PROCESS ANALYSIS

MODULE 4: INTRODUCTION TO INTERPRETATION OF ACCOUNTS AND

3.2 ACCOUNTING AS AN INFORMATION SYSTEM

Accounting can be seen as an important part of the total information system within a business.

Financial Accounts: geared toward external users of accounting information Management Accounts: aimed more at internal users of accounting information SELF ASSESSMENT EXERCISE

Describe accounting as an information system

3.3 THE PURPOSES OF ACCOUNTING INFORMATION i. To determine performance of an entity over time.

ii. To determine the financial position of an enterprise at a particular point in time.

iii. To measure changes in cash flow over period.

iv. To evaluate management efficiency.

v. To assess the going concern status of an entity.

vi. To predict the collapse or corporate failure of an entity.

vii. To measure the entity’s compliance to all relevant laws and regulation (e.g. IFRS).

Users of Accounting Information

Users Information needs

1. Management Planning, controlling and decision making

2. Shareholders Investment decisions

3. Lenders Liquidity position assessment

4. Employees Profitability and welfare assessment

5. Suppliers Liquidity position assessment

6. Competitors Viability and competitiveness

7. Financial Analysts Public education and records

8. Government agencies Taxation assessment

9. General public Social responsibility assessment SELF ASSESSMENT EXERCISE

State the purposes of accounting information.

3.4 OBJECTIVES OF FINANCIAL STATEMENTS

Financial statements are usually produced out of the accounting records maintained by companies. Generally accepted accounting principles and procedure are followed to

prepare these statements. The purpose of financial statement is for decision making majorly but among others, we have financial statement to

1. Know the earning potentials of an enterprise

2. To be provided with reliable facts & figures about economic resources and also the obligations that an enterprise has to undertake.

3. Financial statement are also needed to be able to disclose information related to the financial statement which may be of relevance to users of statements

4. Changes in noteworthy

They also provide reliable information about changes in the net-worthy of a company that has resulted from trading and other activities.

LIMITATIONS OF FINANCIAL STATEMENTS

1. Comparison of the financial statement of two or more companies may be difficult if the statement of accounting policies used for preparing the financial statements is known.

2. Financial statements are prepared to show true and fair view hence the actual figures may not be shown in the financial statements.

3. Financial statements are prepared on going concern basis while organization may even fold up few months after the financial statement date.

4. Application of accounting concepts and commenting may not be the same from company to company when compared.

5. Financial statements only ensure the disclosure of monetary facts. Non monetary facts can only be disclosed in note to the financial statements.

SELF ASSESSMENT EXERCISE

State the objectives and limitations of financial statements

3.5 SOURCES OF DOCUMENT FOR FINANCIAL RATIO COMPUTATION

A company annual report contains lot of useful financial information which are used by the financial analyst. A typical annual report of an organization should contain the following information:

1. Statement of financial position

2. Statement of profit or loss & other comprehensive income

3. Change in Equity account 4. Statement of cash flow 5. 5 years financial summary 6. Notes to the financial statement 7. Auditors Report

8. Directors Report

9. Audit Committee Report 10. Chairman’s statement 11. Results at a glance

12. Notice of annual general meeting 13. Chairman’s statement

14. Report of the audit committee

15. Performance charts (such as bar charts, pie charts etc) 16. Statement of unclaimed dividend warrants

Usually in the statement of financial analysis, focus is usually on the statement of financial position and also on the statement of profit or loss and other comprehensive income.

Also, other statement in an annual report should provide information that could ease the understanding of the financial statement analysis.

STATEMNT OF FINANCIAL POSITION

This is the most significant financial statement that usually indicates the state of affairs of the company on a particular date. Usually statement of financial position is to show the financial condition of a company. The statement of financial position gives

1. A concise and precise overview of the company assets and liabilities 2. Information about the company’s liquidity and solvency

STATEMENT OF PROFIT AND LOSS AND OTHER COMPREHENSIVE INCOME This statement is a financial measure of the company’s performance during a particular period of time. The statement presents the summary of income, expenses and the net profit/loss of a company.

It also shows the profitability state of the company therefore the statement of profit or loss and other comprehensive income gives concise summary of the company’s income and expenses for a given period of time.

SELF ASSESSMENT EXERCISE

Outline sources of document for the calculation pf financial ratios.

3.6 INTERPRETATION OF FINANCIAL STATEMENT

This is the in-depth analysis of financial statement using certain analytical instruments and techniques to enable users have a better understanding and gain insight into such financial statement with a view to making informed decisions. Interpretation of accounts helps in the appraisal of the component, of the capital structure and the lost associated to them.

Financial ratio shows the relationships between two or more financial data in a financial statement; it may be expressed as a percentage or fraction of another figure or group of figures in the same financial statement. The following are the varied types of comparison obtainable

1. Time sense Analysis: This involves company the calculated ratio, for the present with past ratio so as to be able to ascertain whether there has been an improvement or decline in the financial state of the company overtime.

2. Cross-sectional Analysis: This involves company the ratio of the one company with some other selected company in the same industry at the same point in time

3. Industry-Average Comparison: Here comparison between the company and the average ratio obtained from the industry is made.

4. Pro-Forma Analysis: Here, comparison between the computed ratio of the company and the future ratio is budgeted information is made

SELF ASSESSMENT EXERCISE

Identify four types of comparison obtainable in financial ratio

4.0 CONCLUSION

Clear understanding of the components of financial statement will aid its interpretation for potential users.

5.0 SUMMARY

In this unit, meaning of financial statement and analysis, objectives of financial statement and limitations of financial statement were discussed. Also, sources of document for the computation of financial ratios were identified.

6.0 TUTOR MARKED ASSIGNMENT

Question 1: The trial balance of Danladi Bako Limited as at December 31, 2014 is as