Financial Statement Preparation and Analysis for Eccles plc and Chocco plc

This document provides a detailed explanation of the preparation of financial statements for Eccles plc and the analysis of financial performance and position for Chocco plc. It includes information on the balance sheet, income statement, and financial ratios. The document also discusses the importance of balance in the statement of financial position and the use of financial ratios for analysis. The content is relevant to the subject of accounting and is suitable for students studying accounting fundamentals.

ACCOUNTING
FUNDAMENTALS

TABLE OF CONTENTS
QUESTION 1.............................................................................................................................3
a) Preparation of financial statement......................................................................................3
b) Determining why the statement of financial position balances.........................................4
QUESTION 2.............................................................................................................................4
a) Schedule of ratios for Chocco plc for 2019 and 2018........................................................4
b) Analysing and interpreting the financial performance and position of Chocco plc..........6
REFERENCES...........................................................................................................................9

QUESTION 1
a) Preparation of financial statement
Eccles plc
Income Statement for the year ended 31st December
2019
Particulars Amount (in £)
Sales 827630
Less: Cost of sales 578650
Gross profit 248980
Less: Expenses
Administrative expenses 30000
Directors remuneration 5000
Distribution costs 28000
Outstanding commission to salesmen 3000
Profit before interest and tax 182980
Interest paid 2000
Earnings after interest 180980
Tax 68000
Net profit 112980
Eccles plc
Statement of financial position as at 31st December 2019
Particulars Amount (in £)
ASSETS
Current assets
Stock 330600
Debtors (170125+980) 171105
Cash and bank (12900-68000) -55100
Total current assets 446605
Non-current assets
Plant and equipment 632730
Total Non-current assets 632730
Total assets 1079335
LIABILITIES
Current liabilities
Accounts payable (Creditors) 171355
Outstanding commission 3000
Total current liabilities 174355
Non-current liabilities

Share capital (310000+300000) 610000
4% Debentures 100000
Retained profits at 1st January 2018 (132000-
50000) 82000
Net profit for the year ended 31st December 2019 112980
Total Non-current liabilities 904980
Total liabilities 1079335
b) Determining why the statement of financial position balances
The main reason behind why the balance sheet always balances and must balance is
that the assets of the organization is being financed from the various sources like share capital
along with the profits and retained earnings (Jansson, 2018). These sources are known as the
internal sources of finance while the other source is called external which includes the loan
from the financial institutions, creditors etc. thus, the total assets of the company should be
equivalent to the total liabilities which results into formation f the accounting equation which
is: Total assets = Total equity + Total liabilities.
QUESTION 2
a) Schedule of ratios for Chocco plc for 2019 and 2018
Ratio analysis of Chocco plc
2019 2018
Liquidity ratio
Current assets 2303 2355
Current liability 2511 3046
Inventory 708 659
Quick Assets 1595 1696
Current ratio Current assets / current liabilities 0.92 0.77
Quick Ratio
(Current Assets - Inventory) / Current
Liabilities 0.64 0.56
Profitability ratio
Employed Capital 7225 7041
Net operating profit 805 699
Return on capital
employed Net operating profit/Employed Capital 11.14% 9.93%
Net Income 431 366
Shareholder's Equity 3088 2912

Return on Equity Net Income / Shareholder's Equity 13.96% 12.57%
Cost of Sales 3235 3096
Sales 6738 6441
Gross Margin Total Sales – COGS/Total Sales 51.99% 51.93%
Net profit 431 366
Sales 6738 6441
Net profit ratio Operating Income/ Net Sales 6.40% 5.68%
Efficiency Ratios
Inventory 708 659
Net Assets 3088 2912
Cost of Sales 3235 3096
Sales 6738 6441
Asset turnover ratio Sales / Net assets 2.18 2.21
Inventory turnover ratio Sales / Inventory 4.57 4.70
Leverage ratios
Total assets 9736 10087
Total Equity 3088 2912
Total debt 4137 4129
Proprietary Ratio
Total Shareholders' Equity / Total
Assets 31.72% 28.87%
Debt equity ratio Total debt/total equity 1.34 1.42
Market value ratios
Market price per share 5.12 4.00
Earnings per share
Number of shares = 300/0.5 = 600
shares 0.72 0.61
Net book value 3088 2912
Market capitalization 600 shares*MPS 3072 2400
Price earnings ratio 7.1 6.6
Market to book value ratio Market Capitalization / Net Book Value 0.99 0.82
Dividend paid 255 242
Net income 431 366
Dividend pay-out ratio Dividend paid/Net income 59.16% 66.12%
b) Analysing and interpreting the financial performance and position of Chocco plc
Liquidity ratios

Current ratio
The current ratio of the company has increased in comparison to the previous year
which the ratio is still low and the company requires to take actions for the purpose of
increasing the current assets or reducing its current liabilities.
Quick Ratio
Through this ratio, it can be interpreted that the company has made an investment into
its stocks which ahs resulted into blocking of the cash (Mas' ud and Srengga, 2017). Thus, it
becomes a point of concern for the company as this might result into insufficient amount of
funds for carrying out the daily business activities.
Profitability ratios
Return on capital employed
This ratio of the company rose to 11.14% in the year 2019 which is positive sign of
growth. It depicts that the Chocco plc has effectively made use of its capital employed in
creating desired income. Therefore, more such efforts should be made for ensuring that in
future the percentage increases.
Return on Equity
The ROE has shown an increase in trend and from the investors point of view, this is
very sound and it highlights the efficiency and the effectiveness of the organization in terms
of effectively utilizing the funds provided by the investors along with providing attractive and
higher return on it.
Gross Profit Margin
This ratio has remained consistent and there is no such change which is mainly of no
variation in the sales and the cost of sales. It is important to improve it further through the
way of increasing the sales revenue and reducing eth cost of sales associated with it.
Net Profit ratio
The net profit margin of Chocco plc has increased to 6.40% which shows that the
entity has been working sound in respect to further increasing its profits. The company has
effectively exercised control over its expenditure which has resulted into increase in net
profit.
Efficiency ratios
Asset turnover ratio
This ratio of the company has reduced which means that the company is not able to optimum
utilize its assets in generating higher revenue. Thus, it is crucial for the entity t implement
strategy for ensuring effective use of its assets which will result into positive outcome.

Inventory turnover ratio
The ITR of the organization has declined which implies that the organization is
confronting issue in regard to selling its products (Valaskova and et.al., 2018). It is attractive
to have higher proportion and if there should arise an occurrence of lower proportion it
portrays that the organization overspend through the method of buying an excessive amount
of load of merchandise and is squandering its assets by warehousing the non-saleable
inventory things. This features that organization isn't effective in rapidly selling its inventory.
Leverage ratios
Proprietary Ratio
This proportion has indicated an upward pattern which is ideal for the organization as
it features that the company is utilizing the equity assets rather than obligation in the
business. The rate has expanded and is in this manner having extra space for the taking the
obligation if there is any requirement of it (Kristanti and Herwany, 2017). Alongside that,
there is a decrease in the total assets of the organization and an expansion in the equity funds
which has come about into high ratio.
Debt equity ratio
This ratio helps in deciding the creation of the obligation and equity in the capital
structure of an organization. It is attractive to have the proportion of 1 however in the event
of Chocco plc the proportion is 1.34 which has diminished in contrast with the earlier year
yet isn't extremely low. This portrays that the substance is having more obligation when
contrasted with its value which cause risk for the business entity consequently, measures are
needed to be embraced which will help in accomplishing the ideal proportion.
Market value ratios
Price earnings ratio
The PER of Chocco plc has indicated an expansion in pattern which features the
developing stocks of the organization. Alongside it, the proportion is high which portrays the
more grounded and positive future presentation of the element and alongside it, the desires of
the investors with respect to the future income will likewise increment and will pay more
(Rashid, 2018). Be that as it may, then again, it is critical to investigate the opposite side too,
which is, growing stocks are higher unpredictable which applies tremendous tension on the
entity to invest in more amounts of energy to legitimize with the higher valuation.
Market to book value ratio
This proportion is the budgetary measurements which is used to assess the current
estimation of the current share worth of an organization as opposed to its book esteem. The

proportion has ascended to 0.99 from 0.82 in 2018. The proportion lower than 1 show that the
share of the organization is underestimated which is considered as the awful speculation
which could imply that there is something missing with the organization and furthermore
portrays that the organization will be paying considerably more than what will be left after
bankrupt (Doorasamy, 2016). The proportion greater than 1 alludes to the overvaluation of
the stock passing on that the association is performing admirably. The 0.99 is roughly 1, in
this manner, Chocco plc should execute the techniques which will help in accomplishing the
proportion of more than 1. Thusly, the stock estimation of the organization is acceptable.
Dividend pay-out ratio
The DPR of the organization has declined in regard to its earlier year which features
that the organization is reinvesting its acquiring into the activities which results into
additional extension of the business (Zarei, Yazdifar and Ghaleno, 2020). Through this,
organization will have the option to achieve high development goals which will thus result
into acquiring significant level of capital additions for the speculators. In this way, Chocco
plc is in the situation to draw in more speculators who are more enthusiastic about procuring
higher expected benefits from a critical rise in the share price of the organization and least
interest in the pay produced through profit.

REFERENCES
Books and Journals
Doorasamy, M., 2016. Using DuPont analysis to assess the financial performance of the top 3
JSE listed companies in the food industry. Investment management and financial
innovations, (13, Iss. 2), pp.29-44.
Jansson, C., 2018. Financial resilience: the role of financial balance, profitability, and
ownership. In The Resilience Framework (pp. 111-131). Springer, Singapore.
Kristanti, F. T. and Herwany, A., 2017. Corporate governance, financial ratios, political risk
and financial distress: A survival analysis. Accounting and Finance Review (AFR)
Vol. 2(2).
Mas' ud, I. and Srengga, R.M., 2017. Financial Ratio Analysis To Predict Financial Distress
Conditions Manufacturing Companies Listed In Indonesia Stock Exchange,(Online),
Vol. 10. No. 2.
Rashid, C. A., 2018. Efficiency of Financial Ratios Analysis for Evaluating Companies’
Liquidity. International Journal of Social Sciences & Educational Studies. 4(4),
p.110.
Valaskova, K., and et.al., 2018. Financial risk measurement and prediction modelling for
sustainable development of business entities using regression
analysis. Sustainability. 10(7). p.2144.
Zarei, H., Yazdifar, H. and Ghaleno, M. D., 2020. Predicting auditors' opinions using
financial ratios and non-financial metrics: evidence from Iran. Journal of
Accounting in Emerging Economies.