Aspirations Ltd began its business operations as a wholesale supplier of office equipment on January 1, 2021. To finance its operations, the company issued 1,500,000 ordinary shares at a par value of GH¢1 each, receiving full payment in cash at the time of issuance.
The following financial statements for the year 2021 have been prepared based on the historical cost concept.
Task:
Analyze and interpret the financial statements of Aspirations Ltd for the year 2021 using appropriate accounting principles.
The correct answer and explanation is :
To analyze and interpret the financial statements of Aspirations Ltd for the year 2021, we need to consider various accounting principles and how they apply to the company’s operations.
Key Accounting Principles Applied:
- Historical Cost Concept:
Aspirations Ltd’s financial statements are based on the historical cost concept, which means that assets are recorded at their original purchase cost, rather than their current market value. This principle ensures reliability and objectivity in the reporting of financial results. However, it may not reflect the current value of assets, such as office equipment, which could have appreciated or depreciated since their purchase. - Going Concern:
The going concern principle assumes that the company will continue to operate for the foreseeable future. Since Aspirations Ltd is a newly established business, this assumption is vital for the preparation of its financial statements. There should be no indications of financial distress or plans to liquidate, as this would influence how assets and liabilities are valued. - Accrual Basis of Accounting:
Aspirations Ltd would have applied the accrual basis of accounting, where revenues are recognized when earned and expenses when incurred, regardless of when cash transactions occur. For example, revenue from sales would be recorded in 2021 when the office equipment is sold, not when payment is received. - Revenue Recognition:
According to the revenue recognition principle, revenue is recognized when it is earned and realizable. As a wholesale supplier, Aspirations Ltd likely recognized revenue at the point of sale or delivery of office equipment, assuming all criteria were met (e.g., transfer of ownership). - Cost of Goods Sold (COGS):
The COGS principle relates to the direct costs incurred in producing the office equipment sold during the year. The gross profit margin, calculated as sales revenue minus COGS, would reflect how well the company controls its production costs or how efficiently it sources its office equipment.
Financial Statement Interpretation:
- Balance Sheet: This would show the assets and liabilities of the company at the end of 2021. The most significant asset would likely be office equipment, and liabilities could include any short-term or long-term borrowings. The equity would reflect the capital raised through the issuance of shares, which is GH¢1,500,000.
- Income Statement: This would detail the company’s performance over the year, including sales, cost of sales, operating expenses, and net profit or loss. It would help assess the company’s profitability, operational efficiency, and overall financial health.
- Statement of Cash Flows: This would show the cash inflows and outflows, including cash received from the issuance of shares, payments for office equipment, and operating cash flows. It helps determine liquidity.
Overall, the application of these accounting principles will give a fair view of Aspirations Ltd’s financial performance in 2021. By analyzing the financial statements, investors, creditors, and management can make informed decisions about the company’s future.