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Part A
Q1. Explain the relationship between Australian Accounting Standards and accounting principal.
Q2. Define ‘financial probity’
Q3. Why does the balance sheet not provide an accurate picture of the organisation’s profitability?
PART B
In this section you are required to consider the implementation of budgets for your organisation, or one that you are familiar with. This may be an organisation that you have previously worked for or one that you are in close contact with, such as your training provider, a not-for-profit organisation you volunteer for, or a sporting or social club.
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In this assignment a discussion has developed on the accounting principle of Australia and how it works on the practice field. Furthermore, with the help of ratio analysis a calculation has developed to identify the strengths and the weakness of the Biz Ops Enterprise. A forecast has made on the financial performance statements to analyse the company’s growth and chances of profitability.
Conservatism is also known as prudence in accounting. In this principle of accounting it says record all anticipated losses and expenses and ignore all anticipated gains and incomes, this is known as conservatism or prudence (Erasmus et al. 2016, p. 998). The concept of convention future losses are losses and future gains perhaps not the gains.
According to the conversation concepts it stated that the closing stock is valued on the basis of the cost price or market price whichever is lower. Provision for bad debts and doubtful debts are maintained. The purpose of conservatism is that, this policy understates rather than overstates net assets and net incomes which help the company to play safe.
Key accounting standards that are directly relevant to gathering revenue data for statutory recording and reporting are:
AASB 118 REVENUE - According to the Accounting revenue standard section (118), each company needs to produce an income statement and company every company needs to follow the revenue standard.
Revenue is the income that rises if the cost of goods sold got lower of the firm. The accounting revenue standard is applied in each revenue transaction of a company. Hence, the company needs to follow each standard to prepare the cash flow, income statement and balance sheet.
The revenue shall be measured at the fair value of the consideration received or receivable.
Financial statements according to AASB comprises of :
1) Statement of financial activities at each of the year (Balance Sheet).
2) Annual Statement of profit and loss for each financial year.
3) Annual income Statement of the cash flows for each financial year.
4) Changes of earning per share for a financial year.
Current assets are those assets which can be converted into cash within one year, example of it are cash, debtors etc.
Off the shelf software’s are common nowadays. The example of the the off shelf software are spreadsheets, database applications, desktop related application, web design. Uses of these applications are:
Word processing application is generally used for the writing reports, memoranda, letters to the supplier and customers.
Spreadsheet application: This application is helping to keeping company’s various accounts, Invoice control system etc.
Database application is helping the company to maintain the customer records , sales records .
Business needs vary from one organisation to another because different organisations have different requirements. Therefore, the continuous improvement of process and techniques effectively run the business is must to survive in the competitive environment. Owners of the businesses always step out of their normal day to evaluate whether or not they are being effective and efficient , how they can improve their inefficiencies and plan for the future to cope the challenges ahead in the future, because the competition is so strong and huge everyone or rather everybody wants perfection. There are many companies which offer this kind of software’s like QuickBooks, Microsoft Dynamics, MAS90 etc. These software’s helps in getting instant insights into your finances, get complete visibility of the business, monitor key trends in the businesses, easy invoice and estimates, track sales and expenses.
Advantages of the off the shelf software’s are:
Disadvantages of the off the shelf softwares are:
I will purchase Quickbooks software because quickbook is very simple and easy to use software for business management purpose. It helps in sees who owes money and send them reminders, gets instant insights into the finances, gives complete visibility of the business (balance sheet, profit and loss account and tax details), easy invoicing and estimates, online banking integration, tracks sales and expenses.
Ratio | 2014 | 2015 |
Net profit margin | 0.05794187999 | 0.04453064594 |
Net profit ratio | 4.406172899 | 3.386013512 |
Cash Flow return on assets | 0.02797317985 | 0.03429950787 |
return on owner's equity | 2.51047409 | 1.913288288 |
Table 1 : ratio analysis
Analysis of Ratio
Net profit margin
The net profit ratio percentage is generally measured after the tax profit (Sharpley et al. 2015, p.885). Therefore,all the tax related expenses are not concern for a net profit margin ratio. In 2014, the net profit ratio of Biz Ops Enterprise is 4.40. It is indicates a positive movement of net profit. The company was able to decrease the long term liabilities in order to maintain the 4.40 net profit ratio. On the other hand, in 2015, the company’s net profit decreased from 4.40 to 3.38. That indicate the company has not able to minimise the operating expenses during 2014 to 2015 financial years. It is important for Biz Ops Enterprise to minimise the current liabilities and short term liabilities in order to increase the net profit ratio. Decreased net profit ratio will not make a positive feedback to the shareholders of the company. Hence, the share price may fall down.
Net profit ratio
The net profit ratio percentage is generally measured after the tax profit (Sharpley et al. 2015, p.885). Therefore,all the tax related expenses are not concern for a net profit margin ratio. In 2014, the net profit ratio of Biz Ops Enterprise is 4.40. Its indicates a positive movement of net profit. The company was able to decrease the long term liabilities in order to maintain the 4.40 net profit ratio. On the other hand, in 2015, the company’s net profit decreased from 4.40 to 3.38. That indicate the company has not able to minimise the operating expenses during 2014 to 2015 financial year. It is important for Biz Ops Enterprise to minimise the current liabilities and short term liabilities in order to increase the net profit ratio. Decreased net profit ratio will not make a positive feedback to the shareholders of the company. Hence, the share price may fall down.
Cash flow return on assets
Cash flow return on assets is measured company’s efficiency of a particular period (Brand et al. 2014, p.465). The Biz Ops Enterprise using cash flow return on assets to measure the future cash flow of the company. In 2014, the cash flow on assets was 0.02. On the other hand in 2015 the company was able to increase the the cash flow return on assets. That signifies the company maintains a certain cost control and paid all the outstanding expenses in order to increase the future cash flow over the period. Furthermore, a positive cash flow return on assets ratio also helps the company to Measure Company’s earning quality.
Returns on owner’s equity
Return on equity is basically how much profit company generated with the capital of the shareholders (Erasmus et al. 2016, p. 998). Therefore, a higher return on owner’s equity is always a favourable condition for a company. In 2014, Biz Ops Enterprise return on owner’s equity ratio was 2.51. The Return on owner’s equity was decreased from 2.51 to 1.91 in 2015. That decrease indicating the company was not able to increase the earning per share. In addition to this the company has faced some difficulty in order to maintain a good amount of retained earnings. It is important for the company to increase the profitability to increase the market share price. A higher market share price will help the company to provide higher dividend price to the company. In addition to this the company also can generate higher retain arning by increasing the shareholders capital.
Biz Ops Enterprise is not performing well in 2015 financial year. The reason behind the under performance are discussing billow
Working capital of the company is keep decreasing from 2014 financial year. Working capital helps the company to pay all the expenses day in day out business. It is important for the company to pay the creditors amount of time in order to minimise the current liabilities. On the other hand it has seen company was unable to increase the net profit margin. This is also affecting the company’s annual gross profit.
A proposed budget plan is very much useful for a company’s financial manager. In 2015, Biz Ops Enterprise was unable to increase the gross profit and sales. Therefore, to get a bank loan and stay in challenging business it is very much necessary to minimise the certain cost and operating cost. On the other hand, a budget plan helps the company to allocate the money properly. In some sector
AUD (2016) | AUD (2016) | |
Income | 150000 | |
Expenses | ||
Light | 1050 | |
maintenance | 512 | |
Salary and wages | 20000 | |
Advertisement expenses | 2500 | |
MArketing expense | 25000 | |
Other operating expenses | 1500 | 50562 |
Profit | 99438 |
Table 2 : Budget plan
A proposed budget plan has been developed for the company. It will helps the company to make a forecast. A proposed budget helps the company to identify the income and the expenditure. The estimated net income for the next financial year will be AUD 150000. The proposed budget is emphasis on the employee's salary and wages. It is important for a company to give higher salary in order to achieve the sales target. On the other hand, proposed budget help will help the company to minimise various expenses like maintenance and light. A estimated of AUD 99438 gross profit has been identified during the next financial year. It is important for the company to minimise the operating expenses and cost control in order to achieve the net profit target.
A business plan needs a proposed budget plan. It is important to know the fund allocation procedure. Moreover, certain accounting rules and regulation needs to maintain in order to produce a quality budget plan. With the help of various accounting tool, a company can get a look of employee’s salary structure, cost of production, operating expenses. An accounting tool will help the companies’ entrepreneur to cost reduction (Investors.hpe.com, 2016).
Particulars | 2016 | 2017 |
Sales | 113255 | 120354 |
Cost of good sold | 79576 | 76408 |
Gross profit | 33679 | 43946 |
Operating expenses | ||
Development | 3502 | 3486 |
General and administrative cost | 12353 | 11942 |
Restructuring | 1017 | 1116 |
Other operating cost | 2416 | 2378 |
Total operating expenses | 19288 | 18922 |
Operating income | 5471 | 5125 |
Other income or expense | -739 | -639 |
Profit before taxes | 4732 | 4486 |
Provision for income taxes | 178 | 125 |
Net income from continued business operations | 6554 | 1616 |
Other | -963 | |
Net income | 2333 | 1616 |
Net income available to common shareholders | 4554 | 3398 |
Earnings per share | ||
Basic | 2.51 | 1.91 |
Diluted | 2.48 | 1.88 |
Weighted average shares outstanding | ||
Diluted | 1839 | 1791 |
EBITDA | 10032 | 11319 |
Table 3 : Forecast of income statement
Analysis
On the basis of the previous year income statement, a proposed income statement has been developed. It will give Biz Ops Enterprise to known a brief idea about the expenses and the EBITDA. This forecast will help the company’s accountant in order to minimise the operating expenses. Furthermore, a proposed budget and a forecast income statement will help the company to get a bank loan. It is necessary to provide a proposed budget and income statement for getting a loan.
2016 | 2017 | ||
Cash Flows From Operating Activities | |||
Net income | 5554 | 3398 | |
Depreciation & amortization | 4061 | 2194 | |
Investment/asset impairment charges | |||
Deferred income taxes | -700 | -100 | |
Stock based compensation | 709 | 494 | |
Account receivable | 572 | -28 | |
Inventory | -330 | 339 | |
Accounts payable | 31 | -140 | |
Income taxes payable | -137 | -727 | |
Other working capital | -4549 | -1284 | |
Other non-cash items | 2279 | 1603 | |
Net cash provided by operating activities | 5749 | ||
Cash Flows From Investing Activities | |||
Investments in property, plant, and equipment | -3603 | -2083 | |
Property, plant, and equipment reductions | 424 | 213 | |
Acquisitions, net | -2398 | -2198 | |
Purchases of investments | -259 | -273 | |
Sales/Maturities of investments | 302 | 291 | |
Net cash used for investing activities | -5534 | -4150 | |
Cash Flows From Financing Activities | |||
Debt issued | 21758 | 19275 | |
Debt repayment | -15867 | -17130 | |
Common stock issued | 371 | 157 | |
Common stock repurchased | -2883 | -1755 | |
Excess tax benefit from stock based compensation | 145 | 29 | |
Dividend paid | -1250 | -1089 | |
Other financing activities | 70 | -12118 | |
Net cash provided by (used for) financing activities | 1344 | -11731 | |
Net change in cash | 2300 | -10132 | |
Cash at beginning of period | 16133 | 18768 | |
Cash at end of period | 17433 | 4636 | |
Free Cash Flow | |||
Operating cash flow | 6590 | 5249 | |
Capital expenditure | -3603 | -2083 | |
Free cash flow | 2887 | 3666 |
Table 4 : Forecast of cash flow
Analysis:
With the help of the previous year cash flow a forecast analysis has been developed. A positive impact has been developing. The company needs to minimise the liquidity in order to maximise the company’s net cash flow. Furthermore, in this proposed cash flow help the company to identify the investment activity over the next financial year. Furthermore, a forecast of cash flow helps the company’s accountant to maximise the operating profit. It is important for the company to reduce the per unit, hence it is important to follow the proposed cash flow.
I this assignment a discussion have developed on the accounting principle and practice. A templet has been provided in order to give a proper idea of the accountancy principal. Furthermore, a proposed budget has been provided to a company to identify the strengths and the weakness. Certain solution had been provided to the company in order to maximise the the profit and cash inflow.
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