Accounting For Business: Income Statement, Balance Sheet, Investment Analysis, Financial Ratios

This article covers Accounting For Business with solved assignments, essays, dissertation, and financial ratios. It includes Income Statement, Balance Sheet, Investment Analysis, Financial Viability, Non-Financial Factors, and Comparative Analysis of Financial Performance of Companies. The subject is Accounting For Business with course code not mentioned and college/university not mentioned.

Accounting For Business

TABLE OF CONTENTS
SECTION A.....................................................................................................................................3
QUESTION 1...................................................................................................................................3
1 Income statement.....................................................................................................................3
2 Balance sheet............................................................................................................................4
SECTION B.....................................................................................................................................5
QUESTION 2...................................................................................................................................5
A Calculating the payback period...............................................................................................5
B Calculating net present value...................................................................................................5
C. Financial viability of investment and justification of one project..........................................6
D. Non- financial factors to be considered while finalising the decision...................................6
E. Calculating IRR......................................................................................................................7
QUESTION 4...................................................................................................................................7
A Calculating different ratios of both companies.......................................................................7
B Comparative analysis of financial performance of company..................................................8
REFERENCES..............................................................................................................................10

SECTION A
QUESTION 1
1 Income statement
Particular Details Amount
(in £)
Sales 20,000
Cost of sales
Opening inventory 2000
Purchases 16000
Less: Closing inventory [3000] [15000]
Gross Profit 5000
Expenses
Administration expenses 900
Salaries & wages [600 + 10] 610
Selling and distribution expenses [1000 - 100] 900
Depreciation on machinery 625
Depreciation of Building 100
Debenture interest [20 + 10] 30
Audit fee [100 + 40] 140
Bad debt 20
Directors’ remuneration 200
[3525]
Profit Before Tax 1475
Provision for taxation [200]
Profit After Tax 1275
Dividends – interim paid
-- final proposed [8000 x £0.10]
50
800 [850]
Retained profit for the year 425

Retained profit b/f 1610
Retained profit c/f 2035
Depreciation on machinery = machine at cost – accumulated depreciation * 25%
Depreciation on machinery = 3000 – 500 = 2500 * 25% = 625
Depreciation on building = Building at cost * 5% = 2000 * 5% = 100
Debenture interest = 600 * 5% = 30
Outstanding interest = 30 – 20 = 10
2 Balance sheet
Assets Amount (in £)
Receivables 1200
Closing stock 3000
Prepaid selling expense 100
Cash 50
Land 5000
Building 2000
Machinery 3000
14350
Liability
Bank overdraft 30
Payable 700
Bad debt 20
Accrue salary 10
Audit fee 40
Accumulated depreciation of machine 625
Accumulated depreciation on building 100
£1 Ordinary share capital 8000
Retained profit 2035
Share premium 300
5% Debenture 600

Dividend payable 800
14350
SECTION B
QUESTION 2
A Calculating the payback period
Year Cash flows of System A Cumulative cash flows
1 600 600
2 700 1300
3 800 2100
4 600 2700
5 100 2800
Payback period 2
0.9
Payback period 2 year and 9 months
B Calculating net present value
year cash inflows depreciation EBIT
net
cash
inflow
1 600 390000 -389400 600
2 700 390000 -389300 700
3 800 390000 -389200 800
4 600 390000 -389400 600
5 100 390000 -389900 100
year
Cash inflows (in
£)
PV factor @
10%
Discounted
cash flows (in
£)
1 600 0.909 545

2 700 0.826 579
3 800 0.751 601
4 600 0.683 410
5 100 0.621 62
Total discounted cash
inflow 2197
Initial investment 2000
NPV (Total
discounted cash
inflows - initial
investment) 197
C. Financial viability of investment and justification of one project
With respect to the above calculation it can be stated that there is financial viability of the
project. The reason behind this fact is that the money will be return in less time that is 2 years
and 9 months. Further with respect to the net present value as well the company is having
positive amount which implies that the present value of future cash flow is positive and this is
good for the company.
D. Non- financial factors to be considered while finalising the decision
While taking the decision other than financial aspect there are also some of the non-
financial aspect which needs to be considered before finalising the decision. These non- financial
factors are as follows-
 The most essential aspect to the match the industry requirement because in case this
requirement will not be matched then this can affect the working of the project to a great
extent (Jiang and et.al., 2020).
 In addition to this another factor is environmental factor to be considered before making
the investment decision.
 Moreover, the factor also involves changes in politic or any other governmental factor as
well.
 In addition to this, changes within the management and leadership of the company can
also affect the decision relating to any of the investment.

 Also another factor affecting the decision relating to the investment decision is future
plan of the company that is whether the future objective of the company meets the current
plan or not (La Rosa and et.al., 2018).
E. Calculating IRR
year cash inflows
0 -2000
1 600
2 700
3 800
4 600
5 100
6
IRR 14%
With respect to the internal rate of return it is clear that the profitability of the investment
project is 14 %. This simply implies that in case the investment will be done than the company
will be in position to gain the 14 % return which is beneficial for the company.
QUESTION 4
A Calculating different ratios of both companies
Gross profit ratio
Particular Formula A ltd B ltd
Gross profit ratio Gross profit/ sales * 100 35.00 33.33
Gross profit 350 200
Sales 1000 600
Net profit ratio
Particular Formula A ltd B ltd
Net profit ratio Net profit/ sales * 100 19.00 19.17
Net profit 190 115
Sales 1000 600
Current ratio

Particular Formula A ltd B ltd
Current ratio Current asset/ current liabilities 1.88 2.64
Current asset 375 330
Current liabilities 200 125
Quick ratio
Particular Formula A ltd B ltd
Quick ratio
(current asset - inventory) / current
liabilities 1.10 1.52
Current asset 375 330
Inventory 155 140
Current
liabilities 200 125
Receivables ratio
Particular Formula A ltd B ltd
Account
receivable
Average account receivable/ total sales *
365 62 88
Account
receivable 170 145
Sales 1000 600
Inventory days in ratio
Particular Formula A ltd B ltd
Inventory
days Inventory/ cost of sales *365 87 128
Inventory 155 140
Cost of sales 650 400
B Comparative analysis of financial performance of company
With the above ratios it is clear that all the performance of A ltd is better in comparison
to B ltd. With respect to the gross profit it is clear that company A is having more gross profit
margin as compared to B ltd. This is particularly because of the reason that company A is having
more sales and more gross profit (Zolfani, Yazdani and Zavadskas, 2018). Further with respect

to the net profit it is clear that both the companies are having almost same net profit and there is
a slight difference in the net profit margin of both the companies. For A ltd it is 19 and for B ltd
it is 19.17. Further with respect to the liquidity as well company A ltd is having better
performance with the B ltd. This is clearly visible with help of the current ratio.
The company A ltd is having current ratio of 1.88 and B ltd is having 2.64. This 1.88 is
good for the company because it is near to the ideal ratio that is 2: 1. This ideal ratio implies that
company must be having twice current asset for payment of every current liability. For B ltd the
current ratio is more and too high current ratio is also not good for the company. Further for the
quick ratio as well company A ltd is good. This is pertaining to the fact that when low quick ratio
implies that company has not invested much amount in inventories (Sutarno and et.al., 2019).
Moreover, with help of the efficiency ratio it is clear that receivable ratio is better for Company
A because it is less in comparison to company B that is 62 and 88 days respectively. Further the
inventory days highlight the fact that how much time the company takes in converting the
inventory in to cash. This ratio is also good for company A as it takes less time in converting the
inventory into cash.

REFERENCES
Books and Journals
Jiang, Q., and et.al., 2020. Differential dynamic decision-making model for multi-stage
investment of scenic area. Alexandria Engineering Journal. 59(4). pp.2819-2826.
La Rosa, F., and et.al., 2018. The impact of corporate social performance on the cost of debt and
access to debt financing for listed European non-financial firms. European Management
Journal. 36(4). pp.519-529.
Sutarno, S., and et.al., 2019, December. Implementation of Multi-Objective Optimazation on the
Base of Ratio Analysis (MOORA) in Improving Support for Decision on Sales Location
Determination. In Journal of Physics: Conference Series (Vol. 1424, No. 1, p. 012019).
IOP Publishing.
Zolfani, S. H., Yazdani, M. and Zavadskas, E. K., 2018. An extended stepwise weight
assessment ratio analysis (SWARA) method for improving criteria prioritization
process. Soft Computing. 22(22). pp.7399-7405.