Explore Unit 1 Financial Reporting assignment sample covering sole traders, partnerships, cash flows, error correction, accounting concepts and ratio analysis for strong coursework and exam prep.
This section explains how to prepare financial statements for sole traders and partnerships, including the income statement, statement of financial position, and partnership appropriation and capital accounts, with clear workings and explanations. It covers key adjustments like depreciation, accruals, prepayments, drawings, and interest on capital, helping you understand how to present a true and fair view of the business’s performance and position. This assignment sample follows UK accounting standards and conventions, making it a useful reference for students studying financial reporting and seeking assignment help in uk. Use this structured approach to build confidence in preparing accurate and well-presented financial statements.
Financial Statements for a Sole Trader
Statement of Financial Position at 31 December 20X2
Non-Current Assets
| Category | Cost (£) | Accumulated Depreciation (£) | Net Book Value (£) |
| Equipment & Machinery | 100,000 | 10,000 | 90,000 |
| Total Non-Current Assets | 100,000 | 10,000 | 90,000 |
Adjustments:
Current Assets
| Category | Amount (£) |
| Inventory | 9,200 |
| Receivables | 7,600 |
| Prepayments | 600 |
| Bank | 4,000 |
| Total Current Assets | 21,400 |
| Total Assets | £111,400 |
Adjustments:
LIABILITIES AND CAPITAL
Current Liabilities
| Category | Amount (£) |
| Payables | 8,800 |
| Accruals | 2,800 |
| Total Current Liabilities | 11,600 |
| Net Current Assets (Total Current Assets - Current Liabilities) | £9,800 |
| Total Assets Less Current Liabilities | £99,800 |
Non-Current Liabilities
| Category | Amount (£) |
| Interest-Free Loan from Dad | 6,000 |
| Total Non-Current Liabilities | 6,000 |
| Net Assets (Total Assets Less Total Liabilities) | £93,800 |
Adjustments:
Financed By:
| Category | Amount (£) |
| Opening Capital (1st January 20X2) | 75,000 |
| Add: Profit for the Year | 19,700 |
| Less: Drawings (Including Goods for Own Use) | (900) |
| Closing Capital | £93,800 |
Note: Closing capital should match the value of net assets.
Income Statement (Profit and Loss Account) for the Year Ended 31 December 20X2
Sales and Gross Profit Calculation
| Category | Amount (£) |
| Sales Revenue | 160,000 |
| Less: Cost of Sales | |
| Opening Inventory | 3,300 |
| Add: Purchases | 109,100 |
| Less: Closing Inventory | (9,200) |
| Total Cost of Goods Sold | (103,200) |
| Gross Profit | £56,800 |
Operating Expenses
| Expense Type | Amount (£) |
| Rent | 24,000 |
| Electricity | 3,800 |
| Business Rates | 3,400 |
| Depreciation | 5,000 |
| Irrecoverable Debts (Bad Debts) | 900 |
| Total Expenses | (37,100) |
| Net Profit for the Year | £19,700 |
Explanation of Key Adjustments and Concepts
Period-End Adjustments
Adjustments ensure that the financial statements present an accurate and fair view of the business.
Depreciation
Depreciation spreads the cost of fixed assets over their useful life. The straight-line method is used:
Irrecoverable Debts
A sum of £900 is written off as a bad debt, reducing the trade receivables.
Accruals and Prepayments
Owner’s Drawings
Financial Statements for a Partnership
Partnership: Hodgins & Co.
For the Year Ended 31 December 20X2
Income Statement (Profit and Loss Account)
This statement summarizes the revenues and expenses of the partnership to determine the net profit available for distribution.
| Category | Amount (£) |
| Sales Revenue | 600,000 |
| Less: Cost of Sales | |
| Opening Inventory | 5,000 |
| Add: Purchases | 120,000 |
| Less: Closing Inventory | (8,000) |
| Total Cost of Goods Sold | (117,000) |
| Gross Profit | 483,000 |
| Less: Operating Expenses | |
| Wages and Salaries | 106,000 |
| Rent | 42,000 |
| Heating and Lighting | 6,000 |
| Sundry Expenses | 12,000 |
| Interest on Loan | 800 |
| Depreciation: | |
| - Freehold Premises | 7,600 |
| - Plant and Machinery | 13,800 |
| - Motor Cars | 6,000 |
| - Office Equipment | 1,600 |
| Total Expenses | (195,800) |
| Net Profit Before Appropriation | £287,200 |
Appropriation Account
The appropriation account shows how the net profit is distributed among partners.
| Category | Amount (£) |
| Net Profit | 287,200 |
| Less: Appropriations | |
| Interest on Capitals: | |
| - Bell (10%) | 12,111 |
| - Booker (10%) | 7,322 |
| - Candell (10%) | 1,567 |
| Total Interest on Capitals | (21,000) |
| Partner’s Salaries: | |
| - Booker | 16,000 |
| Total Salary Expense | (16,000) |
| Remaining Profit to be Shared | 250,200 |
| Bell (2/5) | 100,080 |
| Booker (2/5) | 100,080 |
| Candell (1/5) | 50,040 |
| Total Appropriation | (250,200) |
Partners’ Capital Accounts
| Partner | Opening Balance (£) | Goodwill Adjustment (£) | Revaluation Profit (£) | Capital Introduced (£) | Drawings (£) | Closing Balance (£) |
| Bell | 100,000 | (20,000) | 47,333 | - | (30,000) | 97,333 |
| Booker | 60,000 | (10,000) | 23,667 | - | (40,000) | 33,667 |
| Candell | - | 12,000 | - | 50,000 | (4,000) | 58,000 |
| Total | 160,000 | (18,000) | 71,000 | 50,000 | (74,000) | 189,000 |
Adjustments:
Partners’ Current Accounts
| Partner | Opening Balance (£) | Interest on Capital (£) | Salary (£) | Profit Share (£) | Drawings (£) | Closing Balance (£) |
| Bell | 16,000 | 12,111 | - | 100,080 | (30,000) | 98,191 |
| Booker | 12,000 | 7,322 | 16,000 | 100,080 | (40,000) | 95,402 |
| Candell | - | 1,567 | - | 50,040 | (4,000) | 47,607 |
| Total | 28,000 | 21,000 | 16,000 | 250,200 | (74,000) | 241,200 |
Adjustments:
Statement of Financial Position (Balance Sheet) as of 31 December 20X2
Assets
| Category | Cost (£) | Accumulated Depreciation (£) | Net Book Value (£) |
| Freehold Premises | 210,000 | (7,600) | 202,400 |
| Plant and Machinery | 27,000 | (13,800) | 13,200 |
| Motor Cars | 12,000 | (6,000) | 6,000 |
| Office Equipment | 6,000 | (1,600) | 4,400 |
| Total Non-Current Assets | 255,000 | (29,000) | 226,000 |
Current Assets
| Category | Amount (£) |
| Inventory | 8,000 |
| Trade Receivables | 14,000 |
| Bank | 19,200 |
| Total Current Assets | 41,200 |
Capital and Liabilities
| Category | Amount (£) |
| Partners' Capital Accounts | 189,000 |
| Partners' Current Accounts | 241,200 |
| Loan from Bell | 20,000 |
| Trade Payables | 17,000 |
| Total Capital and Liabilities | 467,200 |
Purpose of Preparing Financial Statements (Merit - 1M1)
Financial statements are a fundamental tool used to understand the financial health and performance of a business, including profitability, liquidity, and overall financial stability (Olayinka, 2022). These statements help in maintaining financial discipline by providing the sole traders and partnerships with some structured summary of all financial transactions within a certain period. A business owner can use the income statement to find out how much profit the company is making by evaluating the revenue, the expenses and the net profit from the resulting statement (Rusydi, 2021). The statement of financial position (balance sheet) shows the financial standing of the business by indicating all the assets, liabilities and capital and ensures that the owners and stakeholders can get an idea about the financial situation at a particular time.
Financial statements have an important role in equity sharing and accountability for partnerships (Gardi et al., 2021). In this last, the appropriation account is transparent on how net profit is divided among the shareholders according to preset ratios, salaries and interest on capital. This guarantees fair contributions & withdrawals and stops any disputes about that. Personal investments, withdrawals and profit allocation are kept track of the partners' capital and current accounts in order to see each partner's financial stake in the business (Hawk, 2024). Accurate financial reporting also supports tax compliance due to the fact that, as a business, it needs to follow legal requirements and avoid penalties without raising more questions to the tax authorities.
Financial statements are a very important aspect that is used for decision-making in the organization, financial planning and future growth strategies (Dwivedi et al., 2020). They also enable businesses to know trends, manage cash flow effectively and determine whether a business would want to raise more outside capital. Financial reports are one of the things sole traders and partnerships use to check whether the venture is viable and profitable enough to keep running or whether some gear changes are needed (Andries, Clarysse and Costa, 2021). Financial statements function as a communication tool between the business and external entities like investors, banks, or regulatory bodies, ensuring that all financial transactions are properly recorded and follow standard accounting principles.
The usefulness of Financial Statements to Stakeholders (Distinction - 1D1)
Financial statements have many stakeholders, each using the reports for different reasons. Business owners and managers understand financial statements to measure profitability, track performance, and make data-based decisions on investment, expansion and cost control (Lassoued and Khanchel, 2021). They can study the trends in revenue, expenses and net profit of a business. Then they can know its strengths and weaknesses to implement the strategies for the business’ long-term sustainability.
Financial statements are relied upon by partners to ensure fair profit distribution, assess capital investments, and monitor contributions of an economic nature. The appropriation account allows for transparent profit sharing, the partners’ capital and current accounts to record financial transactions and avert disputes (Morales et al., 2022). Financial records are essential for running a business to maintain trust and accountability with business partners.
Investors and other potential investors analyse financial statements to see that a business is financially stable and can generate returns. Investors decide to allocate their capital (money) and go for adding more capital to the business only if it is profitable and also can maintain the operations. Financial statements are only used by lenders, like banks and financial institutions, to determine the business’s creditworthiness (Makhazhanova et al., 2022). On the balance sheet view, they try to assess the liquidity and solvency of the company so that the industry can pay for its loans and so forth.
Before providing credit terms, suppliers and creditors rely on financial statements to assess a business’s financial health. This element also helps the suppliers trust the ability of a company to meet its short-term liabilities as per the statement of financial position and thus reassures them about timely payments. Government agencies and tax authorities use financial statements to verify compliance with tax regulations and financial reporting standards (Edy et al., 2021). Accurate financial records help all businesses fulfil their tax obligations and lessen the chances of something going wrong when dealing with their taxes.
Employees and trade unions examine financial statements to assess job security, salary potential, and future growth opportunities (Nilsson and Nilsson, 2021). A profitable and financially stable business often provides job security, career advancement opportunities, salary increments, and more. In unprofitable companies, employees can be worried about job cuts or reduced salaries.
Customers and clients engaging in long-term contracts and high-value transactions may be interested in financial statements. A financially strong business establishes confidence in customers that it will be able to stay in business without risk to itself or its service delivery. Businesses can oblige existing and potential corporate clients and government customers who would like to enter any form of contract with them to be financially able to execute agreements (Olayinka, 2022). All stakeholders need to see what the financial statements are about because these are reliable economic data, it will help to assist when making decisions and investors will at least have some trust in the business. Financial reports give businesses analytical insights into profitability, solvency, and long-term viability, assuring credibility, attracting investments, and sustaining operations in a competitive marketplace.
| Particulars | Amount (₹ Crore) |
| Revenue | 2,90,800 |
| Cost of Sales | (1,98,000) |
| Gross Profit | 92,800 |
| Operating Expenses | |
| - Selling Expenses | (20,000) |
| - Administrative Expenses | (10,000) |
| Total Operating Expenses | (30,000) |
| Operating Profit | 62,800 |
| Other Income | 5,000 |
| Finance Costs | (2,000) |
| Profit Before Tax | 65,800 |
| Tax Expense | (16,450) |
| Net Profit for the Year | 49,350 |
| Particulars | Amount (₹ Crore) |
| ASSETS | |
| Non-Current Assets | |
| - Property and Equipment | 1,12,240 |
| - Right-of-Use Assets | 78,860 |
| - Intangible Assets and Goodwill | 44,990 |
| Total Non-Current Assets | 2,36,090 |
| Current Assets | |
| - Accounts Receivable | 4,45,610 |
| - Unbilled Revenues | 1,53,000 |
| - Invested Funds | 4,69,630 |
| - Other Current Assets | 90,950 |
| Total Current Assets | 11,59,190 |
| Total Assets | 13,95,280 |
| EQUITY AND LIABILITIES | |
| Equity | |
| - Share Capital | 3,75,000 |
| - Retained Earnings | 6,00,000 |
| - Other Reserves | 1,20,000 |
| Total Equity | 10,95,000 |
| Non-Current Liabilities | |
| - Long-Term Borrowings | 50,000 |
| - Lease Liabilities | 70,000 |
| Total Non-Current Liabilities | 1,20,000 |
| Current Liabilities | |
| - Trade Payables | 80,000 |
| - Short-Term Provisions | 71 |
| - Other Current Liabilities | 1,00,209 |
| Total Current Liabilities | 1,80,280 |
| Total Equity and Liabilities | 13,95,280 |
Workings for Statement of Financial Position:
Property & Equipment + Right-of-Use Assets + Intangible Assets = 1,12,240 + 78,860 + 44,990 = ₹2,36,090 Crore
Accounts Receivable + Unbilled Revenues + Invested Funds + Other Current Assets = 4,45,610 + 1,53,000 + 4,69,630 + 90,950 = ₹11,59,190 Crore
Non-Current Liabilities + Current Liabilities = 1,20,000 + 1,80,280 = ₹3,00,280 Crore
| Particulars | Share Capital (₹ Crore) | Retained Earnings (₹ Crore) | Other Reserves (₹ Crore) | Total Equity (₹ Crore) |
| Balance as at April 1, 2023 | 3,75,000 | 5,50,650 | 1,10,000 | 10,35,650 |
| Net Profit for the Year | 49,350 | 49,350 | ||
| Other Comprehensive Income | 10,000 | 10,000 | ||
| Dividends Paid | (20,000) | (20,000) | ||
| Balance as at March 31, 2024 | 3,75,000 | 6,00,000 | 1,20,000 | 10,95,000 |
Previous Balance + Net Profit - Dividends Paid = 5,50,650 + 49,350 - 20,000 = ₹6,00,000 Crore
Share Capital + Retained Earnings + Other Reserves = 3,75,000 + 6,00,000 + 1,20,000 = ₹10,95,000 Crore
Notes to Financial Statements
These are our financial statements for Tata Consultancy Services (TCS) Limited, prepared in line with International Financial Reporting Standards (IFRS) and are in compliance with the regulatory standards as per the Securities and Exchange Board of India (SEBI.) (Bhasin, 2017) The financial statements included in this booklet represent an accurate and fair view of the company's financial performance, position and cash flow about the financial year ending March 31, 2024.
Revenue from contracts with the customer is recognized by reference to the expected consideration at the time at which control of the goods or services is transferred to the customer. The company follows the long-term contracts carried out using the percentage of completion method and short-term service contracts using the point-in-time recognition method (Sari, Anugrah and Nasir, 2020).
Historical costs, less accumulated depreciation and impairment losses, are used to record property, plant and equipment (Karapavlovic, Obradovic and Bogicevic, 2020). The straight-line method is used to calculate the depreciation on each asset and is time-based based on the useful life of each asset. Accordingly, the estimated useful life of the different asset classes is as follows:
Buildings: 30 years
Plant & Machinery: 10 years
Office Equipment: 5 years
Vehicles: 4 years
Business acquisitions give rise to goodwill, which is tested yearly for impairment (Hartmann, 2021). Software and patents are other intangible assets, some of which are amortized throughout their reasonably expected helpful life and cover 3 – 7 years.
Amortization and depreciation charges are calculated using asset patterns of usage and the expected residual value of ownership (Nechaev, 2020). Annual review of assets for possible indication of impairment and impairment loss recognised in the income statement if the carrying amount of the assets exceeds the recoverable value.
The company classifies financial instruments into financial assets, liabilities, and equity instruments by IFRS 9. The key financial assets are trade receivables, cash equivalents, and investments of equity instruments. Financial liabilities include borrowings, lease liabilities, and trade payables (Magli, Nobolo and Ogliari, 2018).
The trade receivables are reported at amortized cost based on the effective interest rate. [Given] Expected credit loss (ECL) models are provided for the records of doubtful debts based on the allocation of books by the risk of turning outstanding receivables (Schutte et al., 2020). The receivables exceeding 180 days are provided with a provision rate of 5% for the year.
For income tax accounting purposes, the company has a liability method. Temporary differences between the carrying amount of assets and liabilities in the financial statements and their tax bases generate deferred tax liabilities (Schutte et al., 2020). For the year, a 25% rate of corporate tax is applied.
Under IFRS 16 – Leases, the company recognises lease liabilities, which generate rights of use and corresponding liabilities to the balance sheet (PricewaterhouseCoopers, 2019). According to the rules of lease payments, interest expense is recognized in the income statement, while principal repayment is booked as an expense.
In FY 2024, TCS declared a final dividend of ₹20,000 crore for its shareholders. The dividend payout stays in sync with the company’s objective of maintaining a balance between a stable dividend payout to the investors and enough capital for business expansion (PricewaterhouseCoopers, 2019).
Director’s Report for the Financial Year Ended March 31, 2024
To the Shareholders,
Tata Consultancy Services (TCS) Limited, the Board of Directors, have the pleasure of presenting the Annual Report of the year ended March 31, 2024 (TCS, 2023). With global economic challenges, the company has achieved strong financial growth, recording total revenue of ₹2,90,800 crore and a net profit of ₹49,350 crore (an increase of 8.2% yearly). Using an increasingly technological landscape, TCS has demonstrated robust operational efficiency and resilience (TCS, 2023).
TCS has continued to expand globally during the year, delivering digital transformation solutions to banking, financial services, retail, healthcare, and telecommunications sectors. These included deploying AI-powered analytics solutions to improve business process efficiency, establishing the TCS Quantum Computing Research Lab to drive quantum computing applications, and enhancing cloud computing services with Microsoft Azure, Amazon Web Services (AWS) and Google Cloud (Jordan, 2024). The company also made strategic acquisitions in Europe and North America to expand its consulting capabilities.
Besides adding 58 new $100 million revenue clients, TCS built on its enterprise engagement model. The client acquisition remained high, with 98% of business being from existing clients (Jordan, 2024). The company invested ₹5,000 crore in AI, machine learning, blockchain and cybersecurity innovations despite that. Led by its successful TCS Innovation Lab network (the network that identifies opportunities related to new-generation digital solutions and helps these ideas become commercially viable markets), TCS filed 15 new patents in the last 12 months, maintaining its leadership in next-generation digital solutions (Bhattacharya, 2022).
The focus on talent development continued, and the company hired 45,000 new employees globally and maintained an employee satisfaction rating of 91 per cent in internal surveys (Bhattacharya, 2022). It has also invested significantly in AI and cybersecurity training and reskilling programs, so TCS is at the front rank in workforce development and digital expertise.
TCS remained at the forefront of retaining sustainability in its long-term strategy. Over the past three years, the company has reduced carbon emissions by 30%, invested in education programs impacting more than 500,000 students worldwide, and eliminated fossil fuel use in key data centres (Hayat, Islam and Hossain, 2024).
The company has a detailed risk management framework to deal with specific risks, such as cybersecurity threats, regulatory compliance, currency fluctuations, and geopolitical uncertainties. The Board has firmly adhered to the SEBI regulations, IFRS accounting standards, and money laundering policies. The Board has proposed this in the form of a final dividend of ₹20,000 crore, which is at par with the past returns, as well as maintaining a strong capital structure for future investments (Hayat, Islam and Hossain, 2024).
Income Statement for the Year Ended March 31, 2024
|
Particulars |
Amount (₹ Crore) |
|
Revenue |
10,00,122 |
|
Cost of Sales |
(7,50,000) |
|
Gross Profit |
2,50,122 |
|
Operating Expenses |
|
|
- Selling and Distribution Expenses |
(30,000) |
|
- Administrative Expenses |
(20,000) |
|
Total Operating Expenses |
(50,000) |
|
Operating Profit |
2,00,122 |
|
Other Income |
5,000 |
|
Finance Costs |
(10,000) |
|
Profit Before Tax |
1,95,122 |
|
Tax Expense |
(50,000) |
|
Net Profit for the Year |
1,45,122 |
Workings
|
Particulars |
Amount (₹ Crore) |
Workings |
|
Revenue |
10,00,122 |
Given Data |
|
Cost of Sales |
(7,50,000) |
Given Data |
|
Gross Profit |
2,50,122 |
Revenue - Cost of Sales = 10,00,122 - 7,50,000 |
|
Operating Expenses |
||
|
- Selling Expenses |
(30,000) |
Given Data |
|
- Administrative Expenses |
(20,000) |
Given Data |
|
Total Operating Expenses |
(50,000) |
30,000 + 20,000 |
|
Operating Profit |
2,00,122 |
Gross Profit - Total Operating Expenses = 2,50,122 - 50,000 |
|
Other Income |
5,000 |
Given Data |
|
Finance Costs |
(10,000) |
Given Data |
|
Profit Before Tax |
1,95,122 |
Operating Profit + Other Income - Finance Costs = 2,00,122 + 5,000 - 10,000 |
|
Tax Expense |
(50,000) |
Profit Before Tax × 25% = 1,95,122 × 25% |
|
Net Profit for the Year |
1,45,122 |
Profit Before Tax - Tax Expense = 1,95,122 - 50,000 |
Statement of Financial Position as at March 31, 2024
|
Particulars |
Amount (₹ Crore) |
|
ASSETS |
|
|
Non-Current Assets |
|
|
- Property, Plant, and Equipment |
5,00,000 |
|
- Intangible Assets |
1,00,000 |
|
- Investments |
2,00,000 |
|
Total Non-Current Assets |
8,00,000 |
|
Current Assets |
|
|
- Inventories |
1,50,000 |
|
- Trade Receivables |
1,00,000 |
|
- Cash and Cash Equivalents |
50,000 |
|
Total Current Assets |
3,00,000 |
|
Total Assets |
11,00,000 |
|
EQUITY AND LIABILITIES |
|
|
Equity |
|
|
- Share Capital |
2,00,000 |
|
- Retained Earnings |
4,00,000 |
|
- Other Reserves |
1,00,000 |
|
Total Equity |
7,00,000 |
|
Non-Current Liabilities |
|
|
- Long-Term Borrowings |
2,00,000 |
|
- Deferred Tax Liabilities |
50,000 |
|
Total Non-Current Liabilities |
2,50,000 |
|
Current Liabilities |
|
|
- Trade Payables |
1,00,000 |
|
- Short-Term Provisions |
25,000 |
|
- Other Current Liabilities |
25,000 |
|
Total Current Liabilities |
1,50,000 |
|
Total Equity and Liabilities |
11,00,000 |
Statement of Changes in Equity for the Year Ended March 31, 2024
|
Particulars |
Share Capital (₹ Crore) |
Retained Earnings (₹ Crore) |
Other Reserves (₹ Crore) |
Total Equity (₹ Crore) |
|
Balance as at April 1, 2023 |
2,00,000 |
2,54,878 |
90,000 |
5,44,878 |
|
Net Profit for the Year |
1,45,122 |
1,45,122 |
||
|
Other Comprehensive Income |
10,000 |
10,000 |
||
|
Dividends Paid |
(20,000) |
(20,000) |
||
|
Balance as at March 31, 2024 |
2,00,000 |
3,80,000 |
1,00,000 |
6,80,000 |
Workings
|
Particulars |
Amount (₹ Crore) |
Workings |
|
ASSETS |
||
|
Non-Current Assets |
||
|
- Property, Plant, and Equipment |
5,00,000 |
Given Data |
|
- Intangible Assets |
1,00,000 |
Given Data |
|
- Investments |
2,00,000 |
Given Data |
|
Total Non-Current Assets |
8,00,000 |
Property, Plant & Equipment + Intangible Assets + Investments = 5,00,000 + 1,00,000 + 2,00,000 |
|
Current Assets |
||
|
- Inventories |
1,50,000 |
Given Data |
|
- Trade Receivables |
1,00,000 |
Given Data |
|
- Cash and Cash Equivalents |
50,000 |
Given Data |
|
- Other Current Assets |
20,000 |
Given Data |
|
Total Current Assets |
3,20,000 |
Inventories + Trade Receivables + Cash Equivalents + Other Current Assets = 1,50,000 + 1,00,000 + 50,000 + 20,000 |
|
Total Assets |
11,20,000 |
Total Non-Current Assets + Total Current Assets = 8,00,000 + 3,20,000 |
|
EQUITY AND LIABILITIES |
||
|
Equity |
||
|
- Share Capital |
3,75,000 |
Given Data |
|
- Retained Earnings |
4,00,000 |
Given Data |
|
- Other Reserves |
1,00,000 |
Given Data |
|
Total Equity |
8,75,000 |
Share Capital + Retained Earnings + Other Reserves = 3,75,000 + 4,00,000 + 1,00,000 |
|
Non-Current Liabilities |
||
|
- Long-Term Borrowings |
1,00,000 |
Given Data |
|
- Deferred Tax Liabilities |
20,000 |
Given Data |
|
Total Non-Current Liabilities |
1,20,000 |
Long-Term Borrowings + Deferred Tax Liabilities = 1,00,000 + 20,000 |
|
Current Liabilities |
||
|
- Trade Payables |
50,000 |
Given Data |
|
- Short-Term Provisions |
25,000 |
Given Data |
|
- Other Current Liabilities |
50,000 |
Given Data |
|
Total Current Liabilities |
1,25,000 |
Trade Payables + Short-Term Provisions + Other Current Liabilities = 50,000 + 25,000 + 50,000 |
|
Total Equity and Liabilities |
11,20,000 |
Total Equity + Total Liabilities = 8,75,000 + 1,20,000 + 1,25,000 |
2M1 Evaluate the need to identify and correct omissions and errors before preparing company financial Statements.
Introduction
Preparing financial statements is an essential process for which precision, adherence to accounting standards and transparency are critical. Some financial records errors and omissions will cause misrepresentation of financial health figures, make wrong decisions and later lead to legal abuses (Russo, 2022). Errors in these rates happen, and if not corrected before finalizing financial statements, such reports show a disturbingly 'untrue and unfair' picture of a company's performance and position.
There are various reasons for errors in financial statements, including errors when recording transactions, errors in the classification of accounts, and errors in applying accounting principles (Russo, 2022). These errors can distort a company’s financial reports as well as the company’s credibility if not caught and fixed.
Types of Errors in Financial Statements
Some errors affect the trial balance and errors that do not affect the trial balance.
These errors result in an imbalance in the trial balance,, thereby showing an error. They include:
However, these errors might occur: Ledger Posting Errors, where an amount is wrongly recorded in the ledger accounts (Choudhary, Merkley and Schipper, 2021).
Errors in Double Entry – Errors related to ‘Recording only one side of a transaction’ (either debit or credit).
Though the errors do not produce a trial balance discrepancy, they mislead financial users. They include:
Stipulation of the Error of Omission stipulates that when a transaction is omitted from the books, the omission will be regarded as an error (Al Najjar, Ghanem and Higazi, 2024).
When an entry is recorded in the wrong account but still within the same class.
Errors of Judgment – Errors would have occurred, but the accounting system produced the illusion of proper records.
Case of compensating errors (i.e.) Two or more errors cancel each other out so that the trial balance looks correct although mistakes exist (Al Najjar, Ghanem and Higazi, 2024).
Errors of Reversal – In the case of a mistake, if a debit entry is wrongly recorded as a credit, and a credit entry is improperly recorded as a debit.
Examples of Errors and Omissions
Error of Omission
Suppose a company receives an invoice from a supplier for ₹50,000, which is not recorded in the books. This omission means that expenses and liabilities are understated. The correction involves recording the missing transaction as follows:
|
Account |
Debit (₹) |
Credit (₹) |
|
Purchases |
50,000 |
- |
|
Trade Payables |
- |
50,000 |
Error of Commission
If telephone expenses of ₹10,000 are wrongly debited to the advertising expense account, the total costs may still be correct, but the classification is wrong. The correction requires adjusting the accounts as follows:
|
Account |
Debit (₹) |
Credit (₹) |
|
Telephone Expense |
10,000 |
- |
|
Advertising Expense |
- |
10,000 |
Error of Principle
A repair expense of ₹15,000 is mistakenly recorded as an increase in machinery value instead of a revenue expense. This overstates fixed assets and understates expenses. The correction involves:
|
Account |
Debit (₹) |
Credit (₹) |
|
Repairs Expense |
15,000 |
- |
|
Machinery Account |
- |
15,000 |
Compensating Errors
If an equal overstatement of purchases offsets an error in overstating sales revenue by ₹25,000, the trial balance remains balanced, but the gross profit figure is incorrect. Adjustments are needed in both accounts to correct the mistake.
Impact of Errors on Financial Statements
Grave consequences of the presence of uncorrected errors in the financial statements can include:
Misrepresentation of Financial Position
If errors are made with profits, liabilities and assets, the company’s financial health will be affected and can be overstated or understated (Hung, Van and Archer, 2023).
Tax and Legal Implications
If the company is misreporting revenue or expenses, it under or over-pays its taxes and can be penalized by the tax authorities.
Investor and Stakeholder Misinformation
Investors and shareholders use accurate financial data in making investment decisions. Misleading financial ratios can occur due to errors and greatly tarnish financial statements' credibility (Hung, Van and Archer, 2023).
Incorrect Managerial Decisions
Management uses financial data for budgeting, forecasting, and strategic planning. Misallocation of resources and poor business decisions are often a result of errors in financial statements.
Methods for Detecting and Correcting Errors Before Finalizing Financial Statements
Financial professionals rely on several techniques to detect and correct errors to guarantee accuracy (Zlati, Antohi and Cardon, 2019).
Checking whether total debits and credits match is called a Trial Balance Review.
Comparing actual financial figures against budgeted or prior year amounts as Variance Analysis.
Match invoices, receipts, and contracts to accounting entries called Document Reconciliation.
Internal and External Audits – Reviews are done to discover misstatements or discrepancies.
In case of errors that cannot be corrected immediately, the incorrect amount is temporarily held in a suspense account until corrected (Zlati, Antohi and Cardon, 2019).
Using a Suspense Account for Error Correction
|
Account |
Debit (₹) |
Credit (₹) |
|
Suspense Account |
20,000 |
- |
|
Purchases |
- |
20,000 |
|
Account |
Debit (₹) |
Credit (₹) |
|
Sales Revenue |
20,000 |
- |
|
Suspense Account |
- |
20,000 |
Financial accuracy, regulatory compliance, and stakeholder confidence require detecting omissions and errors before finalizing financial statements. Errors against the business can cause misstatements, tax penalties, and wrong financial decisions (Azzali and Mazza, 2020). Companies should adopt internal controls with a suitable control environment, review process, and audit oversight to effectively prevent and correct financial misstatements.
Application and explanation of relevant accounting concepts
Accounting concepts help prepare financial statements in a way that ensures consistency, transparency and accuracy. Financial statements reflect a company's actual and proper financial position, which is ensured by these principles that govern the recording and reporting of financial transactions (Schoenmaker and Schramade, 2023). These concepts need to be applied to IFRS and GAAP financial regulations. Financial statements would not be consistent without these principles as it would be difficult for stakeholders to interpret it and compare the performance of businesses (Lev, 2018).
Accrual Concept
According to the accrual concept, financial transactions should be recorded when they are made, not when cash is received or paid (Lev, 2018). This will ensure that the revenues and expenses will go against the proper accounting period, making the financial performance more accurate. Suppose a company gives services worth ₹50,000 in March but takes the payment in April, then the revenue will be booked in March as it was served in that month. Also, in a business, if a company has paid electricity bill expenses in December but has to pay cash in January, the cost is recorded in December (Burke, 2019). This concept is significant in ascertaining a firm's profitability level and determining whether a firm's financial statements present the business's economic aspect. It provides an idea of the true financial performance of the organization without the distortion that the timing of cash transactions makes to the traditional performance indicators (Burke, 2019).
Going Concern Concept
The going concern condition assumes that the business will continue to operate in the future unless contrary evidence exists. Under this assumption, financial statements reflect a long-term view of the financial position of the company and the valuation of assets and liabilities is also affected (Górowski, Kurek and Szarucki, 2022). If a company were not deemed a going concern, assets would have to be valued at liquidation price rather than historical cost or fair value on a sound basis. This means businesses wouldn’t need to artificially drop asset values or anticipate expenses earlier to deceive investors and stakeholders. When a company is experiencing financial distress or bankruptcy, financial statements must report this information and assets may have to be reported at their realisable value (Zhao, Ouenniche and De Smedt, 2024).
Matching Concept
The matching concept requires that the expenses are booked in the same accounting period as the corresponding revenues. It is to ensure that the reported net income is an actual performance of the business for that particular period (Zhao, Ouenniche and De Smedt, 2024). If the advertising expenses in January are realized through sales in March, then such an expense should have been booked in March instead of January. The principle prevents making a profit overstated or understated, which would lead to the financial statement not reflecting the company's operational efficiency level (Bhimavarapu et al., 2023).
Consistency Concept
The consistency concept states that companies should always apply the same accounting methods and principles to ensure the comparability of financial statements. A change in the depreciation method from a straight line to a reduced balance requires a company to disclose and justify it (Bhimavarapu et al., 2023). This provides consistency to investors, creditors, and analysts regarding how a company performs on an ongoing basis and does not suffer from distortions introduced by frequent changes in accounting policies. Without this principle, financial statements could not be relied upon (Lukason and Camacho-Miñano, 2019). Thus, one could not assess trends or even make a meaningful comparison with other companies in the same industry due to an inability to assume that the values reported were relevant to all.
Prudence Concept
The prudence concept stipulates that accountants should be cautious in recording of revenues and expenses. Simply put, this will simultaneously recognise expected costs and liabilities but only recognise the revenues when realized (Lukason and Camacho-Miñano, 2019). This principle prevents companies from overstating their profits and assets, which could be a misrepresentation to investors. For instance, if a company believes that a client will default on a payment, it should create a provision for doubtful debts rather than letting the default occur (Magli, Nobolo and Ogliari, 2018). Inventory is to be recorded at a lower amount than the cost or the net realizable value.
Materiality Concept
This concept indicates that the financial statements will contain every transaction that may affect the decisions of the stakeholders. The accountants can focus on the material transactions and the insignificant items not considered in the financial analysis (Hussinki et al., 2024). For example, a company does not need to report any minor stationery expenses separately if such fees are not significant in comparison to the operational costs of the company (Hussinki et al., 2024). Moreover, they must report detailed financial items such as capital expenditures, loans, and substantial investments.
Entity Concept
The entity concept requires that a business be considered distinctly from its owners for accounting purposes. That’s why the owner's personal assets and liabilities should not be mingled with the business's financial transactions. A business owner’s use of cash should be recorded as drawings instead of an expense incurred by the business (Carnegie et al., 2022). This principle ensures that the business's financial report will contain only the economic activities of the business itself and will help to have correct information about profitability and the business’s financial health (Thi, Nguyen and Nguyen, 2023). In particular, it is essential because if businesses are looking for loans or investments, it gives the confidence that private matters will not touch the business's finances.
Realization Concept
The realization concept provides that revenue should be recognized only when received, with reasonable certainty of receipt (Napier and Stadler, 2020). It prevents companies from hasty realization of revenue that can inflate their financial performance. If a company gets advance payments for services supplied in the next financial year, the amount should be booked as a liability (unearned revenue). Financial statements would reflect the genuine revenue generation in this way, and none will be allowed to exhibit false income statements (Świecka, Terefenko and Paprotny, 2021). It is essential in businesses where payments are made on a credit basis that the realization principle is that the revenues shown in financial statements are actual earnings and not expectations of future costs.
Dual Aspect Concept
The dual aspect concept is the basis of the double-entry accounting system. It is the foundation for each financial transaction, with two equal and opposite impacts on accounting records (Świecka, Terefenko and Paprotny, 2021). Thus, every debit entry has a corresponding credit, while the reverse is untrue. For example, a company buys machinery worth Rs.5,00,000 on credit. Furthermore, the accounting records will show a rise in the liability account (trade payables account) and an increase in the machinery assets account. This principle helps you ensure that the principle of the accounting equation is kept in place, errors are avoided, and financial reporting is transparent (Barker et al., 2021).
Income Statement for the Year Ended 31 December 2024
|
Particulars |
Amount (₹ Crore) |
|
Revenue |
1,58,381 |
|
Cost of Sales |
(85,200) |
|
Gross Profit |
73,181 |
|
Operating Expenses |
(16,500) |
|
Operating Profit |
56,681 |
|
Other Income |
3,800 |
|
Finance Costs |
(2,500) |
|
Profit Before Tax |
57,981 |
|
Tax Expense |
(15,200) |
|
Net Profit for the Year |
42,781 |
Statement of Changes in Equity for the Year Ended 31 December 2024
|
Particulars |
Share Capital (₹ Crore) |
Retained Earnings (₹ Crore) |
Other Reserves (₹ Crore) |
Total Equity (₹ Crore) |
|
Balance as at 1 January 2024 |
25,000 |
45,000 |
9,000 |
79,000 |
|
Net Profit for the Year |
- |
42,781 |
- |
42,781 |
|
Other Comprehensive Income |
- |
- |
1,000 |
1,000 |
|
Dividends Paid |
- |
(10,000) |
- |
(10,000) |
|
Balance as at 31 December 2024 |
25,000 |
77,781 |
10,000 |
1,12,781 |
Statement of Financial Position as at 31 December 2024
|
Particulars |
Amount (₹ Crore) |
|
ASSETS |
|
|
Non-Current Assets |
63,000 |
|
Current Assets |
36,900 |
|
Total Assets |
99,900 |
|
EQUITY AND LIABILITIES |
|
|
Equity |
85,000 |
|
Non-Current Liabilities |
9,500 |
|
Current Liabilities |
11,400 |
|
Total Equity and Liabilities |
99,900 |
|
Ratio |
Formula |
Purpose |
|
(i) Current Ratio |
Current Ratio = Current Assets ÷ Current Liabilities |
Measures the company's ability to meet short-term obligations using its current assets. |
|
(ii) Acid Test Ratio (Quick Ratio) |
Acid Test Ratio = (Current Assets - Inventory) ÷ Current Liabilities |
Assesses short-term liquidity excluding inventory, as inventory may not be quickly converted into cash. |
|
(iii) Trade Receivables Turnover in Days (Trade Receivables Collection Period) |
Trade Receivables Turnover in Days = (Trade Receivables ÷ Revenue) × 365 |
Indicates the average number of days a company takes to collect payments from customers. |
|
(iv) Trade Payables Turnover in Days |
Trade Payables Turnover in Days = (Trade Payables ÷ Cost of Sales) × 365 |
Represents the average number of days a company takes to pay its suppliers. |
|
Ratio |
Formula |
2024 Calculation |
2024 Value |
2023 Calculation |
2023 Value |
|
Current Ratio |
Current Assets ÷ Current Liabilities |
₹36,900 ÷ ₹11,400 |
3.24 |
₹35,000 ÷ ₹11,000 |
3.18 |
|
Acid Test Ratio |
(Current Assets - Inventory) ÷ Current Liabilities |
(₹36,900 - ₹5,200) ÷ ₹11,400 |
2.78 |
(₹35,000 - ₹5,000) ÷ ₹11,000 |
2.73 |
|
Trade Receivables Turnover in Days |
(Trade Receivables ÷ Revenue) × 365 |
(₹19,500 ÷ ₹1,58,381) × 365 |
44.94 Days |
(₹19,000 ÷ ₹1,50,000) × 365 |
46.23 Days |
|
Trade Payables Turnover in Days |
(Trade Payables ÷ Cost of Sales) × 365 |
(₹3,800 ÷ ₹85,200) × 365 |
16.28 Days |
(₹3,600 ÷ ₹80,000) × 365 |
16.43 Days |
|
Return on Assets (%) |
(Net Profit ÷ Total Assets) × 100 |
(₹42,781 ÷ ₹99,900) × 100 |
42.82% |
(₹40,000 ÷ ₹95,000) × 100 |
42.11% |
|
Return on Equity (%) |
(Net Profit ÷ Total Equity) × 100 |
(₹42,781 ÷ ₹1,12,781) × 100 |
37.93% |
(₹40,000 ÷ ₹1,07,500) × 100 |
37.21% |
|
Operating Profit Margin (%) |
(Operating Profit ÷ Revenue) × 100 |
(₹56,681 ÷ ₹1,58,381) × 100 |
35.81% |
(₹54,000 ÷ ₹1,50,000) × 100 |
36.00% |
|
Asset Turnover Ratio |
Revenue ÷ Total Assets |
₹1,58,381 ÷ ₹99,900 |
1.59 |
₹1,50,000 ÷ ₹95,000 |
1.58 |
|
Debt Ratio |
Total Liabilities ÷ Total Assets |
₹(9,500 + 11,400) ÷ ₹99,900 |
0.21 |
₹(9,000 + 11,000) ÷ ₹95,000 |
0.21 |
|
Equity Ratio |
Total Equity ÷ Total Assets |
₹1,12,781 ÷ ₹99,900 |
1.13 |
₹1,07,500 ÷ ₹95,000 |
1.13 |
Current Ratio
7 Years | MBA
Though Infosys does have some strong liquidity, as it is still capable of meeting its short-term obligations, its current ratio has slightly increased from 3.18 in 2023 to 3.24 in 2024. Most commonly, a ratio above 1.5 is healthy, and Infosys's ratio shows that it has an ample amount of current assets as a buffer to liabilities. This increase in cash represents working capital held, with sales higher reflecting the fact the company is good at managing it. However, an excessively high ratio may imply that the company’s assets are not effectively utilized for growth possibilities (Ngoc, Nguyen and Pham, 2023).
Acid Test Ratio (Quick Ratio)
Even after stripping inventory, Infosys’s acid test ratio improved slightly, from 2.73 in 2023 to 2.78 in 2024, which means it has good short-term liquidity. In other words, Infosys has enough cash, receivables or other liquid assets able to pay its short term liabilities. This suggests little reliance on inventory sales for liquidity which is common for a tech company that has limited inventory. The upward indication shows that Infosys could keep a liquid position as operations grew efficiently (Infosys.com, 2021).
Trade Receivables Turnover in Days
From 2023 to 2024, the trade receivables turnover in days became 4.94 days better, indicating that Infosys collects payments from customers faster. In this context, improved collection efficiency suggests better credit policies and customer payment cycles, thereby decreasing bad debt risk. This allows Infosys to reinvest in operations more effectively; therefore, a shorter collection period will help improve Infosys’s cash flow. However, if collection times keep falling far too much, it may reveal that the company is issuing ever more severe credit terms, which could jeopardize relationships with clients (Beck, 2023).
Trade Payables Turnover in Days
While the trade payables turnover saw no change from last year, at a stable 16.28 days in 2024 and 16.43 days in 2023, Infosys stays firm on its supplier payment cycle. This indicates that payment terms for this company have not been extended or shortened, indicating financial stability. Keeping Infosys’s suppliers happy pays by ensuring the firm is paid on time while allowing the firm to negotiate better deals (Chavan, Gowan and Vogeley, 2022). An increase in payable days implies a delay in payments, and a decrease implies that the company is receiving short-term liquidity advantages instead of paying it quickly.
Return on Assets (ROA)
The per cent return on assets was uplifted in 2024 over the previous year, rising to 42.82%, which reflects that Infosys is doing better on using its assets to create profits. The company is earning a lot of profit because of its size and the utilization of its total assets (Prasetya Margono and Gantino, 2021). High ROA implies strong operational efficiency and effective utilization of assets. If this ROA is rising, Infosys is make more profit on every unit of its asset investment, which implies that investments in infrastructure, technology and human capital are providing better returns.
Return on Equity (ROE)
As a result of the improved percentage of the net income versus shareholders’ equity, the return on equity increased from 37.21% in 2023 to 37.93% in 2024. The positive ROE indicates that Infosys is earning more profit for the investors, rendering it attractive. This suggests steady increases are making for adequate profit reinvestment and possible operational improvements. A high ROE is good, but if the ROE gets too high, then this may indicate extreme amounts of leverage (Akhtar et al., 2021). Infosy's low debt level supports that growth is because of operational efficiency and not financial risk.
Operating Profit Margin
Running this metric (i.e., operating profit margin) represents 36.00% in 2023 and 35.81% in 2024. Infosys’s operating costs (expenses) have increased more than its revenue. It may be for a slight dip, which could be because of higher operational expenses, increased labour costs, or more investment in research and development. The margin is substantial, though a decline may signal higher costs than revenue expansion (Weber and Wasner, 2023). The focus for Infosys should be to optimize the expenses best and keep the pricing competitive to ensure the sustainability of the profit margin.
Asset Turnover Ratio
In 2024, Infosys had an asset turnover ratio pegged to 1.59 (1.58 in 2023), implying that Infosys is still capable of doing business efficiently by generating revenues (due to low ratios of total assets to revenue). A stable asset turnover ratio signifies that the company is not expending more for using its assets or underutilizing its assets (Giany Febriyanti, Simon and Dinda Oktavia, 2024). Asset turnover is substantial at 1.2, indicating that Infosys has an optimal investment in assets vis-a-vis revenue generation. If monitored, this ratio should be noted to ensure that the company maximizes efficiency in the manner that the asset is utilized.
Debt Ratio
The amount of debt financed by Infosys also remained unchanged both in 2023 and in 2024 at 0.21, indicating a prudent approach from their side regarding debt fund financing. Infosys has a low debt ratio. Thus, it depends more on one's own equity instead of borrowing, reducing the risk. This stable ratio implies good solvency and limited reliance on external funding. It also allows the company to inject capital for future investment without overleveraging its financial structure (Issa and Gevorkyan, 2022).
Equity Ratio
In both years, the equity ratio remained at 1.13, indicating that Infosys depends largely on shareholder equity rather than liabilities to fund its assets. A key sign of financial strength and stability, a high equity ratio means that Infosys is a low-risk investment for shareholders. A high equity ratio means the company can be financially independent and reduce its vulnerability to a weakening economy or interest rate volatility (Reyad et al., 2022).
Infosys has consistently held its financial and operational stability during both years. A well-balanced financial structure improved profitability, liquidity, and asset management. Profitability ratios continue to look strong. However, rising costs will require watching over as the key to long-term growth. Also, the low reliance on debt lends Infosys considerable resilience, which makes the company better positioned to expand and maintain financial security in the future.
Improving Operating Profit Margin via Strengthening Cost Management
From 2023 to 2024 operational costs increased, which reduced Infosys’s operating profit margin from 36.00% in 2023 to 35.81% in 2024. While the falloff is modest, it nonetheless implies that ignoring rising costs would impede longer-run profit. Such a zero based budgeting model can lead to having use of every cost before being allocated. Further reduction of the IT infrastructure maintenance expenses can be achieved by optimising infrastructure costs by reducing the data centres and minimizing the use of the expensive infrastructure by shifting to cost-efficient cloud solutions (Reyad et al., 2022). Reduction in fixed costs will be possible by outsourcing the non-core activities like administrative support and legal services to the specialized agencies while ensuring service quality. Procurement cost savings can also be achieved by renegotiating vendor contracts for IT infrastructure, software licenses, and consulting services to improve the company’s profitability (Fazekas and Blum, 2021).
Improving Trade Receivables Collection to Provide a Better Cash Flow
While trade receivables turnover days had improved from 46.23 to 44.94 during 2024, it indicates a slightly faster collection period. At the same time, the amount of money that is sitting in outstanding invoices is impressive. One way you may encourage faster collections is by introducing early payment discounts for customers who pay within 15 to 30 days. One way to eliminate the delays is to implement AI-powered invoice tracking systems to send automated reminders, track late payments, and escalate collection efforts more efficiently (Kailash Wamanrao Kalare et al., 2024). However, further minimizing the collection risks is strengthening credit control policies through stricter credit checks in line with giving credit and adjusting the credit terms to slow-paying customers. Infosys can also follow factoring services, where Infosys can sell receivables to third parties at a discounted rate to get immediate cash flow and reduce dependence on delayed payments (Infosys.com, 2021).
Optimal Trade Payables Cycle for Supplier Efficiency
In 2024, Infosys’s trade payables turnover in days stood at 16.28 days, consistent with the supplier payment cycle. While extending payment terms would improve the outflow of cash, it illustrates a strong supplier relationship. A conservative key supplier payment of 30-45 days generates additional working capital but doesn’t risk relationships. Dynamic discounting, where suppliers get paid early at a discounted rate, can save costs and maintain stable supply lines (Huang, 2021). Infosys can utilize supply chain financing solutions where the banks offer credit based on supplier invoices, thereby helping it stretch payment cycles without starving the supplier's cash.
Expanding Asset Utilization to Improve Turnover Efficiency
In 2024, Infosys had a stable asset turnover ratio of 1.59, indicating the company’s stable asset utilization efficiency. Nevertheless, more efficiency and profitability can be obtained from existing assets by maximizing revenue generation from existing assets. One of the best ways to boost a productive workforce is by increasing revenue per employee using high-value consulting services, AI-driven automation and enterprise software solutions. Consolidating the underutilized resources and making the most out of cloud workloads can help maximise IT infrastructure utilization (Helali and Omri, 2021). Revenue growth can be fuelled by the expansion of high-margin service offerings such as data analytics, AI consulting and cybersecurity services, which ensures a lower relationship between the revenue and fixed costs.
Strengthening Debt Management While Preserving Financial Stability
Infosys had a low debt ratio of 0.21 in 2023 and 2024, which shows how little Infosys relied on debt finance. While this is good from a financial strength perspective, at the same time, this hints that they are underusing low-cost debt for expansion. Innovation can be funded by debt as a way to initiate strategic growth initiatives such as R&D, acquisitions, and emerging technology investments without depleting cash flow (Bellucci, Pennacchio and Zazzaro, 2023). It can also help refinance high-cost debt or issue corporate bonds at competitive rates in terms of interest-paying and financial flexibility.
AI & Cloud-Based Solutions for Process Automation
Infosys is in the technology industry, and it is vital to increase operational efficiency when it comes to automation and AI adoption. Payroll processing, customer support, and cybersecurity monitoring business process automation with AI technology can reduce overheads and increase the speed of service (Rane et al., 2024). Predictive maintenance driven by AI, predictive of IT infrastructure failures, will result in less downtime and increased productivity. New revenue streams can be created from expanding cloud migration for enterprises that will diminish their dependency on traditional IT service models.
Improving Employee Productivity and Workforce Retention
For Infosys’s long-term survival, retaining and increasing workforce productivity is crucial. Reducing hiring costs can be introduced by introducing AI-powered HR analytics to predict employee attrition and take proactive measures to maintain them (Shobhanam and Sumati, 2023). Digital learning platforms and continuous performance tracking can help enhance employee training programs to guarantee that employee skills development coincides with industry demands.
Discuss the benefits and limitations of ratios
Benefits of Financial Ratios
Improved Financial Analysis and Decision-Making
Financial ratios offer a structured way of examining a company’s financial state to inform decisions made by the stakeholders (Harinurdin, 2023). These ratios are used by investors, creditors, and management to analyse profitability, liquidity, efficiency, solvency, etc. to strategize better.
Comparative Performance Evaluation
Ratios assist businesses in comparing their financial performance over various periods to see whether the values are changing or just a trend. In addition, they support benchmarking against industry competitors, allowing organizations to understand best their standing and what they could improve upon (Abebe, 2022).
Assessing Profitability and Efficiency
Along with the profitability ratios that measure one’s earnings compared to the assets, return on assets (ROA) and net profit margin indicate overall operational efficiency. Asset Turnover and Inventory Turnover are efficiency ratios that indicate how well a company uses its assets to generate revenue (Alarussi, 2021).
Liquidity and Solvency Assessment
Current Ratio and Quick Ratio help a company determine how many short-term assets it holds relative to its short-term liabilities (Alarussi, 2021).
Early Detection of Financial Problems
Financial ratios act like warning lights that alert companies to weaknesses that may become major financial problems if not dealt with at the right moment. Management can take corrective action to avoid financial distress if liquidity ratios decline or leverage ratios increase significantly (Paul and Mukherjee, 2018).
Get assistance from our PROFESSIONAL ASSIGNMENT WRITERS to receive 100% assured AI-free and high-quality documents on time, ensuring an A+ grade in all subjects.
Simplified Financial Reporting for Non-Experts
Ratios are a simplified yet effective means for investors and stakeholders without extensive accounting knowledge to interpret financial statements. Ratios can be used because instead of analyzing cumbersome balance sheets and income statements, stakeholders have a quick understanding of economic performance (Paul and Mukherjee, 2018).
Limitations of Financial Ratios
Lack of Consideration for External Factors
Financial ratios are calculated from historical financial information without considering external factors such as economic conditions, inflation, changes in interest rates and political risk (Takamatsu and Lopes Fávero, 2019). Ratios, however, do not indicate that a company will be strong against external challenges.
Variations in Accounting Practices
Comparing ratios to one another may be difficult because different companies have different accounting policies. Even though depreciation methods, inventory valuation (FIFO or LIFO) and revenue recognition policies can vary, revisions in the financial ratios can lead to approximations that complicate benchmarking correctly (Juhro, Syarifuddin and Sakti, 2025).
Limited Use for Future Predictions
Ratios give insights based on previous financial data but will not guarantee that future performance will be the same as last (Juhro, Syarifuddin and Sakti, 2025). Now, a profitable company may not be very long when the industry is disrupted in the future for reasons beyond operational inefficiencies.
One-Dimensional Analysis
Financial ratios alone do not constitute a complete picture of how much of a financial health a company is in. You can get misleading conclusions by studying ratios from management expertise, innovation, brand strength, and competitive positioning (Anderson, Chowdhury and Uddin, 2024).
Difficulties in Interpreting Industry-Specific Ratios
Ratio analysis of some industries poses unique problems of their own. Take, for instance, a technology company with high R&D costs that will report lower profitability ratios, and a retail business with high inventory turnover may look to be highly efficient while both are making thin profit margins (Anderson, Chowdhury and Uddin, 2024).
Potential for Financial Manipulation
Companies may place their earnings or values on the financial statement through earnings management or financial statement manipulation and favourably present the ratios. Ratios are easily distorted by artificially inflating revenue, deferring expenses or altering asset valuations, which can mislead investors and stakeholders (Moramarco, 2023).
3M1 Analyse the usefulness of accounting ratios when evaluating accounting records.
Assessing Financial Performance and Profitability
Accounting ratios help clarify a company’s profitability picture and are of great use in evaluating a company's financial performance. Some ratios like net profit margin, return on assets (ROA), and return on equity (ROE) determine how efficiently a company generates profits from its revenues and assets (Moramarco, 2023). It lets investors and management analyze trends over time to see if profitability is trending up or down. If ROE remains high consistently, the use of shareholders' funds is efficient, and if Net Profit Margin is declining, it means the costs are rising or operations are underperforming (Hussain et al., 2021).
Liquidity and Solvency Measuring for Financial Stability
Liquidity and solvency ratios enable businesses to assess their capacity to meet the short-term and long-term obligations. The Current Ratio and Quick Ratio indicate whether or not a company possesses sufficient liquid assets to cover its short-term liabilities (Hussain et al., 2021). However, a low liquidity ratio may be a warning sign of difficulties with cash flow, resulting in delayed payments and operational problems. Solvency can be achieved through the debt-to-equity ratio and interest coverage ratio, determining how much a company relies on debt financing (Arhinful and Radmehr, 2023). A high Debt-to-equity ratio indicates financial risk; however, a high-interest coverage ratio indicates a firm’s ability to pay off interest on borrowed funds.
Comparative Analysis for Benchmarking Against Industry Standards
One of the key uses of accounting ratios is that they can be used to compare a company’s performance to similar companies within the industry or benchmarks, as well as comparatives, either against historical data, against other companies, or in comparison to other industry norms (Arhinful and Radmehr, 2023). Management can also determine whether the company is operating efficiently by analysing ratios such as Gross Profit Margin and Asset Turnover for other companies in the same industry. Another example would be if the company’s gross profit margin is less than the industry’s, which means pricing, high production cost, or inefficiencies in cost management. A high Inventory Turnover Ratio compared to competitors shows that the firm manages its stock very efficiently (Alnaim and Kouaib, 2023). Conversely, a low ratio could indicate the firm holding too much stock or not selling very well. Ratio analysis offers essential insights for strategic decision-making based on benchmarking.
Identifying Trends and Financial Risk
Ratio analysis determines financial risks and trends before becoming significant problems. Businesses can examine historical ratio trends and identify declining liquidity, increasing leverage, and rising unrecovered asset value above replacement costs (Alnaim and Kouaib, 2023). If the Current Ratio of a company declines consistently, there may be a rise in short-term liabilities or a decline in cash, and immediate corrective measures may be required. Declining Return on Assets (ROA) may indicate that the company's efforts to invest in assets are not generating adequate returns (Breivik et al., 2021).
Simplifying Financial Data for Decision-Making
Accounting ratios aid in decoding complex financial statements for investors, managers, and external stakeholders to arrive at a sensible performance evaluation. Ratio analysis plays a crucial role as many data in financial statements are not easily interpretable (Breivik et al., 2021). For example, knowing how much a company has in total liabilities and assets is insufficient to show financial health unless a company calculates its debt-to-equity ratio. Similarly, the net profit margin cannot be judged by analysing revenue alone. Ratios allow one to simplify financial records, and they are available to help with decision-making without the need for deep expertise in finances (Jenkins, 2024).
Limitations and Considerations When Using Ratios
Accounting ratios can be useful, though they are limited in various ways (Olayinka, 2022). Ratio analysis is affected by variations in the accounting policies, economic conditions and industry-specific factors. Different businesses have different ones to remember, such as depreciation policies, revenue recognition, and inventory valuation techniques, making comparing direct ratios challenging. Secondly, ratios are based on historical financial statements and sometimes do not indicate future performance (Kim, Muhn and Nikolaev, 2024). Companies can also work on any financial figures to portray their chosen ratios in the most favourable light to pull certain kinds of analysis. Ratio analysis should be supported using qualitative assessments, industry comparisons and broader financial reviews to ensure accuracy.
3D1 Evaluate international differences in financial reporting.
International financial reporting is dependent on accounting standards, regulatory environment, economic framework and cultural hue. IFRS and GAAP are the two most used financial reporting systems around the globe (Bathla, Sharma and Kandpal, 2024). There is no uniform convention for doing financial reporting for all systems because companies have their own way of reporting their financial statements, and recognising revenue and value of assets.
The International Accounting Standard Board (IASB) offers International Financial Reporting Standards (IFRS), which are principle-based accounting standards. Indeed, over 140 countries use IFRS, including the European Union, the United Kingdom, Australia and many Asian and African countries (Bathla, Sharma and Kandpal, 2024). The IERF framework emphasises fair value accounting, where assets and liabilities are recorded at their current market value instead of historical cost. The revenue recognition model followed by IFRS is a uniform model for revenues across industries so that financial reporting becomes uniform for various industries (Rouvolis, 2022). A second important aspect of IFRS is that it is very transparent about disclosure and financial information, so companies must provide precise details in their notes and explanations in their financial statements.
Generally Accepted Accounting Principles (GAAP) is an accounting system based primarily on the United States and is based on the rules (CFI Team, 2019). The Financial Accounting Standards Board (FASB) governs, and the U.S. Securities and Exchange Commission oversees it. Unlike the IFRS, the GAAP relies heavily on existing accounting on a historical cost basis, whereby the assets and liabilities are acknowledged at their original cost of purchase. The revenue recognition rule under GAAP is more structured but less flexible due to specific detailed rules under different industries. For the companies that follow GAAP, there are very strict determinations for how financial statements should be presented, such as reporting separate comprehensive income (CFI Team, 2019). GAAP standardization reduces the risk of misinterpretation but deprives management of the professional judgment it needs to report in the financials.
Differences between IFRS and GAAP impact financial reporting in several ways. The most significant difference regards how assets are valued. The use of fair value measurement for assets under IFRS can lead to more volatile financial statements because of changes in market conditions (Imhanzenobe, 2022). On the other hand, GAAP is primarily based on historical cost, which contributes to stability but may not reflect the current economic value of assets. The other area of difference is inventory valuation. Whereas GAAP permits using the Last In, First Out (LIFO) method, IFRS does not. Thus, IFRS reporting companies may have different cost structures and tax implications than GAAP reporting companies (Imhanzenobe, 2022).
The two frameworks also vary in how they recognize revenue. Under IFRS 15, a single revenue recognition model, IFRS follows a five-step process to recognize revenue across industries consistently (Kvaal et al., 2023). However, GAAP has multiple revenue recognition rules based in the industry, making cross-industry comparisons harder to do. Other areas of variation include financial statement presentation (Kvaal et al., 2023). Comprehensive income and the statement of comprehensive income are required under IFRS and allowed or required under GAAP to present comprehensive income separately or in the income statement.
Due to the differences in financial reporting internationally, multinational corporations face challenges in reporting financials. The two companies shall report significantly different profit margins, interest rates, and liability values as IFRS requires (Kvaal et al., 2023). Without this uniformity, however, investors and analysts have trouble comparing one company’s financial performance to another in global markets. Financial reporting becomes more expensive and complex for companies operating in multiple countries, which must comply with distinct regulatory frameworks (Dudycz and Praźników, 2020). Usually, they have to make dual financial statements in compliance with IFRS and GAAP.
These differences should also be considered when investors and stakeholders evaluate a company's financial statements. The latter may appear more profitable since GAAP and IFRS reporting companies differ between revenue recognition and asset valuation (Dudycz and Praźników, 2020). Investors need to adjust financial figures to compare companies that use different reporting standards in the same terms.
Various efforts are underway to converge the IFRS and GAAP to develop a single global accounting framework (Bengtsson and Argento, 2023). Although the U.S. has not yet adopted IFRS, considerable progress has been made in aligning specific standards, including lease accounting. Ultimately, the objective is greater consistency and comparability in global financial reporting (Bengtsson and Argento, 2023). However, differences in the regulatory environment, business culture, and economic structure exist in different countries.
Besides the requirements of IFRS and GAAP, various financial reporting frameworks are used in different countries. The Chinese Accounting Standards (CAS) adhere to IFRS but are supplemented with new rules for state-owned enterprises and financial institutions (Chen et al., 2020). Indian Accounting Standards (Ind AS) were primarily based on IFRS but were modified to conform with local business practices; for that reason, India has adopted it. For Japan, the use of Japanese GAAP (JGAAP) differs from IFRS in areas such as impairment testing and goodwill amortization. IFRS applies for listed companies in the European Union, but some local tax and legal requirements result in minuscule provisos to financial reporting across the EU member states (European Parliament, 2024).
Explain the different financial reporting methods and their differences.
The reporting methods differ among countries because of variations in accounting frameworks, regulatory requirements, and economic environments. International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) were utilized among the two most commonly used financial reporting methods (European Parliament, 2024). There are different principles for each system of preparing financial statements, revenue recognition, asset valuation, and reporting structure.
International Financial Reporting Standards (IFRS) is the globally accepted accounting framework based on the International Accounting Standards Board (IASB). Over 140 countries use the IFRS, including the European Union, the United Kingdom, Canada, Australia, and many others in Asia and Africa. The IFRS framework is principle-based and provides for professional judgment in financial reporting rather than requiring strict rules (Cabán, 2024). This flexibility allows companies to produce financial statements based on the economic reality of a transaction. Fair value accounting is a key feature of IFRS whereby assets and liabilities are recorded at market value. It also applies the single revenue recognition model of IFRS 15, which standardizes where and how companies across industries can recognize income for their goods or services sold (Gardi, Aga and Abdullah, 2023). IFRS is another key characteristic because it requires companies to disclose with comprehensive disclosure, which demands them to give detailed notes and explanations to prevent obscurity.
References
Task 1 Business Report Introduction Financial management implies to the process of planning, acquiring, managing and controlling...View and Download
Introduction to Business and Tourism Management Assignment The enterprise is about the initiative to manage and create novel...View and Download
Introduction Get free samples written by our Top-Notch subject experts for taking assignment help uk services...View and Download
Introduction: Entrepreneurship in Tourism Entrepreneurship refers to process of creating, establishing and managing the new...View and Download
Introduction Get expert assistance with our well-researched content. Assignment Helper ensure originality, accuracy, and...View and Download
Introduction The purpose of this reflection is to demonstrate the clinical skill of medication administration and relate it to...View and Download
Copyright 2025 @ Rapid Assignment Help Services
