Topic- Finance in Management and Leadership
You are required to start a new division within a company of your choice from the FTSE 350. You are asked to examine the financial accounting procedures by company’s executive board to be adopted, if you were constructing a financial plan for the organisation (the plan itself is not required but will be by CW2).
Completion of this assessment will address the following learning outcomes:
- Discuss the financial context for contemporary organisations including appropriate sources of finance.
- Briefly analyse how financial information is communicated with stakeholders.
- Differentiate the key financial data, information and accounting systems to meet and manage organisational objectives.
Structure of report:
- Cover page
- Executive summary
- Table of contents
- Background of the company (company which is selected from the FTSE350) including products and services offered by the company, organisational objectives, and values, etc.
- New Division Description and Objectives
- Feasibility of the New division
- Sources of finance (comparing short vs long term sources of finance and justifying a choice for the new division)
- Porter’s 5, PESTEL, and SWOT analysis of new division
- Stakeholder Management (could be a table)
- Stakeholders of the new division and their financial information needs
- Communicating financial information to stakeholders- refer to a communications model
- Principles and Standards
- Accounting principles recognised in the preparation of the statements
- Applying of samples (screenshots) of company’s’ current reports (to show what statements will be prepared)
- Accounting standards (IFRS)
- Conclusion and recommendations
- Reference list
1. Explaining several users who are interested in the financial information of an enterprise and the reason behind their interest
- Company management- The team requires to understand cash flows, profitability and the liquidity of an enterprise each month in order to makes an operational and the financing decisions for the Anglo American company.
- Competitors- They act as the main users of the final reports of the company for the purpose of evaluating its financial state (Voss, 2019). Through this information, competitor could be able to gain effective strategies for achieving competitive edge.
- Customers- They review the financial information at the time of considering or deciding which of the supplier in selecting for the major contract. This helps in judging a financial ability of the supplier for remaining in the business for longer period to facilitate mandated goods and the services in a contract.
- Employees- An organization might elect in providing its final reports to an employees in addition with the detailed description of the document. This is required by the employees for assessing the performance of an enterprise and is used for increasing level of an employee involvement with gaining an understanding of the company's business.
- Governments- They are also seen as the major users of the final reports as they review the financial statements of Anglo American company for determining that it is paying off its all the tax obligation and is complying with all standards that are provided by IFRS and GAAP.
- Investor analyst- An analyst shows a keen interest in the financial statements for deciding that whether Anglo American Firm could be recommended to the clients in respect of making the investment in an entity's securities.
- Investors- They requires financial information as they are counted as owners of the company and desire for understanding or assessing the performance of the investment made by them (Lakis and MasiuleviÄius, 2017). This also helps them in making the suitable decisions relating to withdrawing or making further investment.
- Lenders- An institution that is providing the loan to the company needs financial information for estimating an ability of borrower in paying back all the borrowed funds and an interest related payments.
2. Critically analysing the ways in which financial information is been communicated to all the stakeholders
Specifically, financial information is been communicated to the different stakeholders by way of preparing the financial statements. Framing of final reports includes the statement of the financial information, income statement, cash flow statement and the statement of the shareholders equity (Prasad and Chand, 2017). Ideally, each and every statement comprised of the set of a financial information that assist an organizational stakeholders in making the decisions that are most suitable and best for Anglo American corporation. Balance sheet is the statement that list down the liabilities, assets and an owners equity of an organization. The income statement reflects an information relating to the income and the losses of business whereas cash flow statement depicts movement of the cash and the balance of cash and cash equivalent of the firm. In such statements, management facilitates an overview involving all the judgements in relation to operations of Anglo American and any of the concerns over a future.
Financial statements are seen as the ventral feature through which an accounting information could be communicated to all the organizational stakeholders. It is seen as helpful in thinking of such statements as the models of the business organization because it attempts in showing a business in the financial terms. These statements gives an overall picture regarding an income, assets, liabilities, expenses and the shareholders equities or the reserves. Final reports facilitates a useful information in context of credit and the investment decisions and also in analysing the prospects of the cash flow (Kulikova, Gubaidullina and Elsukova, 2016). It provides an information about the resources of Anglo American, Claims to such resources and the changes in resources.
Moreover, by using the ratio analysis tool also, a firm could be able to convey the financial information to all types of the users. This tool helps in making the comparison of the financial performance and the position of an entity in the present with that of the previous periods (Gulin, Hladika and MiÄ‡in, 2017). There are various types of the accounting ratios that includes profitability ratios, liquidity ratios, efficiency ratios, solvency and the leverage ratios which acts as the true measure through which a financial information can be assessed of Anglo American.
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3. Explaining and determining various types of the financial data and an information that is needed for the purpose of decision making in a contemporary organization
Financial metrics or data act as the essential tools in measuring the performance of the business. Financial data of Anglo American supports in establishing the strategic financial goals which are effectively integrated and coordinated into an organization's financial and the operational management system (García-Sánchez and et.al., 2017). There are some major financial data that needs to be included in the process for developing the strategy of the business and in taking effective decisions are as follows-
Availability of net cash- It is the most important measure that states the financial fitness of an entity. It shows an efficiency level through which a company is using its financial resources for generating more and more cash for the new investments. It refers to an amount of the cash available after deducting an investments and an increase in the working capital from an entity's operating level of cash flows (Minnis and Sutherland, 2017). This data is used in making a plan for the major capital disbursements or an advancement of the current projects.
Revenue growth- The timing, quality and the quantity of the revenues are the determinates of the potential level of the business for achieving success in the long run and is seen as the fundamental concern in the strategic planning. The calculation of the revenue growth subtracts the company's revenue for the last period from a revenue of the current period.
Profits- It is important for the company to have a healthy gross margin of the profits that enables in absorbing the negative effects towards the COGS and the revenues without affecting by the risk of an inability in paying for the routine expenses. Operating margin acts as the determinate of an ability of the firm in generating the profits, irrespective of the fact that Anglo American finances their operations either through debt or an equity (Berger, Minnis and Sutherland, 2017). Net margin measures the remaining profits that could reinvested into the company or distributing to their shareholders as the dividends.
Economic value added- This acts as the contributor of the bottom-line but one which is seen as contingent on the risk adjustment. It enables in making the timely decisions about an expansion of the business in increasing an economic value of the business. It highlights the required corrective actions in the areas that diminishes its value. This is been computed through subtracting an operating capital cost from the net income. It helps the firm in setting up their business goals in adding up for an economic value used for assessing value contributions and in improving process of the resource allocation.
Growth indices- It is the data that shows the growth of an entity's sales and the market share (Bailey and Samuels, 2018). It indicates financial acceptability of a trade-offs that is made for the growth in respect of the reduced profit ratios, cash flow and the ROI. It is important for the business to set the strategic goals with an improvement in the growth index.
Operational efficiency- It is the measure regarding the way in which the resources of the business are efficiently used. Lower profits results in the poor value of operational efficiency and the areas included in such evaluation involves receivable turnover that measures an efficiency level in managing the credit accounts of the customers.
Liquidity- Financial data relating to current assets and the liabilities is been required under the liquidity analysis which helps in examining an ability for generating sufficient cash in paying all the cash expenses.
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4. Evaluating and comparing different final reports and discussion an appropriate accounting concepts and the framework that is been used in producing it.
Cash flow statement
It is the statement that shows the details regarding assets and liabilities of Anglo American.
This statement reflects revenues and the expenses that are incurred in running the business.
It means the statement that records for the cash inflows and the outflows of Anglo American.
This financial statement presents the financial position of Anglo American.
Income statement depicts the financial performance of Anglo American by viewing the profitability earned by it.
This statement tells about the cash position of Anglo American.
The assets are been categorised into two segments that includes current assets and the fixed assets (Lemishovska, 2018). However, liability section involves current liabilities, non-current liabilities and the shareholders equity.
It includes revenue, other income, cost of goods sold, operating expenses with interest and tax expenses.
It is the statement that is divided into three major activities of the business that is operating activity, investing and the financing activity.
Through the use of this statement, liquidity, efficiency and the leverage ratios can be computed in an appropriate manner.
By using an Income statement of Anglo American, profitability, turnover and leverage ratio are been evaluated (Gulin, Hladika and MiÄ‡in, 2017). This shows the information about the profits earned by the company with respect to its sales after meeting off all its cost, expenses and the taxes.
With the use of cash flow statement, the operating ratio, investment to cash flow ratio and financing capital to cash flow ration could be accounted.
Different types of the accounting concepts used by the firm in preparing for its final reports that are as follows-
- Money measurement concept- This concept states that only such items are recorded in the financial statements which are capable of getting expressed in the monetary terms (Accounting concepts, 2018). On the other side, all those resources that are not capable of being measured in monetary value are been excluded from the balance sheet.
- Historic cost- It means that assets in the balance sheet must be recorded on its historic cost that is the original cost and not on the market value.
- Going concern- This principle holds that Anglo American will be continuing its business operations for the definite period of time and the foreseeable future. It means that there is no any intention or the need for selling off assets of business.
- Business entity principle- According to this concept, the owners and the business are been treated as distinct and the separate (Minnis and Sutherland, 2017). This means that owners and the organization are treated as separate at the time of making the final reports.
- Dual aspect- It means that each and every transaction in the business has both aspects that is debit and credit which would affect the balance sheet.
- prudence concept- It is an accounting concept which states that anticipate for all the possible losses and recognition of the profits in case it is realized. This helps the firm in making for all the provisions so that any uncertainty occurred in the future could be met adequately.
- Accrual concept- As per this accounting concept, recognition of the revenue is to be made only when it is earned and the expenses are recognized when the assets are been consumed. Auditors would be certifying only such financial statements that has been prepared by following this concept.
- Matching concept- Under this the expenses in relation to the revenue must be recognized within the same period in which the revenues are been recognized (Bailey and Samuels, 2018). By this way, there does not exist any deferral in recognition of an expenses into the later period of reporting so that at the time of viewing the final reports, it could assured that all the aspects of the transaction has been recorded at same time.
- Materiality concept- Accounting transactions referring to this concept must be recorded when not doing it may alter decisions made by the users of Anglo American financial statements.
- Bailey, W. J. and Samuels, J. A., 2018. Analyzing Two Investments—An Instructional Case to Introduce Basic Financial Accounting Concepts. Issues in Accounting Education Teaching Notes. 33(4). pp.18-29.
- Berger, P. G., Minnis, M. and Sutherland, A., 2017. Commercial lending concentration and bank expertise: Evidence from borrower financial statements. Journal of Accounting and Economics. 64(2-3). pp.253-277.
- García-Sánchez, F. and et.al., 2017. KBS4FIA: Leveraging advanced knowledge-based systems for financial information analysis. Procesamiento del Lenguaje Natural. 59. pp.145-148.
- Gulin, D., Hladika, M. and Mićin, M., 2017. Application of the Fair Value Concept in Function of Achievement the Objectives of Financial Statement Users. In Country Experiences in Economic Development, Management and Entrepreneurship(pp. 553-570). Springer, Cham.
- Kulikova, L. I., Gubaidullina, A. R. and Elsukova, T. V., 2016. Disclosure of the risks of the organization influencing decision making by users of financial reporting. International Business Management. 10(22). pp.5280-5285.