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Introduction: Financial Statement
Financial statements are the collection of financial data that shows the financial function of a business organization. The first step of the accounting process is the creation of journal entries. The journal entries show the cash inflows and outflows of a business organization from its operating activity. The Journal entries are summarized and categorized to create the financial statements. The financial statements of a business organization are mainly published in the financial reports every quarter and yearly basis. The annual reports mainly have three parts. The first provides the manager's report, which shops the plans of the business organization. The second part of the annual report shows the financial statements, and the third part shows the working notes of the financial statement.
Financial statements are used mainly by two types of users such as internal users and external users. The Internal users such as managers of a firm use the financial statements to analyze the firm's performance to create an efficient planning process. The objective of this planning process is to ensure the growth rate increase of the business organization. Other internal users that use the financial statements are employees. Employees use the financial statements to understand the profit and growth margin of the organization. It has been observed that employees tend to shift to business organizations, which show a higher growth rate. External users use financial analysis to understand and compare similar business organizations operating in the same market. Comparisons help external users understand which organization will provide them with the maximum return or investment or the highest risk rate. After analyzing these factors, investors strategize their investment decision. This study has produced the Income statement, balance sheet and cash flow statement of Highland Malt. After that analysis of these statements has been provided. In the last, the limitation of financial statement analysis as the conclusion has been provided.
Financial Statement
Income Statement
Focusing on the business transactions occurring for Highland Whisky, estimations have been made by considering the expenditures and income that would be calculated to understand loss or profit made by this sector. For this purpose, the generation of the income statement has provided the current financial status of Highland Whisky by developing a focus on "sales, gross profit, expenses through operation, other income and operating profit" that will help in acknowledging the present financial overview of this organization (TEXTS, 2018).
Referring to the above assumptions that have been through income statements, the relevant financial calculations have been made by considering the financial data for Highland Whisky. The calculation for the income statement has been made for both 2018 and 2019, respectively, which will help develop the proper comparison for the financial status for this sector in these two years, respectively. In 2018, the sales value was 1000000 and costs involved for these sales are 100000; whereas in 2019, the value for sales has been recorded to be 2000000 and the relevant price is 200000. Therefore, the gross profit calculation has been made through the deduction of the sales price from the sales value that led to the generation of 900000 for 2019 and 1800000 for 2018. Furthermore, the operating expenses have been calculated by considering utilities, wages, loan payment, maintenance, Adger payment, advertisement cost and fees, and taking the cost through supplies (Penman, 2019.).
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These estimates are summed up for getting the net value for operating expenses that include 410000 for 2019 and 320000 for 2018. The estimation of the "net operating profit" has been made by deducing the operating expenses from gross profit. The value for the "net operating profit" is 490000 for 2019 and 1480000 for 2018. The proper estimation for other income has been conducted by summing up the values for stock sales income and received loans and thereby generating proper financial calculations for additional income. The value generated for other income in 2019 is 0, whereas, for 2018, the value has been recorded to be 800000. Furthermore, the calculation for the net profit is done by deducing the pricing estimate for the total "other income" from the operating profit that will help in the generation of the values of 490000 for 2019 and 2280000 for 2018. Therefore, a conclusion could be derived from the above income statement that Highland Whisky has made much more profit in 2018 and thereby seemed to face a loss in 2019 that could be figured out from net profit values.
Balance sheet
The availability of the shareholder's equity, liabilities, and assets has been reported by generating a particular balance sheet that will be considered at a particular time. For this purpose, the capital structure evaluation is made by using the return rates that will help in the generation of accurate estimation for the balance sheet (Charitou et al., 2018). Highland Whisky's property has been correctly analyzed through the generation of focus on equity, liability and assets.
Balance sheet
2019
2018
Current asset
Inventory
250000
250000
Supplies
25000
40000
Total current asset
275000
290000
Long term asset
Equipment
50000
0
Cash from a loan
50000
50000
Adjustment to asset
670000
710000
Long term asset
770000
760000
Total asset
1045000
1050000
Current liability
Inventory
250000
250000
Long term liability
Loan
45000
50000
Equity shareholders
750000
750000
Total long term liability
795000
800000
Total liability
1045000
1050000
Table 2: Balance Sheet
From the above table, the assumptions have been made for the balance sheet that led to the generation of the different financial values for 2018 and 2019, respectively. Focusing on the current assets, the summation of the supplies and inventories has been productive in getting the accurate value for the "total current assets" that have been 275000 for 2019 and 290000 for 2018. Therefore, there has been a larger quantity of current assets that have been available in 2018 for Highland Whisky. The "long term asset" calculation has been done through the summation of the asset adjustment, loan cash, and equipment (Chen and Fang, 2021). The value for this asset in 2019 has been recorded to be 770000, whereas, in 2018, the estimation was made as 760000.
Furthermore, the financial value for total assets has been done by summing up the "long term asset and current asset" that generated the estimate for 2019 as 1045000 and 1050000 for 2018. For current liability, only inventory is calculated that generates estimates for 250000 for both 2018 and 2019. To estimate "total long term liability", the summation has been made through equity shareholders and loan values that generated financial values of 795000 for 2019 and 800000 for 2018. The calculation for the total liability has been done by adding both short and "long term liabilities". In 2019, the total liability was 1045000, but in 2018, the value was 1050000.
Cash flow statement
The complete summarization of cash equivalents and cash amounts have been shown in the generation of the cash statement (Osadchy et al., 2018). The cash flow statement of Highland has been shown in the below table as follows.
Cash flow statement
2019
2018
Cash at the beginning
2430000
0
Cash flow from operating activity
Net income
1000000
2000000
Cash flow from operating activity
-410000
-320000
Cash flow from investing activity
0
750000
Net cash flow
3020000
2430000
Table 3: Cash flow statement
The above table generates values for the cash flows by properly considering the financial estimates for the "net cash flow" for 2018 that is 2430000, thereby considering this value at the initial stage of 2019 for estimating the available cash. In 2018, the cash at the initial stage was 0 because previous year’sdates has not been shown (Sutopo et al., 2018). The summation has been made for net income, investing activity, and operating activity to get the "net cash flow" recorded to be 2430000. Furthermore, in 2019, the summation for "net cash flow" has been done through the operating activity cash flow and initial cash availability for getting the estimate of 3020000 accordingly.
Analysis of the Financial statement
To create a better understanding of a firm's financial position, it is very important to analyze the financial statements in further detail, rather than just observing the raw datas shown in these statements (Baksaas and Stenheim, 2019). Financial analysts have created various tools such as ratio analysis, trend analysis, horizontal analysis, vertical analysis to understand the statements. This section provides the ratio analysis process to understand the financial performance of the firm.
Ratio analysis
Ratio analysis is a “financial analytical tool Which is used to compare different financial perspectives of a firm to understand its financial performance” (Kourtiset al., 2019). Internal managers use the ratio analysis to understand the financial flows, and external users compare the ratio of different firms to make investment decisions.
Ratios
Formula
2019
2018
Profitability ratios
Return on assets
PBIT/Total Assets
0.47
1.41
Asset Turnover
Revenue/Total Assets
0.96
1.90
Gross profit margin
Gross profit/Revenue
90%
90%
Net profit Margin
PBIT/revenue
49%
74%
Liquidity ratios
Current ratios
Current asset/current liabilities
1.1
1.16
Networking capital ratio
Current assets-Current liabilities
25000
40000
Table 4: Ratio analysis
The profitability ratio shows a firm's capacity to earn profit using its assets and to manage different costs (Srinivasan, 2018). Under the profitability ratio, four types of ratios have been calculated and discussed as follows.
The return on asset ratio measures a firm's capacity to earn operating profit using its assets available (Supriyanto and Darmawan, 2018). It also signifies the change of operating cost in the firm. The calculation shows that the "Return on asset" ratio went down in 2019. The decrease in this ratio signifies that firm’s capacity to manage its operating expenses has decreased. The firm needs to improve this ratio by increasing operating profit or decreasing the asset amount.
The "Asset on revenue" ratio shows firms' capacity to use their assets to earn revenue has also decreased even though the firm's overall revenue increased. Highland malt needs to decrease its asset or increase its revenue to improve this ratio in future to reflect a better financial situation.
The "Gross profit margin ratio" compares the gross profit of a firm with the revenue". This ratio identifies firms' capacity to manage the cost of sales and improve gross profit. The calculation shows that firms capacity to manage its cost of sales remained the same. A stable gross profit margin is a good sign for the firm. However, they should try to improve this ratio by decreasing the sales cost and increasing the revenue.
The net profit margin ratio compares the operating profit with the revenue (Wijaya and Yustina, 2019). This signifies a firm's capacity to earn an operating profit and control operating expenses respective to the total revenue. The calculation shows that the net profit margin ratio has also decreased, which means the firm could not decrease its operating expenses. Highland mall should try to improve this ratio by decreasing its operating expenses.
In the overall summary of profitability ratio, it can be said that the firm's income statement did not improve in the year 2019, compared to 2018. They should decrease the costs and increase the revenues to improve the income statement.
The “Liquidity ratio measures the capacity of a firm to use its assets to meet the liability (Sadi’ah, 2018).
The Current ratio compares the current asset and current liabilities to understand whether a firm can meet its current liabilities or not. The current ratio should be more than one to meet the current liability. The calculation shows that the current ratio is 1.1 in 2019, which means Highland can meet the current liability. However, it is very near to becoming unable to meet the current liability. To continue operating activity, firms need to improve this ratio by decreasing the current liability and improving the current assets.
The networking capital ratio shows the difference between the current asset and current liability (Daryanto and Nurfadilah, 2018). The calculation. Shows that this ratio went up in 2019, which means firms asset and liability difference decreased. The firm needs to increase this difference in a positive sign to reflect a good financial situation.
In the overall summary of the ratio analysis, it can be stated that Highlands financial situation degraded in the year 2019. However, it needs to be stated that the firm succeeded to make a profit which is a good sign. It also needs to be said that ratio analysis has its limitations. So, it cannot be stated that the firm performed badly compared to the market average. The limitations of the ratio analysis have been shown in the following section of the project.
Limitation of the financial statement analysis
Financial statements show the financial aspect of a firm. However, it does not show the external market environment (Roska, 2017). The external market environment has a direct effect on the financial statements or performance of the firm. The financial statement analysis also does not conclude the inflation rate of the market, which is another important factor. Investors need to use Net present value analysis, IRR analysis, horizontal and vertical trend analysis to understand the true financial position of a business organization.
Human factors and environmental factors need to be considered before investing (Vigimet al., 2018). If one firm has a poor ethical value following trends, investors should avoid the business organization. Investors should also consider the brand value of a firm while investing. It has been observed that business organizations which have a higher brand value tend to be less risky. On the other hand, the business organizations which do not have brand value provide a higher return on investment. However, the risk of investment is high.
Conclusion
The project shows the process of creating an income statement, balance sheet and cash flow statement. The financial statements show that Highlands’s financial performance degraded over the year 2019. However, the firm is still able to earn profit which is a good sign. If Highland receives the proper market situation, its financial performance can be improved in the upcoming year. Highland also bought new machines which are expected to improve its production capacity and efficiency. External market analysis should be conducted to predict the future financial performance of the firm. The internal policies can also be improved to increase the productivity of the firm. Lastly, it can be said that analysis of financial testament and ratios is not enough to understand the real performance of Highland. The performance of Highland needs to be compared with other similar firms to reach the exact conclusion about the firm's performance.
References
Journals
Baksaas, K.M. and Stenheim, T., 2019. Proposal for improved financial statements under IFRS. Cogent Business & Management, 6(1), p.1642982.
Charitou, A., Floropoulos, N., Karamanou, I. and Loizides, G., 2018. Non-GAAP earnings disclosures on the face of the income statement by UK firms: The effect on market liquidity. The International Journal of Accounting, 53(3), pp.183-202.
Chen, J. and Fang, J., 2021. Reclassification of income statement items and weight adjustment of compensation performance indicators. China Journal of Accounting Studies, pp.1-25.
Daryanto, W.M. and Nurfadilah, D., 2018. Financial performance analysis before and after the decline in oil production: Case study in Indonesian Oil and Gas Industry. International Journal of Engineering & Technology, 7(3.21), pp.10-15.
Kourtis, E., Kourtis, G. and Curtis, P., 2019. Αn Integrated Financial Ratio Analysis as a Navigation Compass through the Fraudulent Reporting Conundrum: Α Case Study. International Journal of Finance Assignment, Insurance and Risk Management, 9(1-2), pp.3-20.
Osadchy, E.A., Akhmetshin, E.M., Amirova, E.F., Bochkareva, T.N., Gazizyanova, Y. and Yumashev, A.V., 2018. Financial statements of a company as an information base for decision-making in a transforming economy.
Penman, S.H., 2019. Accounting for intangible assets: There is also an income statement. Abacus, 45(3), pp.358-371.
Roska, V., 2017. Accounting as Factor of limitation of Cash basis Corporate Income Taxpayer in Croatia. Economic and Social Development: Book of Proceedings, pp.270-277.
Sadi’ah, K., 2018. The Effect of Corporate Financial Ratio upon the Company Value. The Accounting Journal of Binaniaga, 3(02), pp.75-88.
Srinivasan, P., 2018. A Study on Financial Ratio Analysis of Vellore Cooperative Sugar Mills at Ammundi, Vellore. International Journal of Scientific Research in Multidisciplinary Studies, 4(6), pp.1-18.
Supriyanto, J. and Darmawan, A., 2018. The effect of financial ratio on financial distress in predicting bankruptcy. Journal of Applied Managerial Accounting, 2(1), pp.110-120.
Sutopo, B., Kot, S., Adiati, A.K. and Ardila, L.N., 2018. Sustainability Reporting and value relevance of financial statements. Sustainability, 10(3), p.678.
Vigim, J.A., Apandi, R.N.N., Widarsono, A. and Prawira, I.F.A., 2018. HOW AUDITOR LIMITATION AND CORPORATE TAX GOVERNANCE EFFECT ON AUDIT QUALITY.
Wijaya, M. and Yustina, A.I., 2019. The Impact of Financial Ratio Toward Stock Price: Evidence From Banking Companies. JAAF (Journal of Applied Accounting and Finance), 1(1), pp.27-44.
