Financial Accounting

Financial Accounting

Executive Summary

Milestone Ltd is listed on the London Stock Exchange (LSE) and manages the entire business

condition. It has discussed the significance of reporting the financial methods which are

implemented by the firm. The financial statement has been stated and mentioned on the

business portal. Further, the requirement of calculating the financial ratios has been

demonstrated in the context below. Thus, all the required information has been justified and

stated in the discussion.

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Table of Contents
Introduction................................................................................................................................4

Significance and Purpose of financial accounting.................................................................5

The purpose of financial reporting for Milestone Ltd........................................................5

Importance for stakeholders...............................................................................................6

The key qualitative characteristics of financial information for Milestone Ltd.....................7

Understandability...............................................................................................................8

Relevance...........................................................................................................................8

Reliability...........................................................................................................................8

Understanding financial performance with the support of various reporting standards........9

Profit and loss statement..................................................................................................10

Cash flow statement.........................................................................................................10

Balance Sheet...................................................................................................................10

Interpretation of financial ratios for understanding the firm’s monetary health condition..11

Earnings Per Share (EPS).................................................................................................12

Debt to Equity Ratio.........................................................................................................12

Operating profit margin ratio...........................................................................................13

Conclusion................................................................................................................................14

References................................................................................................................................15

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List of Figures
Figure 1- Financial Reporting.................................................................................................6

Figure 2- Qualitative Characteristics and Measures..............................................................8

Figure 3- Preparing Financial Statements............................................................................10

Figure 4- Calculating Financial Ratios.................................................................................12

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Introduction

Financial accounting methods are important for focusing on the calculative data which is

considered for regulating the business standards. The aim of the financial report is to state the

significance of measures that are required for accounting standards to be maintained. As it

will support reflecting transparency and regulating methods within the management. It will

discuss the financial reporting importance along with the contribution of stakeholders

including creditors, investors and regulators. Additionally, the various financial statements

including the balance sheet, profit and loss account, and cash flow statement, will be justified

in the discussion. The interpretation of the financial ratios stating Earning Per Share (EPS),

Debt to Equity, and Operating Profit Margin will be discussed and justified in the context

below. It will highlight the financial health and current status of the business with proper

calculation of the ratios. Based on the preparation of the financial reporting will help in

presenting the actual picture of the business and enhance the opportunity required to be

developed.

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Significance and Purpose of financial accounting

Figure 1- Financial Reporting

(Thomas and Ward, 2019)

The purpose of financial reporting for Milestone Ltd

Financial Reporting is considered the process of effectively communicating financial

information. Focusing on both internal and external information, both methods are considered

for developing the reporting standards (Thomas and Ward, 2019). External reporting is

generally used by external members such as tax authorities and trade partners. On the

contrary, internal reporting is used by management in order to focus on better decision-

making within the firm. The reporting system consists of different kinds of financial data

which helps in managing the firm’s ability. Hence, it is majorly important for:

Raising Capital:

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Financial Reporting is significant for raising capital and its financial history is required for

gaining the trust of private investment, public markets, and other operations which are

conducted for further development and expansion.

Financial Analysis:

It is also important for properly analysing the financial report and internal management

process. For instance, measuring the KPI and even calculating the compensation which is

required for the employees. Additionally, it will help the management to sales outstanding

including the trajectory sales of the company.

Importance for stakeholders

Investors:

Investors consider the financial reporting as they have invested an initial part of the growth

and development of the firm. For instance, if Milestone Ltd investors have invested in the

company, they will have to speculate on the profit and losses constantly (Zhang and Guo,

2018). Financial goals are required to be met for returning back the profit which is expected

by the investors. Investors will be able to aim at generating the amount which they are

expecting from the business to return back.

Creditors:

Creditors are considered loyal lenders for the business and based on the financial reporting,

which is prepared by the company will support them in taking the correct decision to lend

(Wang, 2018). Thus, it is highly significant for the creditors to analyse the financial reporting

for the development of the business in a regular manner. Further, the creditors will even

analyse, whether the borrows are capable of paying back the amount or not.

Regulators:

The regulators aim at supervising all the relevant information which is effectively mentioned

in the financial reporting. Risk exposures and current liquidity positions are also indicated

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with the support of the reporting system (Embong and Ebrahimi, 2019). Regulating the

reporting standards will help in maintaining the transparency which is required according to

the competing situation. Hence, maintaining regularity in terms of law and compliance is also

needed specifically.

The key qualitative characteristics of financial information for Milestone Ltd

Figure 2- Qualitative Characteristics and Measures

(Lev, 2018)

Qualitative measures are important to be considered for managing business decisions and

figuring out their usefulness. Focusing on the financial statements helps in generating

opportunities on a border basis, hence a few of the key qualitative characteristics will be

mentioned below:

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Understandability

The financial reports are prepared for informing the shareholders regarding the performance

of the company. Thus, it is prepared in such a way that it is easy to understand and consists of

statutory data majorly (Lev, 2018). It is highly essential for the shareholders including the

investors to understand the financial reporting system effectively for providing more

enhanced opportunities to the company broadly.

The usefulness of Understandability:

The concept of understandability will help create a better perception for the shareholders,

creditors, and investors to relate to the reporting standards, even if not familiar with

accounting measures. They will be able to invest or retain within the company according to

the performance effectively.

Relevance

The financial report which is prepared for the internal as well as the external members must

be relevant and accurate in terms of relating to the business (Francis and Schipper, 1999).

Thus, Milestone Ltd should focus on the prime statutory recipients for effective decision-

making. Creating a relevant reporting standard will be sufficient for the investors or the

shareholders to relate with. It is required to be relevant to the reporting measures for the

shareholders and other business requirements essentially.

The usefulness of relevancy:

Better decision-making considered by the financial institutions including the suppliers can be

attained with the help of financial reporting and relevancy measured. Additionally, it also

supports conducting better economic decisions at large.

Reliability

The qualitative characteristic of reliability is focused on reliable and true measures for

financial reporting (Monteiro et al., 2019). It is one of the most core aspects which needs to

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be considered by the business in terms of presenting the actual financial activities which has

taken place within the business. Further, the information must be retained from trustworthy

sources in order to present a picture of the business condition.

The usefulness of reliability:

It is considered to be useful for conducting fair decision measures and even significant errors

can be measured effectively. The true nature of the firm including the operations and

transactions can be identified with the support of reliability. For illustration, if Milestone Ltd

is using reliability for generating opportunities at large.

Understanding financial performance with the support of various reporting

standards

Figure 3- Preparing Financial Statements

(Mirzaei and Mirzaei, 2021)

Financial reporting standards prepared such as profit and loss statements, balance sheets, and

other methods are considered. Comprehensively, it is used for understanding the financial

reports for focusing on a better management system. The financial statement will help in

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showing stakeholders to invest based on the returning ability of the firm. It is one of the most

significant measures the companies need to focus on to create stronger opportunities on a

broader basis. Thus, a few of the financial reporting measures will be stated below:

Profit and loss statement

The profit and loss statement is considered for effortlessly managing the company’s

measures. It also reflects the real picture of profit and loss and exactly understanding the

accurate expenses and revenues which are generated effectively (Mirzaei and Mirzaei, 2021).

Additionally, it also supports a better taxation process which is followed by the business

regulators. It effectively supports understanding the company’s financial performance for the

sake of an effortless management system. For illustration, if Milestone Ltd is implementing

the profit and loss statement prepared accordingly, it will be highly beneficial for the firm.

Cash flow statement

The cash flow statement which is prepared by the businesses shows the variety of investment,

operations, and financing measures. Hence, the cash flow statement is generally prepared for

critically appraising the methods of investment which are done for the company’s benefit,

including taking loans (Sun, 2018). Further, repayment of debts is also measured with the

support of a cash flow statement prepared. The firm’s liquidity position can also be

understood with the help of the statement prepared including other relevant circumstances.

Eliminating the effects of accounting methods that are not relevant can also be analysed with

the support of a cash flow statement. Thereby, it can be said that the cash flow statement can

support understanding the financial performance specifically. Thus, Milestone Ltd focuses on

preparing the financial reporting measures accordingly.

Balance Sheet

The balance sheet is prepared by the businesses for understanding the financial position

including the specific time frame. It specifically shows the owe of the business and the

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growth perspective of the company. Hence, it is one of the most important financial methods

which is focused on according to the expectations of the stakeholders (Healy and Palepu,

2001). Further, investors can get exact insight into the business which is present in terms of

liquidity. Thus, prior to investing in the company the investors by analysing the balance sheet

will be able to invest accordingly. Businesses’ capital structure can be understood with the

support of balance sheet measures. It effectively shows the liability and asset side of the

business. For instance, Milestone Ltd properly stating the balance sheet will be able to show

the true picture of the liabilities and assets of the business accurately.

Interpretation of financial ratios for understanding the firm’s monetary health

condition

Figure 4- Calculating Financial Ratios

(Palea, 2015)

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Financial ratios are interpreted and calculated for figuring out the actual potential and status

of the business withstanding the competing market. It is one of the important factors which is

mandatorily considered by businesses, be it small, medium, or large size companies. Hence,

the significance of understanding the financial ratios will be mentioned below:

Earnings Per Share (EPS)

The profitability ratio is calculated for figuring out the share price of the business which is

listed for the benefit of the public. It is one of the effective measures which is considered by

the business for finding out the actual price of the shares initially. It indicates, if a higher EPS

is considered, which means more availability of money is present in the company, thus can be

further reinvested for the benefit of the stakeholders (Palea, 2015). Additionally, buy-back

shares can support measuring the needs of the business or retain the profitability which is

required for further expansion. It will support conducting a better and healthy condition of the

business by generating opportunities in terms of managing the liquidity present. Thus,

focusing on the EPS will support maintaining the actual liquidity in terms of management.

Debt to Equity Ratio

This ratio is calculated for finding out the financial leverage of the firm and divide by total

liabilities and shareholder equity. Effectively calculating this specific ratio will help the

investors to find out the higher leverage which is required to be known by the stakeholders.

Indication of lower D/E states that borrowing has been less, which can be effective for

investors (Alzoubi and Alnimer, 2018). On the similar side, if D/E is higher, it states that the

company has higher borrowing history. Thus, lower D/E shows better financial health of the

firm, which can be effective for growth. Hence, the D/E closer to zero is highly

recommended by the investors, which states it has lower leverage and can return a higher

profit. Thus, financial health is in better condition.

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Operating profit margin ratio

The concept of the Operating profit margin ratio is to assess the firm’s liquidity, and

profitability and find out the leverage. It is also focused on finding out the return on the sales

showing proper indication for management. Additionally, it is also known as earning before

interest which makes the business manage the overhead expenses (Orazalin and Omarova,

2018). Hence, a positive profit margin ratio indicates the effective financial health of the

business required initially. Thereby, it is highly useful for industries manipulating risk and

other bonuses for operating the margin. The auditors calculate with effective accounting

standards and a better management system. Thereby, figuring out the correct calculation and

ratio will be taken into account in financial terms.

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Conclusion

The discussion has highlighted the importance of focusing on the financial accounting

methods adapted effectively. It has described the purpose of financial accounting for the firm

of Milestone Ltd including the role of stakeholders such as investors, creditors, and

regulators. Further, the key qualitative characteristics such as reliability, understandability,

and relevance have been mentioned along with its usefulness. It has mandatorily stated the

financial performance which is required for the firm, has been demonstrated effectively. The

financial position of the business with the support of calculating the ratios has been described

and mentioned above. The concept of profit and loss statements, cash flow statements, and

balance sheets have been described in the discussion. Further, Earnings Per Share, Debt to

Equity ratio, and Operating Ratio have been stated in the discussion above. Therefore, all the

financial measures have been justified in the context specifically.

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References

Alzoubi, E. S., and Alnimer, O. R. (2018). Financial ratios and the predictive power of

financial statements: Evidence from Jordan. International Journal of Accounting, Auditing

and Performance Evaluation, 14(1), 62-78.

Embong, Z. and Ebrahimi Rad, S.S. (2019) 'Decision usefulness of financial

information: The role of audit and IFRS',Journal of Financial Reporting and

Accounting, 17(2), pp. 249-266.

Francis, J., and Schipper, K. (1999). Have financial statements lost their relevance?. Journal

of Accounting Research, 37(Supplement), 319-352.

Healy, P. M., and Palepu, K. G. (2001). Information asymmetry, corporate disclosure, and the

capital markets: A review of the empirical disclosure literature. Journal of Accounting and

Economics, 31(1-3), 405-440.

Lev, B. (2018) 'The deteriorating usefulness of financial report information and how to

reverse it', Journal of Accountancy, 225(3), pp. 24-29.

Mirzaei, A., and Mirzaei, H. (2021). The interrelation of financial statement components and

the prediction of financial performance: Evidence from Iran. International Journal of

Business and Management, 16(4), 88-103.

Monteiro, A.P., Vale, J., Silva, A., and Pereira, C. (2019) 'Impact of the internal control

and accounting systems on the financial information usefulness: The role of the financial

information quality', Journal of Accounting and Finance, 19(1), pp. 60-73.

Orazalin, N., and Omarova, A. (2018). The importance of financial ratios in the decision-

making process of investors. International Journal of Economics, Commerce and

Management, 6(11), 172-183.

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Palea, V. (2015). Financial ratios and firms' performance: A review of literature and

empirical analysis for European companies. Journal of Applied Accounting Research, 16(2),

161-191.

Sun, K.J. (2018) 'The Effect of Financing Sources on the Usefulness of Financial

Reporting Quality in Guiding Investments', Journal of Accounting, Auditing &

Finance, 33(4), pp. 553-575.

Thomas, A. and Ward, A. M. (2019): Introduction to Financial Accounting, 9 th ed. McGraw

Hill.

Wang, J. (2018). Analysis of financial ratios in Chinese and American companies. Journal of

Accounting and Finance, 18(7), 47-55.

Zhang, W., Ma, J., and Guo, X. (2018). The interrelationship between earnings management

and financial statement information: Evidence from China. Journal of Applied Accounting

Research, 19(1), 44-63.

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