Financial resources available to a business are in the form of cash, liquid securities and credits lines. These are important for operations of a business. The sufficiency of resources is also essential for effective and efficient operations. Financial management is an effective and efficient management of funds of an organisation. It is done to achieve all objectives of an organisation.
The management of financial resources involves planning, organising, controlling and monitoring. In the present assignment, detailed discussion about financial position of Stratford Yachts Ltd is done. A report on profitability and liquidity is presented which is measured through different ratios. The same is also compared with the industry average ratios..
1. Difference between financial and management accounting
Financial accounting- Financial accounting is a procedure of summerzing, recording and reporting of financial transaction of business operations. These transactions are recorded to prepare the financial statements of business which includes profit and loss account, balance sheet and cash flow statement (Chiaramonte and Casu, 2017). This accounting is done to provide information to management and people outside the organisation such as investors, lenders, suppliers, tax authorities and other stakeholders.
It is a means of measuring the economic performance of a business. This comprises a system of monitoring and controlling of money, its inflow and outflow. This analyse the operating performance of the company. For accounting different financial transactions, a business uses accounting principles (Beatty and Liao, 2014). Financial accounting can be done on accrual basis and cash basis or a combination of two. Generally, it is done on accrual basis that is it is recorded as money accrues/earned not when it is actually received.
Management Accounting- Management accounting is a process of providing periodical financial and statistical information to the business managers so they can make day-to-day and short-term management decisions (Del, Negro and Sims, 2015). This provides reports and information to the internal stakeholders of an organisation such as employees, directors, managers. The report of management accounting includes cash availability with company, generation of sales revenue, fund available for accounts payable and status of accounts receivables. This is a forward looking and confidential reports. There are no principles and basis to formulate this. This analyses operating performance of a company. For accounting different financial transactions, a business uses accounting principles. These are prepared and based on decisions, of the management (Garven, 2015). The management accounting involves decision-making, systematic planning and performance of management systems, making available expert knowledge for financial reporting and assist the management in formulating and implementing the organisational strategy.
Difference between Financial and Management Accounting
Financial accounting is different from management accounting.
The major differences between them are as follows-
- Requirement- For a business, financial accounting is mandatory while management accounting is optional but it is generally done to evaluate and enhance organisational performance.
- Focus on reporting- Financial accounting focuses on creation of financial statements of business from monetary transactions (Financial statement of non-profit organisation. 2018). Managerial accounting is focused on operational reports available within an organisation only.
- Standards- For financial accounting to comply with GAAP and other standards are compulsory. For management accounting, there are no such standard, so they are made by management on their discretion.
- System- Financial accounting does not consider the overall system ofan organisation it only has one criteria that is to generate the profits (Kim and et.al., 2016). Conversely, management accounting takes into consideration overall aspects of the business and is interested in enhancing the profits of the company.
- Time period- Financial accounting has a historical orientation as it is concerned with transactions already done. Management accounting addresses budgets and forecast the future for the growth and development of a company.
- Valuation- Financial accounting addresses proper valuation of the assets and liabilities so it involves impairment and revaluation of the same. Management accounting is only concerned with productivity of the business and its enhancement.
- Timing- Financial accounting requires presenting financial statements at the end of accounting period (The difference between financial and managerial accounting. 2018). Management accounting may issue as many reports as as it deems fit
- Aggregation- Financial accounting reports on financial and monetary results of a firm. Management accounting always reports more detailed reports, resulting from all the operations of the firm.
- Maintaining records- The records and reports made under financial accounting has to be maintained with the organisation for certain period. The reports of the management accounting can be kept for a period, as management wants.
- Information- The records taken and considered in the making of financial statements shall be proved correct.. Management accounting deals with estimates and variable facts so they need not to proven correct.
2. Purpose of various financial statements
Profit and loss account: It is also called as income statement. This is a statement that presents and summarizes costs, expenses and revenue of an organisation. The P&L statement shows the actual income earned by business after taking into consideration all revenue and capitalised expenses. This provides information about the ability of a business to generate profits by increasing revenue and decreasing costs and expenditures.
Balance sheet: This is a statement which shows assets owned, liabilities and shareholder's equity of the firm. This provides a base to calculate the rates of return and evaluation of its capital structure (Mestry, 2017). This statement is a picture of, what company owns and owes.
Assets= Liabilities+ shareholder's equity.
The assets can be current or fixed assets. Liabilities can be long-term, deferred tax and pension fund liabilities. Shareholder's equity includes retained earnings and preferred stock.
Cash flow statement: This statement reflects the effect of changes in balance sheet and profit and loss account on cash and cash equivalents. This measures the position of the company in generation of cash and ability to pay its debts and working capital. The statement is all about where the money is coming from and where it is being spent. The statement breaks down the analysis in three activities- operating, investing and financial.
Statement of shareholder's Equity: Shareholder equity is also referred as the owner's fund. This shows that how shares, total equity and w\ownership has changed in an accounting or financial year. The change in the shareholdings represents profit and loss of a company and issues related to dividends and/or shares. The changes in equity can be in the form of ownership, stocks, and preferred stocks, paid up capital, increase or decrease in capital of the firm.
Financial statements in a Non-profitable organisation are:
*Statement of financial position
*Statement of Activities
*Statement of cash flows
*Statement of Functional expenses
Statement of financial position: This is similar to the balance sheet of a profit organisation. The equity section of the balance sheet is replaced by net assets section. This sections include unrestricted net assets, temporarily restricted net assets and permanently restricted net assets. The amounts are shown at end of a month, quarter or year.
Assets= Net assets+ liabilities
Statement of activities: This statement quantifies the revenue and expenses of a non profit organisation for a reporting period. This includes revenues, gain, other support and releases from donor restriction, expenses and losses (Tantalo and Priem, 2016). Revenues are contributions, membership dues, program fees, grants, investment income, fundraising events, gain on sale of investments. Expenses and losses can be program function and support function.
Statement of cash flow: It reports the change in cash and cash equivalents of a non profit organisation during an accounting period. The statement of cash flow contains the information about the cash inflows and outflows from the non profit organisation. This reveals the extent of those non profit activities that generated cash and use of the same. This is a statement which shows the actual money earned and the actual place where this money is invested or expended. This shows how the grants and fund raised are used and it has adequate cash to pay for operations necessary but a restricted use for a particular fund.
Statement of functional expenses: This statement is all about how expenses are incurred for each functional area of the non profit business. The functional areas of a non profit business includes management, administration, fund raising, and programs. The amount and the degree of expenditure in all the functional areas are shown separately.
3. Different group of stakeholders and their information needs
Stakeholder- A stakeholder can be any person, group of persons, an organisation, a society at a large or a social group who has a stake in the business. A stake means a vital interest in the business or its activities. The holding of stakes gives ownership, and property interests, legal interest and obligations and moral interests. The stakeholder can affect and can also be affected by the business.
Different groups of stakeholders: They can be divided into two groups- internal and external stakeholders.
Internal stakeholders: This is group of stakeholders whose interests lies directly within the organisation or who work for there, such as employees, directors, managers, owners. The internal stakeholders are affected by the decision of the business as stakeholders as well as the employee of the organisation. The business decisions are generally taken by these people only. So to protect the interest of the external stakeholders the people at the higher level of management have to be very cautious so that the interest of external stakeholders can not be prejudice.
External stakeholders: These are the stakeholders who do not directly work with the organisation but are affected in some way or another, such as government, suppliers, unions, social groups, creditors. They don't have an active participation in day to day operations and activities of the business, so they are not involved into the small or low level decision at operational level (Tantalo and Priem, 2016). But are included in the major decisions of the business as they are partial owner of the org