Accounting Fundamentals: Income Statement, Balance Sheet, and Ratio Analysis

This document provides an introduction to accounting fundamentals, including the preparation of income statement and balance sheet. It also includes a detailed analysis of a company's performance through ratio analysis. The document discusses profitability, liquidity, efficiency, investment, and financing ratios. The financial performance and position of Chocco plc are also evaluated.

ACCOUNTING FUNDAMENTALS

Table of Contents
INTRODUCTION...........................................................................................................................................3
MAIN BODY..................................................................................................................................................3
Question 1.........................................................................................................................................3
Question 2:........................................................................................................................................6
CONCLUSION.............................................................................................................................................10
REFERENCES..............................................................................................................................................11

INTRODUCTION
Accounting can be defined as a process of recording financial transactions in a manner which
can contribute in preparation of financial statements. The report is based on two separate tasks in
which first task consists information about preparation of income statement and balance sheet.
While task two is based on analysis of given company's performance by help of ratio analysis.
MAIN BODY
Question 1
(a) Income statement and balance sheet:
Preparation of financial statement of Eccles plc
Income statement
For the year ended on 31st December 2018
Particulars Amount(£)
Sales 826,650.00
Add: Goods sold on 31st 980.00 827,630.00
Cost of goods sold -578,650.00
Gross Profit 248,980.00
Less: Expenses

Administrative expenses 30,000.00
Directors Remuneration 5,000.00
Distribution cost 28,000.00
Add: commission not recorded 3,000.00 66,000.00
Operating Profit 182,980.00
Interest paid 2,000.00
Net income before tax 180,980.00
Less: Tax 68,000.00
Net income 112,980.00
Balance sheet
Statement of Financial Position
as on 31st December, 2018
Particulars Amount(£)
Non-Current Assets
Plant & Equipment 632,730.00
Current Assets
Stock 330,600.00
Debtors 170,125.00
Add: goods sold at 31st 980.00
Cash and bank 12,900.00 514605.00

Total Assets 1,147,335.00
Current Liabilities
Trade creditors 171,355.00
Sales commission 3,000.00
Tax 68,000.00 -242,355.00
Non current
Liabilities
4% Debentures 100,000.00 -100,000.00
Net Assets 804,980.00
Equity
£1 Ordinary shares 310,000.00
10% Preference shares 300,000.00
Outstanding 980
Retained earnings 132,000.00
Add: Net income 112,000.00
Less: Ordinary
Dividend -20,000.00
Preference dividend -30,000.00 194,000.00

804,980.00
(b) Explain why the statement of financial position balances.
The assets mostly on balance sheet comprise about the corporation owns or will earn in the
potential time that are easy to measure. Liabilities, like taxes, accounts payable, wages, as well as
loans, are how a corporation owes (Robinson, 2020). The equity portion of the investors shows
the cash reserves of the corporation and the money that stakeholders invested. Net assets must be
proportional to the combined of shareholders’ equity also for accounting records to manage. The
financial accounting with double entries is the primary reason why an accounting equation
balance is from at least three variables accounts, this accounting method documents all expenses
and hence also serves as a review to ensure the transactions are accurate. It indicates that there
are three parties to each contract. One earns advantages that are thereby debited but the other
party presents the gain for which this is attributed. This should be recalled that all parties must be
paid with much the same amount, thus the Dual Entering Process description. So since both of all
transactions are paid with much the same amount or calculation for either debit balances as well
as the credit side of the balance sheet, that is a declaration of benefit, obligation and capital of
shareholders, must balance or add up the two aspects (Dewi, Azam and Yusoff, 2019).
Question 2:
(a) Ratios
Profitability ratio
2019 2018
Gross margin Gross profit/net sales*100

Gross profit. 3503 3345
sales 6738 6441
Results 51.99 % 51.93 %
Net profit ratio Net profit/net sales*100
Net profit. 431 366
sales 6738 6441
Results 6.40 % 5.68 %
Efficiency ratio
2019 2018
Assets turnover Turnover/assets employed
Turnover 6738 6441
Assets employed 9736 10087
Results 0.69 times 0.64 times
Stock holding period Stock/cost of goods sold*365

Stock 708 659
Cost of goods sold 3235 3096
Results 80 days 78 days
Debtors collection period Receivables/sales*365
Receivables 1249 1287
sales 6738 6441
Results 68 days 73 days
Creditors payment period Payable/credit purchase
Payable 583 655
Credit purchase 6738 6441
Results 32 days 37 days
Liquidity ratio
2019 2018
Current ratio current assets/current liabilities

Current assets 2303 2355
Current liabilities 2511 3046
Results 0.92 times 0.77 times
Quick ratio Quick assets/current liabilities
Quick assets 1595 1696
Current liabilities 2511 3046
Results 0.64 times 0.56 times
Financing ratios
2019 2018
Gearing ratio Debt/debt+equity
Debt 6648 7175
Debt+equity 9736 10087
Results 0.68 0.71
Interest cover ratio Profit before interest/interest charges

Profit before interest 855 699
Interest charges 226 181
Results 3.78 3.86
Investment ratio
2019 2018
Return on capital employed EBIT/Capital employed
EBIT 805 699
Capital employed 7225 7041
Results 0.11 0.10
Return on equity Earnings/ordinary share capital*100
Earnings 431 366
Ordinary share capital 3088 2912
Results 13.96 % 12.57 %
(b) Comment on the financial performance and position of Chocco plc.

Profitability ratio: On the basis profitability ratio, this can be inferred that there are two types of
ratios that are gross margin and net margin. In terms of net profit margin, in can be stated that in
year 2018, ratio was of 5.68% that raised in next year and became of 6.40%. Similarly, with
gross margin ratio increased in year 2019. Hence, it can be stated that company's performance is
better in year 2019 due to higher revenues and lower expenses.
Liquidity ratio: In liquidity, two types of ratios are measured that are quick ratio and current
ratio. Company failed to manage ideal ratio of liquidity in both years 2018 and 2019. Like
current ratio in year 2018 was of 0.77 times that raised and became of 0.92 times. It indicates
that company does not have enough amount of current assets to make payment of current
liabilities.
Efficiency ratio: The objective of efficiency ratio is to assess about company's performance that
how well they are managing their stock, debtors etc. In the aspect of creditors turnover ratio this
can be stated that company's performance enhanced as number of days to pay creditors
decreased. In addition to this, debtors turnover ratio also reduced in year 2019 by 5 days. These
ratios are showing that company is able to manage their efficiency in year 2019 in a better way
compared to year 2018.
Investment ratio: Under investment ratio, two types of ratios are measured that are return on
capital employed and return on earnings. The performance of both ratios is below average
because return on capital employed is too lower in both of years. As well as return on equity is
increasing in year 2019 which shows that company is able to generate higher earnings in this
year.
Financing ratio: In the aspect of gearing ratio, this can be stated that it is below one and this
shows that company is not able to manage their debts and equity in an effective way. As well as
interest coverage ratio is also lower in year 2019 that is an indication of ineffective performance
of company in current year which need to be enhanced by increasing volume of equities.

CONCLUSION
On the basis of above project report this can be concluded that accounting is one of the main
aspect for companies in order to manage day to day transactions in an effective manner. Under
the report two financial statements are prepared that are income statements and balance sheet in
accordance of given data set. As well as ratios are also measured to analyze given company's
performance in terms of each aspect.

REFERENCES
Robinson, T.R., 2020. International financial statement analysis. John Wiley & Sons.
Dewi, N., Azam, S. and Yusoff, S., 2019. Factors influencing the information quality of local
government financial statement and financial accountability. Management Science
Letters, 9(9), pp.1373-1384.