Good Financial Statements Essay Example
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The trial balance data for Nybrostrand Company are used to compose income statement and balance sheet, to measure performance and to evaluate the company results in accordance with FASB Concepts Statement No. 8 (2010).
Trial balance: past years’ retained earnings
The trial balance is unbalanced which means there is an error in some of the accounts. (“Balancing an Unbalanced Trial Balance”, 2010). The most probable source of error is supposed to be retained earnings account which balance is not included in the trial balance. The missing amount or balancing figure on substracting the amount of all credits from the amount of all debits equals to substraction difference between 982 850 and 851 000, or 131,850 (Table 1, Working 1). If no more errors have been made, this balancing figure should represent the past years’ retained earnings ledger account balance (“Balancing an Unbalanced Trial Balance”, 2010).
Closing entries based on adjusted trial balance: current year retained earnings
Closing entries to transfer the income summary account balance to retained earnings, after all appropriate debits and credits to income summary account (Working 2), show that the excess of revenue over the total expenses equals 118,650 ( Table 2). The balance of 118,650 should be transferred to retained earnings account as current year retained earnings (“Bookkeeping fundamental-2: adjusting & closing entries”, 2009).
Income statement prepared on the basis of trial balance shows the amount of net income equal to 118 650, or current year retained earnings (Table 3)
Balance sheet (Table 4) prepared on the basis of trial balance includes both the amount of past years’ retained earnings (balancing figure for trial balance (Table 1) of 131 850 and current year retained earnings of 118 650 (Table 2)
Given that no comparative information for prior periods is available, the company performance can be assessed by selected indicators (ratios) derived on the basis of the balance sheet and income statement (“Financial Ratio Analysis”, 2014). The computed retained earnings represent one of the crucial figures as the earned part of the equity (FASB Concepts Statement No. 6, 1985) and reflect that profit gained remains the most significant source of equity for the company. In 2012, the company amount of net profit gained was equal to 90% of past periods retained earnings which means that the company is in the active stage of profit growth. This is corroborated by impressive profit margins (Table 3, Working 3) the company has, with gross profit margin equalling to 48% and net profit margin to 20%. The financial position of the company also remains stable, given the current ratio of 1,29 demonstrating good liquidity levels, and gearing ratio of 27% suggesting the appropriate leverage levels and long-term solvency. Still, assets turnover ratio shows that the company generates only 0.89 $ of sales for each $ invested into assets which can mean the need for more focus on its asset management as a revenue generator. However to get a picture how well company manages its assets, the ratio should be compared to the industry average (“Financial Ratio Analysis”, 2014)
The income statement and balance sheet of Nybrostrand Company composed on the base of the adjusted trial balance are indicative of good financial performance of the company, with revenue generated being the major source of equity. The company has maintained both excellent profit margins and good efficiency and leverage levels, though the assets to generate sales could probably have been used more efficiently.
1. Balancing an Unbalanced Trial Balance (2010). College-Cram. Retrieved from: http://www.college-cram.com/study/accounting/accounting-cycle/balancing-an-unbalanced-trial-balance/
2. Bookkeeping fundamental-2: adjusting & closing entries (2009). Accounting, Financial & Tax. Retrieved from: http://accounting-financial-tax.com/2009/11/bookkeeping-fundamental-2-adjusting-and-closing-entries/
3. Financial Accounting Standards Board (FASB) (1985). Financial Accounting Standards Board Concept Statement No 6. Elements of Financial Statements Retrieved from: http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1218220132831&acceptedDisclaimer=true
4. Financial Accounting Standards Board (FASB) (2010). Financial Accounting Standards Board Concept Statement No 8. Conceptual Framework for Financial Reporting Retrieved from: http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1218220132831&acceptedDisclaimer=true
5. Financial Ratio Analysis (2014). My Accounting Course.com. Retrieved from: http://www.myaccountingcourse.com/financial-ratios/
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