PS: As a financial analyst team, you are asked to prepare a report for shareholders that analyses Falcon’s financial performance. To present a complete a picture as possible, you need to use the numbers and information provided above to identify the main movements or changes that took place between 2013 and 2014 which are contributing to its financial performance. Based on the company’s information and the changes in numbers, you can come up with observations, statements and assumptions which must be supported by accounting, finance, economic, marketing and industrywide facts and references. [100 marks]
Financial Accounting Assignment
Accruals and Prepayments
The accruals and prepayments define the adjustments, which are made to the financial statements for them to adhere to the accruals and matching approach of the accounting principles. The accounting principle indicates that the expenditure should be aligned with the revenues obtained. The accruals approach calls for the revenues to be matched with the relevant expenditures (Porter and Norton, 2012, p.37). It implies irrespective of the money obtained from a transaction, the businesses accounts for the costs incurred and income to be received. For example, the prepayments of expenses are the opposite of the accrual expenses. Within the financial statements, the prepaid expenses are usually deducted from the costs recorded in the trial balances. The accruals are accounted for through the invoices received. The prepayments are entered and received when the payments are made (Taipaleenmäki and Ikäheimo, 201, p.77). Adjusting the accruals and prepayments understands that profits are expected to be recorded as the transactions actually happen.
Businesses usually adjust their accounts for accruals and prepayments based on the periods, which they occur rather than when the cash is receipt. However, the businesses have an exception of this rule in the accounting of cash flow statement as it involves the presentation of cash flow effects of the transactions. Based on the accrual model of accounting, a company is required to account for the various transactions such as the accrued income and expenses, and prepaid income and expenses (McLaney and Atrill, 2014, p.24). The accruals and prepayments would be accounted appropriately using the IFRS guidelines and regulations. The IFRS guidelines indicate that accruals and prepayments should be recorded as they occur. It indicates that the transactions would be recorded initially and not when the cash is actually paid or received at the Falcon Company.
Financial Performance Analysis
The financial performance of Falcon Company improved significantly from 2013 to 2014. Over the financial period, the company was able to increase its revenues from $186.7 million to $222.4 million. This is a 19.1% increase in the overall revenues, which is attributable the change of the company’s strategy to rely on online strategy (Henderson et al., 2013, p.213). The online strategy seems to have worked efficiently in improving the overall revenues of the company. In spite of the growing revenues, the gross profit only grew by small percentage of 7.4 per cent. The gross profit grew from $54.6 million in 2013 to $62 million in 2014. The main reason for the slow growth in gross profit was the increase in the cost of sales compared to the growth of the revenues.
The costs of sales increased by 21 per cent, while the revenues increased by 19 per cent. This led to the slow growth in the overall amount of gross profit of the company. Based on the recent investment of the online strategy, it would have increased the overall cost of sales compared to the revenue growth (Beatty and Liao, 2014, p.340). The additional costs of sales and investments pushed the gross profit lower which eventually influences the overall earnings of the company. Administration expenses reduced by 1.1% from $21.4 million to $20.3 million due to the elimination of wages and salaries after the company invested in online strategy (McNair, Olds and Milam, 2013, p.67). Nevertheless, the distribution expenses seemed to increase at the same percentage as the revenues at 19%. The distribution expenses increased from $30.4 million to $36.2 million.
Additionally, the tax increased by 300% from $0.1 million in 2013 to $0.4 million in 2014. The increase in taxation would have been introduced after the additional investments in other businesses and the costs of online approach. Based on the financial results and findings, the profit before tax increased by 100% from $2 million in 2013 to $4 million in 2014 (Traistaru and Cotoc, 2013, p.34). The growth of profit before tax is important in understanding the impacts of expenses on earnings of the company. Even though gross profit increased by 14%, the profit before tax increased significantly by 100percent.
It is critical to note that the profit before tax grew highly than the gross profit due to the reduction in expenses and finance costs. Thus, the profit before tax doubled due to the significant growth in revenues and reduction of administration expenses. Generally, the net profit of the company has increased by 89 % from 2013 to 2014. It grew from $1.9 million to $3.6 million in 2014. Thus, the financial performance of the company is good and the management should stabilize the current trend of financial performance (Gordon and Gallery, 2012, p.12). Since, the improved efficiency from the adopted online strategy has reduced the administration expenses by 1.1%. The financial performance of the company is critical in understanding the overall growth of revenues and expenses. As a result, it is necessary to understand that Falcon company has good financial performance and status.
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