balance sheet on time. Balance sheet provide informations for users(including investors, creditors, governments and their departments and the general public, etc.) to understand understand and analyze the financial situation, to make their rational economic decisions. Their effects are mainly manifested in the following areas: 1. Balance sheet reflects the economic resources of the company and their distribution . 2. Balance sheet reflects equity structure of the company. 3. Balance sheet reflects mobility and financial Strength of the company. Analysis The example is about Daley Limited. It was set up by Edward and Eric several years ago; now the shares of the company as follows: Joe 34% Joe's father Edward 15% Joe's uncle Eric 15% Joe,s sister Carol 10% Carol's husband Nasser 7% Eric's son Gervase 19% The list of balances at the end December 2005 is as follows: Shares capital @P1 per share 150,000 Sales 2,793,800 Rental received from letting part of office building :29,350 Office building at net book value :423,751 Rental units at net book value 1,744,850 Vehicles, fixtures, etc. at net book value: 404,470 Accumulated reserves at 1 January 2005 1,788,208 Long-term loan 500,000 Creditors 106,309 Cash at bank 76,360 Opening stock at 11月 2005 263,404 Closing stock at 31 12月 2005 279,800 Director's remuneration 69,550 Other administrative expenses 386,024 Selling and distribution costs 100,470 Purchases of goods 1,715,027 Interest payable 38,850 Dividends paid：interim 58，500 Debtors 86,411 Daley Limited Income Statement Dec. 2005 (Unit: Php.) Revenue Sales P 2,793,800 Rental Income 29,350 Total P2,823,150 Expenses Sales cost P1698,631 Selling and distribution cost 100,470 Other administrative expenses 386,024 Director’s remuneration 69,500 Interest Expense 38,850 Tax Expense 158,888 Tatol P2,580,163 Net Income P359,987 Statement of Retained Earnings Dec. 2005 (Unit: Php.) Retained Earnings, 1, 1, 2005 P1,788,208 Add: Net Income 12, 31, 2005 359,987 Total P2,148,195 Less: Dividends Paid 133,500 Retained Earnings, 12, 31, 2005 P2,014,695 Balance sheet Dec.2005 (Unit: Php.) Assets Current assets Cash at Bank 76,360 Debtors 86,411 Stock 279,800 Tatol P442,571 Non-current assets Office Building 423,751 Rentail Units 1,744,850 Vehicles, fixtures, ect. 404,470 Tatol P2,573,071 Total Assets P3,015,642 Liability Current Liabilities Creditors 106,309 Taxes 158,888 Dividends Paid 75,000 Interest payable 38,850 Total P379,047 Long-term Liability Long-term Loan 500,000 Total P500,000 Total Liability P879,047 Owner’s Equity Shares Capital 150,000 Retained Earnings 2,014,695 Toral Owner’s Equity P2,154,695 Total Liability and Owner’’s Equity P3,033,742 1. Working Captail: Current assets – Current liability = 63,524 2. Current Ratio Current assets/ Current liability = 1.17 3. Quick Ratio Quick Assets/ Current liability = (Current assets-stock)/ Current liability =0.43 4. Inventory Turnover Sales cost/ The average cost of inventory = 1,698,631/271,602 = 6.25 5. Debt Ratio Liability/Asset =0.2915*100% = 29.15% 6. Liabilities to Equity Ratio Total Liability/ Toral Owner’s Equity = 0.4080*100%=40.8% 7. Return on Assets (Net Income+Interest)/Total Asset= 0.1323*100%=12.13% Conclusion According to the data we got before, it’s possible for Joe convince a majority of directors to vote in favor of his proposal. Short-term solvency of Daley is weak, but Long-term solvency of Daley is good, so if borrowing P200,000 for long-term loan, it will be possible.