Accounting Exam: Income Statement, Financial Position, Ratios, Cash Flow, NPV, IRR

This Accounting Exam covers topics such as calculating income statement, preparing statement of financial position, calculating ratios, cash flow, payback and net present value, IRR, and factors to consider before making the final decision.

Online Exam | Question based test
Papers

TABLE OF CONTENTS
SECTION A...............................................................................................................................3
Calculating the income statement for the year ended 30/ 06/ 2020.......................................3
Preparing statement of financial position as at 30/ 06/ 2020.................................................4
SECTION B...............................................................................................................................5
QUESTION 2.............................................................................................................................5
a) Calculating ratios:..............................................................................................................5
b) Commenting on the performance of the company.............................................................7
QUESTION 3.............................................................................................................................8
a) Calculating annual cash flow of company.........................................................................8
b) Calculating payback and net present value........................................................................8
c) Advising the company.......................................................................................................9
d. Commenting on IRR and benefits......................................................................................9
e. Five factors that require to be considered before making the final decision....................10
REFERENCES.........................................................................................................................11

SECTION A
Calculating the income statement for the year ended 30/ 06/ 2020
Particulars Details Amount
Sales 1000
Less
Cost of Sales
Opening inventory 45
Purchases 500
Closing inventory 50 495
Gross profit 505
Expenses
Rates (40- 4) 36
Insurance (20- 3) 17
General expenses 22
Energy bills (25 + 2) 27
Audit fees (13+ 2) 15
Bad debt 1
Directors remuneration 52
Debenture interest 10
Interest on bank loan 3
Salaries and wages 150
Depreciation on equipment 20
Depreciation on vehicle 31 384
Profit before tax 121
Provision for tax 22
Profit after tax 99
Interim dividend paid (21 21
Final proposed (350 * 0.1) 35 56
Retained profit from last year 50
Retained profit for this year 93
Notes to financial statement
Depreciation
Equipment
Cost - accumulated 100 - 20 80
Depreciation 80 * 25% 20
Vehicle
Cost - accumulated 200- 45 155
Depreciation 155 * 20% 31

Preparing statement of financial position as at 30/ 06/ 2020
Particular Details Amount
Non- current asset
Equipment 40 60
Vehicle 76 124
Premises 450
Current asset
Receivable 82
Cash 3
Bank 10
Closing inventory 50
Prepayments 7 152
Total assets 786
Non- current liabilities
10 % debenture 140
5% bank loan 60 200
Current liabilities
Payable 62
Accrued 14
Proposed dividend 35
Provision for tax 22 133
Share capital
£1 Ordinary share capital 350
Profits 93 443
Total shareholder fund 776
SECTION B
QUESTION 2
a) Calculating ratios: Gross Profit Ratio
PARTICULARS FORMULA YEAR YEAR

2021 2020
GROSS PROFIT
RATIO
(GROSS PROFIT/NET
SALES)*100
39.09% 40%
 NET PROFIT RATIO
PARTICULARS FORMULA YEAR
2021
YEAR
2020
NET PROFIT RATIO (NET PROFIT/ NET
SALES)*100
7.27% 10%
 CURRENT RATIO
PARTICULARS FORMULA YEAR
2021
YEAR
2020
CURRENT RATIO CURRENT ASSETS /
CURRENT LIABAILITY
CA = INVENTORY +
RECEIVABLES
30 33
CL = PAYABLES +
OVERDRAFT
18 17
CR = CA/ CL 1.67 1.94
 QUICK RATIO
PARTICULARS FORMULA YEAR
2021
YEAR
2020
QUICK RATIO QUICK ASSETS /
CURRENT LIABILTY
QUICK ASSETS = CA -
INVENTORY
18 24
CL 18 17
QR 1 1.41
 INVENTORY HOLDING DAYS
PARTICULARS FORMULA YEAR YEAR

2021 2020
INVENTORY
HOLDING PERIOD
IN DAYS
(Average Inventory / Cost of
goods sold)×365
Gross Margin = (Total
Revenue – Cost of Goods
Sold)/Total Revenue x 100
COGS=
62.7
COGS=
60
AVG. INV. 12 9
ANS. 69.86 days 54.75
days
 RECEIVABLES RATIO
PARTICULARS FORMULA YEAR
2021
YEAR
2020
RECEIVABLES
RATIO
AVG. RECEIVABLES /
NET CREDIT SALES
RECEIVABLES 18 24
SALES 110 100
ANS. 59.73 days 87.6 days
 PAYABLES RATIO
PARTICULARS FORMULA YEAR
2021
YEAR
2020
PAYABLES RATIO AVG. PAYABLES / COGS
PAYABLES 12 12
COGS 62.7 60
RATIO 69.35 days 73 days
b) Commenting on the performance of the company
The ratio analysis is very important for company to analyze the financial stability,
profitability in addition to forecasting future predictions. First and foremost, gross profit ratio
measures profitable position of B plc from the sale of goods and deducting the major

expenses. The ratio has decreased from 2020 to 2021 which shows decreasing trend in
profitability. Company is required to review the sales strategy and implement new strategy to
boost sales and enhance gross profit margin (Abdulkareem and Nagvadiya, 2021).
In addition to this, net profit is also depicting declining trend which means B plc is
incurring indirect expenses and other administrative expenses. Entity is having decreasing
NPR i.e. from 10% to 7% which examines the fact of ever increasing indirect expenses. Such
expenses need to be curbed so that excess money can be used in expansion & diversification
of B plc.
Further, the current assets are greater than current liability which is a good sign because
it means that B plc can easily meet its debts and obligation without affecting fixed assets.
However, the ideal ratio is 1 and B plc is having its ratio greater than 1 which depicts that
current assets of company are kept idle and are not put to any productive usage (Sunaryo,
2021). Company should make an attempt to utilize such idle assets and increase the income
and profit.
On the other hand, quick ratio is perfect of B plc which indicates company has exact
amount of assets to meet its obligations on time. Apart from inventory, business has
maintained enough current assets to pay the bills on time without affecting the profitability of
business.
Moreover, inventory holding day’s shows that company is holding its stock for 50-70
days, i.e. it takes around 60 days for inventory to rotate in business. It is a good sign for
company to have adequate balance in stock-in-hand (Yasir and Ammar, 2021). It also prevents
business from reordering the goods frequently.
Along with this, B plc’s receivable ratio has decreased from 87 days to 56 days that
shows company is receiving money from debtors on early basis. It shows that company is
maintain sufficient cash balance to meet the needs of business. Company is enjoying good
customer base which is setting their dues on time.
Furthermore, payables ratios shows credit worthiness of company at the time of paying
their dues. It is taking around 60 to 70 days to settle their dues with creditors which is a good
sign for company. It is maintaining cordial relations with suppliers by settling their bills on
time (Nasution and et.al., 2022).

QUESTION 3
a) Calculating annual cash flow of company
YEAR CASH INFLOW CASH
OUTFLOW
NET
FLOW
1 31500 14000 17500
2 34200 14000 20200
3 39600 14000 25600
4 27000 14000 13000
b) Calculating payback and net present value
Pay-back period:
Year Cash inflows Cumulative cash inflows
1 31500 31500
2 34200 65700
3 39600 105300
4 27000 132300
Initial investment 40000
Payback period 2.75
-0.6
Net present value:
Year Cash
inflows
PV
factor @
8 %
Discounted cash inflows
1 31500 0.926 29166.667
2 34200 0.857 29320.988
3 39600 0.794 31435.757
4 27000 0.735 19845.806

Total
discounted
cash inflow
109769.217
Initial
investment
40000
NPV (Total
discounted
cash inflows
- initial
investment)
69769.2171
c) Advising the company
Capital budgeting decisions are very crucial for any business and it should be taken with
utmost care. The company should consider the net present value method because the pay-
back period is showing negative results. The NPV is positive trends and shows that company
will be profitable. NPV is more realistic method because it takes actual cash flows on
discounted method and shows future cash flows to identify their present day worth. After
adding all cash flows, if the total cash flow is positive then, business should consider that
venture and invest in such capital budget (PV vs Payback Method, 2022). On the other hand,
pay-back period only calculates cost of business to launch such project without considering
discounted factor. It calculates break-even point after which company will start earning
profit.
However, company can use both methods simultaneously, with the help of pay-back
period, company can reduce the no. of options available and then apply NPV to identify the
best one.
d. Commenting on IRR and benefits
The IRR that is internal rate of return is being defined as the investment appraisal
technique used for analysing the potential profitability of the investment. Any investment
option will be undertaken only if it will be providing good profitability to the investor. In
case option will not be providing profits then it is not worth investment. Hence IRR is a
technique which helps the person in evaluating the potential of the investment and whether it
is investable or not. The benefits of IRR over NPV is as follows-

 The main benefit of IRR over NPV is that it is useful in comparing the multiple projects
against which the analysis is being done on the basis of discount rate (Jablonowski,
2021).
 Another benefit of IRR is that it is very easy and simple to understand as compared to the
other investment appraisal techniques.
e. Five factors that require to be considered before making the final decision
There are many different factors which need to be considered the while making the
investment decision final. These different factors involves the following-
1. The first and for most factor is the liquidity of the investment option. In case the
investment option is not liquid then it is not worth investment. This is because the
money will be blocked and during requirement it cannot be converted into cash easily.
2. Another factor involves the investment period. This is necessary to be evaluated
because if the investment period is high and the return is low then it is not worth
investment.
3. Along with this another factor involves the inflation rate (Maravas and Pantouvakis,
2018). The inflation outlines the rise in prices of the product and services and in case
it is high then it might be possible that investment returns decline.
4. Moreover taxation is also factor which needs to be considered while making the
investment the suggestion. In case the investment option is text adaptable then it will
be beneficial for the person by making the final decision.
5. Another factor involves the volatility of the return. In case the returns will be more
volatile then investment is not a good.
REFERENCES
Books and Journals

Abdulkareem, A. M. and Nagvadiya, B. R., 2021. An Analytical Study of Profitability and Liquidity
Postions of Selected Life Insurance Companies in India. International Journal of Finance
and Banking Research. 7(2). p.28.
Sunaryo, D., 2021. Analysis of current ratio, debt to assets ratio and gross profit margin on financial
distress with moderated share prices in retail companies listed in securities
exchange. International Journal of Educational Research & Social Sciences. 2(1). pp.23-33.
Yasir, M. H. and Ammar, A.B. D., 2021. THE EFFECT OF RELATIONAL CAPITAL
EFFICIENCY ON THE RECEIVABLE TURNOVER RATIO IN IRAQI INDUSTRIAL
COMPANIES: AN EMPIRICAL STUDY. PalArch's Journal of Archaeology of
Egypt/Egyptolog. 18(7). pp.998-1009.
Nasution, I. A. and et.al., 2022. The Effect Of Cash Turnover, Receivable Turnover, And Inventory
Turnover On Liquidity On Liquidity Of Consumer Goods Companies Listed In The Indonesia
Stock Exchange In the 2011-2014 Period. Enrichment: Journal of Management. 12(2).
pp.1840-1845.
Welc, J., 2022. Financial statement analysis. In Evaluating Corporate Financial
Performance (pp. 131-212). Palgrave Macmillan, Cham.
Palepu, K. G. and et.al., 2020. Business analysis and valuation: Using financial statements.
Cengage AU.
Fridson, M. S. and Alvarez, F., 2022. Financial statement analysis: a practitioner's guide.
John Wiley & Sons.
Hosaka, T., 2019. Bankruptcy prediction using imaged financial ratios and convolutional
neural networks. Expert systems with applications. 117. pp.287-299.
Kadim, A., Sunardi, N. and Husain, T., 2020. The modeling firm's value based on financial
ratios, intellectual capital and dividend policy. Accounting. 6(5). pp.859-870.
Online
NPV vs Payback Method, 2022 [Online]. Available through:
<https://strategiccfo.com/articles/investment-shareholders/npv-vs-payback-metho/
#:~:text=NPV%20(Net%20Present%20Value)%20is,solutions%20to%20evaluate
%20project%20value.>