One of the ways of evaluating whether an organization is in a good financial position is by carrying out an analysis of its balance sheet. A balance sheet indicates the financial position of a company. Together with the income statement, the balance sheet shows where the money in the business came from (Belverd and Marian, 2012, p. 104). It also shows the activities that resulted in the financial position at a given date. This report analyzes the balance sheet of Blue Sky pie restaurant and the Candy Bella restaurant.
Blue sky restaurant
The analysis of this business will be based on the financial position reported as shown by the balance sheet. A balance sheet has three main areas which also constitute the accounting equation (Peterson, 2002, p. 97). These elements are assets, liabilities, and capital. An asset is defined as anything that a person owns that can be used to derive economic benefits or ones that can be exchanged for money. Liabilities are defined as financial obligations that arise from transactions done in the past. Capital is defined as the resources that business owners have and use to finance the operations of the business (Clyde, 2010, p. 138).
Strengths and weaknesses of Blue Sky restaurant
From the balance sheet provided by Blue Sky restaurant, several strengths can be noted. First, the restaurant has $140,000 in the bank. This is desirable in working capital management since the business seems to have more cash to pay its short-term obligations as they fall due. This is when it is compared to Candy Bella which only has $90,000 in liquid cash. Secondly, Blue Sky restaurant has lower receivables amount as compared to Candy Bella restaurant.
This indicates that it has efficient debt collecting techniques and this is desirable since the collection of short-term debts is crucial for meeting short-term obligations as they fall due. In general, the current assets of Blue Sky are higher than those of Candy Bella. This shows that Blue sky is more liquid than candy Bella and, hence, it is in a better position to settle its obligations promptly than Candy Bella.
An analysis of its liabilities also indicates that the restaurant has managed to hold its obligations at a minimum. This is good for businesses since liabilities bring about obligations which at times may make a business unable to acquire credit from other lenders due to the high leverage that it has.
However, Blue Sky also has a few weaknesses. A look at the structure of its noncurrent liabilities indicates bank loans as the only source of financing. This may not be desirable since a business is required to have a mixture of several financing sources to spread the risks. Candy Bella seems to have mastered this because it has a mixture of loan and debenture financing.
Strengths and weaknesses of Candy Bella restaurant
The balance sheet presented by the restaurant indicates a capital structure comprising debentures, loans, equity, and retained earnings. This is a desirable structure and, as such, indicates the owners’ understanding of the importance of a diversified capital structure. A diversified capital structure ensures that an investor has spread the business and financial risks and, as such, is cushioned against a possible peril occurring due to the business or financial risks.
The other strength that Candy Bella has is that it has managed to increase its assets totaling $2,630,750 compared to Blue Sky’s total assets worth $2,508,400. Assets as defined earlier, are possessions that can be used to derive economic benefits. The more assets a business entity has, the more its ability to derive economic benefits and hence income. However, it should be noted that there is a possibility of a firm having inflated assets and not necessarily deriving benefits from them. This is the case that is seen after analyzing the balance sheet of Candy Bella restaurant. The firm has a total of $2,630,750 and a total retained profits of $ 50,800 while Candy Bella has a total assets value of $2,508,400 and a total retained profits of $180,500
From the above analysis, it is clear that of the two restaurants, Blue Sky restaurant is managed professionally and thus, the better option for the client to invest in. This is because of the management of assets, liability, and also capital structure. It is clear that blue sky restaurant has more retained earnings than Candy Bella, yet it has fewer assets. This indicates more efficient management and utilization of assets. These and many more aspects such as the ones discussed in the preceding text indicate that Blue Sky is by far better managed than Candy Bella. Therefore, the investor should go ahead and invest in Blue Sky restaurant.
Financial and management accounting
Financial accounting is a branch of accounting that deals with recording and presenting accounting information for the preparation of financial reports. It is based on historical financial information and provides the position of a business about past transactions and activities (International Financial Reporting Group, 2012, p. 108). Financial accounting is concerned with money as a measure of the economic value of the entity. This means that it focuses on providing information mainly to the shareholders, investors, and the government since it indicates the value of the firm (Wendy and Colin, 2003, p. 132). It is useful to the government because it indicates the financial position of a firm and therefore the taxable income. It is also useful to the investor who may be interested in the intrinsic value of the firm.
Management accounting, on the other hand, is a branch of accounting that provides accounting information to the internal management to aid the management to make an informed managerial decision (William and MIlton, 1999, p. 67). While financial accounting is concerned with money as a measure of the economic value of the firm, management accounting is concerned with money as a measure of the cost of production. As such, it will be used by management in making decisions that help the company move towards attaining its goals and objectives.
There are several differences between financial accounting and management accounting. First, as their names suggest, financial accounting focuses on the economic measure of the firm while management accounting focuses on the cost management aspect of the firm (Clyde, 2010, p.112). Secondly, financial accounting considers the past or historic information and concentrates on reporting on the position of the firm as per the past transactions (William and MIlton, 1999, p.134).
On the other hand, management accounting is concerned with the present accounting information and also setting standards, plans, and budgets. All these have futuristic regard to the business. This brings out a clear distinction between financial accounting and management accounting in that financial accounting has a historic perspective while management accounting has a futuristic perspective. The other major difference between financial accounting and management accounting comes from the statements that each branch produces.
Financial accounting is responsible for financial accounts which are produced on a quarterly, semi-annually, or annually basis, while management accounting is responsible for managing accounts that are majorly produced on monthly basis. From the preceding discussion, it can be concluded that accounting is a broad profession that has branches that serve different functions. It can, however, be seen that although management accounting differs from financial accounting, the main aim of both branches is providing information that is useful in making decisions.
Belverd, E & Marian, P 2012, A Guide to International Financial Reporting Standards, Mason, Cengage Learning, Ohio.
Clyde, PS 2010, Financial Accounting : An Introduction to Concepts, Methods, and Uses, Cengage Learning, Mason.
International Financial Reporting Group 2012, International GAAP 2012 : Generally Accepted Accounting Practice Under International Financial Reporting Standards, John Wiley & Sons, Chichester.
Peterson, H 2002, Accounting for Fixed Assets, John Wiley & Sons, New York.
Wendy, C & Colin, M 2003, ‘Financial Reporting under GAAP and IFRS Convergence’ Journal of Financial Economics, vol. 58, no. 2, pp. 102-23.
William, K & MIlton, F 1999, Cost Accounting, Dame Publications, Houston.