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1.1: Report Aims
This report aims to provide a suitable discussion on the financial management tools and parameters for a concerned organisation labelled as Star Ltd. The additional aim of this report shall be further provided for identifying the nature of reporting as well as offer suitable financial calculations to measure company’s performance with industry.
1.2: Report Structure
In this report a detailed discussion shall also be provided for identifying essential uses of the accounting and financial management in the market and additional emphasis shall be provided for identifying the key elements involved in the preparation of financial statements. The report structure shall also consist of suitable interpretation of financial ratios and simultaneously explain all calculated ratios in brief. The additional focus on this report shall further determine key limitations of ratio analysis and locate essential factors involved in organisational decision making. A brief summary and recommendations shall also be provided as a key component of the report structure for furbishing suitable financial details for Star Ltd.
2.1: Definition of Accounting and Financial Management
The process of accounting is generally considered to be a key financial component that requires due attention from a concerned organisation. According to Schmitz and Leoni (2019), accounting is a process which facilitates recording of financial transactions for an organisation to fetch suitable organisational performances. In order to further refurbish the accounting process, financial management is also considered to be a key determinant. Financial management further helps an organisation to obtain fruitful dividend-oriented prospects and attract a large number of investors attributed with investment purposes. The subsequent discussion on usage of accounting and financial management can be further explained based on key decisions employed by Star Ltd.
2.2: Uses of Accounting and Financial Management
The usage of accounting and financial management can be further attributed to facilitate suitable financial decision making for encouraging perennial growth of an organisation. As explained and observed by Weetman (2019), additional uses of accounting and financial management can be further attributed to encourage cost minimisation in order to facilitate higher profitability prospects. The usage of accounting and financial management for Star Ltd. can be further attributed to achieving higher profitability ratios by tactically optimising its relevant operational costs. Hence, the adherence to tactical and strategic usage of accounting and financial management is a key determinant for ensuring harmonious market sustainability for Star Ltd.
3.1: Key Elements of Financial Statements
Kelly and Pearce (2020), opined that asset of an organisation determine the entire valuation of wealth possessed and held by a particular organisation. The assets held by the company Star Ltd mainly consists of machinery, equipment, inventory, cash and receivables and these are the primary determinants for an organisation to determine value of wealth.
Black and Scholes (2019), explained that liabilities are generally considered to be those financial obligations for a company which needs to be paid off or settled within a prescribed time limit. The liabilities concerned for Star Ltd mainly consists of long-term debt, payables and current liabilities for the financial year 2021.
The element equity can be determined as the shareholders or owners fund, which depicts how much investor orientation the company is adhering to and what proportion of capital is being invested by a particular proprietor. Equity for Star Ltd. consists of GBP 100,000 acquired in the financial year 2021.
Hung and Hager (2019), illustrated that revenue is the total value generated by a concerned organisation attributed with facilitation for selling of products. Alternatively, revenue can be considered as the total sales value obtained or shall be obtained by an organisation from its customers and the revenue of Star Ltd. has been provided as GBP 100,000.
Expenses can be considered as the total costs incurred by an organisation, with respect to production inputs facilitated by an organisation. The expenses for Star Ltd. have been numerically represented as GBP 8,000.
From the above tables of ratio calculations for profitability, earning capacity and asset efficiency ratios for Star ltd, the major ratios are considered to be net profit ratio, return on equity as well as asset turnover ratio. The computed ratios further consist of numerical values of 9%, 9% and 4 respectively.
3.3: Calculation and Interpretation of Liquidity Ratios
From the above table of liquidity ratios, the major ratios calculated are considered to be Current ratio and quick ratio. The numerical figures of both current and quick ratios have been calculated as 2.22 and 1.89 respectively and necessary interpretation for gearing ratios are further discussed as follows.
3.4: Calculation and Interpretation of Gearing Ratios
From the above table of debt-to-equity ratios for Star Ltd, the numerically calculated figures consist of 1.20 for the financial year 2021. In this calculation, debt and equity have been valued as £ 120,000.00 and £ 100,000.00 respectively.
3.5: Explanation on Each Ratios
Fatima, Toha and Prakoso (2019), stated that profitability ratios help to determine the profitability prospects of an organisation (Toy Star Ltd) by calculating gross profit, net profit and profit margin ratios.
The earning capacity ratio helps to measure the total earning capacity for Toy Star Ltd, with respect to measuring return on assets and return on equity.
Supriyanto (2019), explained that asset efficiency ratios for a company (Toy Star Ltd) helps determine the turnover prospects of a company by calculating asset turnover ratios.
The liquidity ratios for Toy Star Ltd helps to determine the operational metrics by evaluating current and quick ratios.
The gearing ratios for Toy Star Ltd. further helps to determine the solvency prospects by evaluating debt to equity ratios (Rahardjo, Bangun and Amalia, 2020).
3.6: Ratio Interpretation with respect to Industry Standards
3.6.1: Essentials Factors Involved in Decision Making
The essential factors involved in the decision-making patterns for Toy Star Ltd. can be further measured based on comparison with industry standards. The industry standards suggest that the ideal net profit ratio is considered to be 8%, in which the company achieves a ratio of 9%. The additional aspect of effective decision making can be further measured based on industry based quick ratio, in which standard ratio is considered to be 1.1 and the company performs at 1.89:1. Hence, the financial metrics for Toy Star Ltd. are considered to be above industry average.
4: Limitations of Ratio Analysis
4.1: Three Limitations
The three limitations of ratio analysis can be considered as not providing current and future estimations of financial statements for a concerned organisation. Non-Provision of current and future data leads to a company (Toy Star Ltd) achieving inconclusive financial measurement for a concerned financial period. As expressed, and illustrated by Simkus et al. (2021), the additional limitations of ratio analysis can be further considered as providing different accounting policies for companies. Hence, the following of different accounting or financial policies can lead to decreased financial reliability for Toy Star Ltd.
Egan et al. (2021), Expressed and opined that the additional demerit of ratio analysis can be further considered as allowing organisations to manipulate financial data. Therefore, this can be further manipulated and modulated by the concerned management of Toy Star Ltd to ensure higher financial aesthetics.
5: Summary and Recommendations
5.1: Summary of Ratio Analysis
In this report a detailed discussion on the financial metrics of Toy Star Ltd have been discussed, where the financial ratios are considered to be higher than that of industry standards. The additional attributes of this report have also discussed various limitations of ratios, which are considered to be ability to modulate financial data and existence of different accounting policies.
In order to further improve the financial performances and adhere to the suitable measuring of financial parameters, it is recommended to Toy Star Ltd that cost optimisation should be followed. The cost optimisation shall further allow Toy Star Ltd to encourage higher profitability prospects in the near and distant future.
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