Accounting for Business: Financial Statements Analysis and Ratios

This study material covers financial statements analysis and ratios for accounting, including liquidity, profitability, and efficiency ratios. It also includes a case study on break-even analysis and margin of safety. The subject is Accountancy, and the course code and college/university are not mentioned.

Accounting for
business

Table of Contents
Question 1........................................................................................................................................3
Question 2........................................................................................................................................4
Question 3........................................................................................................................................6
REFERENCES................................................................................................................................9

Question 1
Particular Amount
Sales 1200
Cost of sales 700
opening inventory 250
LESS: purchases 600
closing inventory 150
Expenses
Rent&rates (30-4+1) 27
Selling expenses (20-2) 18
Advertising(20-3) 17
Insurance(9+1) 10
Energy costs(25+1)_ 26
Audit fee(10+2) 12
Depreciation on vehicle(130-
30)*0.25 25
depreciation on fixture and
fittings(100-60)*0.3 12
Distribution cost 30
Salaries &wages 90
Director remuneration 45
Bad debt 3
Interest on bank loan 8
Debenture interest(10+2) 12
PBT 147
TAX 60
PAT 87
Dividend
Interim 25
Final(400*0.09) 36
retained profit for the year 44
Retained profit B/F 26
Retained profit C/F 90
statement of final position of A plc as of
31/12/2021
NON CURRENT ASSET
PREMISES 650

VEHICLE 75
FIXTRURE AND FITINGS 28
795
CURRENT ASSET
INVENTORY 150
RECEVIABALE 90
PREPAYMENTS (4+3+2) 9
BANK 7
CASH 3
TOTAL ASSETS 1012
SHARE CAPITAL
Ordinary shares 400
Reserves 90
share premium 100
retained profit 44
shareholder’s fund 634
Non current liabilities
8% long term loan 100
12% Debenture 100
200
current liabilities
accruals(1+1+1+2+2) 7
Payable 75
Tax 60
proposed dividend 36
SHAREHOLDER FUND’S LIABILITY
total liabilities 1012
Question 2
Liquidity ratio-
2021
Current ratio = current assets / current liabilities
=42/25= 1.68
Quick ratio = (current assets – inventory)/current liabilities

=(42-18)/25
= 24/25
= 0.96
2022
Current ratio = current assets / current liabilities
=43/28= 1.53
Quick ratio = (current assets – inventory)/current liabilities
=(43-22)/28
= 21/28
= 0.75
Profitability Ratio-
Gross profit ratio = (Revenue-cogs)/revenue
2022
=70/150*100
=46.67%
2021
=60/130*100
=46.15%
Net profit ratio = (Revenue-cost) / revenue
2022
=20/150*100
=13.33%
2021
=22/130*100
=16.92%
Efficiency ratio
Accounts payable(payment period) = payables/ cost of sales*365
2022

=16/80*365
= 73 days
COGS = SALES - GROSS PROFIT
= 150-70
= 80
2021
=13/70*365
=67 days
COGS = 130-60
= 70
Account receivables(collection period)
= receivable / cost of sales * 365
2022
=19/150 * 365
= 46.23 days
2021
=19/130 * 365
= 53.35 days
b) B Ltd is not in ideal position pay its short term liabilities because its current ratio is less than
2:1 in both the years. Ideally current assets must be 2 times higher than the current liabilities.
Profitability ratio in both years are effective, higher ratio depicts a better position hence the
company should work on its net profit ratio which has come down in the year 2022. According to
the efficiency ratio company is paying its creditors more quickly in 2022 in 2021. And Debtors
payment rate has also increased in the 2022.
Question 3
Particular units Amount
Budgeted production and sales 35000
Selling price 25
Variable cost 15
contribution 10

Fixed cost 220,000
a) Break even sales volume and sales revenue
= fixed cost/ contribution per unit
= 220,000/10
=22000 units
Break even sales revenue = 22000*25
=550000
b) Budgeted profit for unit 35000
Contribution of 35000 units = 35000*10
=350000
Profit = Contribution- fixed cost
= 350000-220000
=130000
c) Margin of safety
=Total sales- BEP sales
=35000-22000
=13000 units
=325000 revenues (25 is the selling cost)
d) Desired profit = 100,000
Sales volume = desired profit + fixed cost/ contribution per unit
=100,000+220000/10
=32000 units
= 800000 sales revenue
e) Selling price =£23
Variable cost = 15-20%
=12
Contribution = Sales price- variable cost
=23-12
=11
Fixed cost= 220000 + 5%

=231000
If 40000 units are sold the profit
particular Per unit Amount
Selling price 23 920000
Variable cost 12 480000
Contribution 11 440000
Fixed cost 231000
PROFIT 209000
Break even point
= fixed cost/ contribution per unit
= 231000/11
=21000
Margin of safety
=Total sales- BEP sales
= 40000-21000
=19000
If the company raises its sales unit to 40000 that means company can make use of its
resources more efficiently. With 35000 units is able to earn 130000 but by raising the
amount of production it is able to earn much higher profit that is 209000. As compared to
the cost incurred the profit is more attractive hence, the decision of raising the production
unit is good company must consider the decision.
f) Limitation;
 The calculation is based on fixed cost which is not possible in the real world
scenario. Distinguishing between different type of cost is difficult.
 In this calculation only single product can be considered a variety of production
unit cannot use this formula.

REFERENCES
Books and Journals
Asir, M., Rachman, S. and Yuliani, N.F., 2022. Performance Analysis of Financial Statements on
CV. SAM in Gowa District. Budapest International Research and Critics Institute
(BIRCI-Journal): Humanities and Social Sciences, 5(3).
Haustein, E. and Lorson, P.C., 2019. Consolidated financial statements.
Hernawati, E., 2021. Corporate Governance, Earnings Management and Integrity of Financial
Statements: The Role of Audit Quality and Evidence from Indonesia. Review of
International Geographical Education Online, 11(3).
Huy, P.Q. and Phuc, V.K., 2022. Exploration the influence to information quality of financial
statements from internal control structure–an approach to education field in public
sector. International Journal of Intellectual Property Management, 12(3), pp.318-340.
Li, J., Wei, L. and Zhu, X., 2022. Financial Statements-Based Bank Risk Aggregation
Framework. Financial Statements-Based Bank Risk Aggregation, pp.43-54.
Xu, X., 2022. Analysis of Zijin Mining's Financial Statements based on Harvard
Framework. Frontiers in Economics and Management, 3(8), pp.368-377.