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

This document provides an introduction to accounting fundamentals, including the preparation of income statements and balance sheets. It also covers the interpretation of financial statements through ratio analysis. The document includes examples and explanations of various ratios and their implications for a company's financial performance and position. The conclusion highlights the importance of accounting in recording transactions and preparing financial reports.

ACCOUNTING FUNDAMENTALS

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Question 1....................................................................................................................................3
Question 2:...................................................................................................................................5
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Accounting can be described as a mechanism by which financial transactions are reported in a
way that can lead to the preparing of financial reports (Kranacher and Riley, 2019). The study is
based on two different activities in which details about the planning of the income statement and
balance sheet is contained in the first task. Although task two is focused on interpretation of the
findings of the given organisation by way of ratio analysis.
MAIN BODY
Question 1
(a)Income statement and balance sheet:
Income statement:
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 financial condition balance sheet since data about long and the short debt is included with
the liability side, while details about existing & non-current assets is included on assets side
(Karabarbounis and Neiman, 2019). It is also important for firms to view their financial
circumstances statement fairly so that customers can ensure their financial stability and be able to
make choices strategically.
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 grounds of the profitability ratio, it can be claims that there are three
forms of gross and net margin ratios. In view of net profit margin, it can be reported that the ratio
was 5.68% in 2018, which rose in the next year and turned 6.40%. Likewise, in the year 2019,
the gross margin percentage rose. Therefore, owing to higher sales and reduced costs, the results
of the company can be seen to be stronger in 2019.
Liquidity ratio: Two types of ratios are calculated in liquidity, which are fast ratios and current
ratios. For both 2018 and 2019, the company struggled to maintain the ideal liquidity ratio. In
2018, the current ratio was 0.77 times higher and 0.92 times higher than the current average. It
means the company does not have ample liquid assets for current obligations to be compensated.
Efficiency ratio: The purpose of the efficiency ratio is to determine the success of the company
and how well they handle their stocks, debtors, etc. This can be indicated in the factor of the

creditor turnover ratio that the efficiency of the firm increased as the amount of days to pay
creditors reduced. In comparison, the debtors' turnover ratio has fell by 5 days in 2019. These
ratios indicate that the organisation is more able to handle its performance in 2019 relative to
2018.
Investment ratio: Various categories of ratios are calculated under the expenditure ratio, namely
return on working capital and return on earnings. The output in both ratios is less than average,
since the return on the resources invested for both years is too poor. In 2019, the return on equity
is rising, which indicates that the company is able to produce higher profits this year.
Financing ratio: In terms of the gearing ratio, it may be reported that it is under one and this
indicates that the firm is unable to efficiently handle its debts and equity. In 2019, the interest
coverage level is still smaller, which would be an indicator of the company's inadequate growth
in the competitive year, which has to be changed by increasing equity volume.
CONCLUSION
On the basis of above project report this can be concluded that accounting plays a key role in
order to record different kinds of transactions in an effective manner. This is so because by help
of different kinds of accounting rules and regulations, it becomes easier for managers to prepare
financial reports. The report concludes that given company's performance is better in year 2019
as compared to year 2018.

REFERENCES
Kranacher, M.J. and Riley, R., 2019. Forensic accounting and fraud examination. John Wiley &
Sons.
Karabarbounis, L. and Neiman, B., 2019. Accounting for factorless income. NBER
Macroeconomics Annual, 33(1), pp.167-228.