Accounting Fundamentals: Analysis of Financial Performance and Position of Chocco plc

This project explains the importance of accounting fundamentals and includes a profit and loss statement for Kedison Plc. It also evaluates the financial performance and position of Chocco plc with the help of different financial ratios. Suggestions have been made for improving the operations of the company.

Accounting Fundamentals

TABLE OF CONTENT
INTRODUCTION ..........................................................................................................................3
MAIN BODY...................................................................................................................................3
Question 1........................................................................................................................................3
Profit and loss statement for Kedison PLC .................................................................................3
Balance sheet for the year ended.................................................................................................4
Question 2........................................................................................................................................5
Calculation of ratios for Chocco plc............................................................................................5
Commenting on the financial performance and position of Chocco plc...................................12
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Accounting is the process which helps in the recording financial transactions that helps
the business for pertaining of a business. With the help of an accounting process the business can
summarize analyse and report the financial analysis. Accounting fundamentals are the various
different components of accounting such as, recording, summarizing, analysing of assets,
liabilities and owners equity. In this project a profit and loss statement has been prepared for
understanding the financial performance of Kedison Plc has been analysed. This project with the
help of different financial ratios explains the financial performance and position of Chocco plc.
MAIN BODY
Question 1
Profit and loss statement for Kedison PLC
Particulars Amount (in £) Amount (in £)
Sales revenue 826650
Less: Cost of goods sold 578650
Gross Profit 248000
Less: Indirect expenses
Administrative expenditure 30000
Interest paid 4000
Directors remuneration 5000
Distribution costs 28000
Sales commission 3000 68000
EBT 180000
Corporation tax 68000

Net Profit 110000
(-) Preference dividend 30000
Earnings available to equity
shareholders
80000
(-) Ordinary dividend 20000
Retained earnings 60000
Balance sheet for the year ended
Particulars Amount (in £) Amount (in £)
ASSETS
Fixed assets
Plant and equipment 632730
Current assets
Stock 329620
Debtors 171105
Cash and Bank 12900
Total assets 1146355
LIABILITIES
Long term liabilities
4% Debentures 100000 100000
Current liabilities
Creditors 171355
Outstanding commission 3000

Outstanding interest 2000
Tax payable 68000
Shareholders’ equity
Ordinary shares 310000
10% preference shares 300000
Profit for the period 110000
Retained earnings 60000
Total liabilities 1146355

Question 2
Calculation of ratios for Chocco plc
ROCE : Return on capital employed
Particulars Formula 2020 2019
Earnings Before Interest and
Tax 846 720
Total assets 9736
1008
7
Current liabilities 2511 3046
Capital employed Total assets - Current liabilities 7225 7041
ROCE ratio EBIT / Capital employed
11.7
%
10.2
%
ROE : Return on equity
Particulars Formula 2020 2019

Net Income 431 366
Shareholders equity 3088 2912
ROE Net income / average shareholders equity
13.96
%
12.57
%
Earnings per share :
Particulars Formula 2020 2019
Net income 431 366
Preferred dividend 0 0
Average common shares
outstanding 600 600
Earnings per share
(Net income - Preferred dividend) / Average
common shares outstanding 0.72 0.61

Net profit margin :
Particulars Formula 2020 2019
Net profit 431 366
Revenue 6738 6441
Net profit margin Net profit / sales * 100
6.40
%
5.68
%

Asset turnover ratio :
Particulars Formula 2020 2019
Revenue 6738 6441
Total Assets 9736
1008
7
Asset turnover ratio Net sales / Average total assets 0.69 0.64
Stock holding days :
Particulars Formula 2020 2019
Inventory 708 659
Cost of sales 3235 3096
Stock Holding days (Inventory / COGS)*365 80 78

Debtors collection period
Particulars Formula 2020 2019
Debtors 1249 1287
sales 6738 6441
Debtors collection Period (Debtors / sales)*365 68 73
Current ratio :

Particulars Formula 2020 2019
Current assets 2303 2355
Current liabilities 2511 3046
Current Ratio Current assets / Current liabilities 0.92 0.77
Gearing ratio
Particulars Formula 2020 2019
Total debt 4137 4129
Shareholders’ equity 3088 2912
Gearing ratio Long-term debt / shareholders equity 1.3 1.4

Inventory turnover ratio :
Particulars Formula 2020 2019
Net sales 6738 6441
Inventory 708 659
Inventory turnover ratio COGS / average stock 9.52 9.77

Commenting on the financial performance and position of Chocco plc
ROCE :
Return on capital employed shows the measurement of company's profitability in the
terms of its total capital. For the Chocco plc the return on capital employed showed a positive
result on the performance of the business in the following years as the ROCE increased from
10.2% to 11.7%. This shows that the company has utilized its capital much more efficiently than
as compared to the previous year (Rashid, 2018). Despite the positive trend in the ROCE this
organization can improve its performance even more by utilization of its resources in a more
efficient ways.
ROE :
Return on equity is the measurement of the company's profit with relation to the
shareholder's equity. In this organization the ROE ration has increased to 13.96% which in the
previous year was 12.57%. This shows that the business has been successful in generating return
with the help of the shareholder's money. Increasing rate of ROE is very advantageous for the
business it influences the investors to spending on the company. However, the ROE of the
company still does require improvement. This company can try to reduce its expenditure and try
to achieve efficiency in its operations for generating higher return (Rahman. and Fatmawati,
2020.
Earnings per share :
The amount of money that Chocco plc made out of each individual share is said to be it's
earning per share. The earning per share has also increased for this company as in 2020 it was
0.61 which then increased to 0.72. This indicates that the business is able to improve its
operations so that it can generate higher profit out of the investments. Chocco plc can increase its
EPS by improving its business strategies.
Net profit margin :
This is a ratio which tells about what is the percentage of profit that the company has
generated from its revenue. It indicates the amount of profit made by the company from £1. An
organization can increase its net profit margin by decreasing the total cost which its incurs.
Chocco plc has been successful in improving its Net profit margin from 5.68% to 6.40%.

However, to improve the net profit margin even more the organization needs to utilize its
resources more efficiently.
Asset turnover ratio :
Asset turnover ratio measures the efficiency of the organization showing how much
revenue the company generates from its assets. It is important to have higher Asset turn over
ratio as it indicates efficiency of the business resources and management. Chocco plc has been
able to improve its asset turnover ratio slightly from 0.64 to 0.69 in 2020. This company was
able to do so with the help of improving its, production capacity, collection method and strong
inventory management (Dong, Tian and Chen, 2018).
Stock holding days :
Stock holding days shows the average number of days that the stock of the company
spends in the warehouse. For a company it is important to have shorter stock holding days. This
company has held its stock for 78 days in 2019, but in 2020 it increased to 80 days. This means
that the turnover of the stock took longer for the company. It also indicates that the business had
to incur more cost on keeping the stock in the inventory for extra 2 days. Thus, the organization
needs to focus on improving its marketing strategy.
Debtors collection period:
It is the time taken by the business for collecting the total amount of debt it has given. It
is quite natural that Chocco plc the time taken in the debtor's collection to be as little as possible.
This business has managed to do so as its debtors collection period was 73 days in 2019 which
decreased to 68 days. However, the company can reduce this period as well by offering the
debtors discount on early payment (Gullett, Kilgore and Geddie, 2018).
Current ratio :
It's the measurement of the ratio which measures the liquidity of the organization. This
ratio allows the investors to understand how a company is able to maximize the current assets of
the company with its balance sheet. The ideal current ratio is considered to be 2:1. This shows
the risk involved in the business for the investors. The current ration of Chocco plc is 0.92 in
2020 which in the 2019 was 0.77. Although the current ratio has improved it can improve more
if company can increase is business efficiency.
Gearing ratio :

This ratio is the measurement of financial risk and also the expression of the total amount
of company's debt in the terms of its equity. In 2019 the gearing ratio was 1.4 which now has
decreased to 1.3. This decrease in the gearing ratio shows that the company at present is at lower
risk in comparison to earlier (Tenney and Kalenkoski, 2019).
Inventory turnover ratio :
Inventory turnover ratio is the financial ratio which shows the number of times company
has sold or re-invested in the inventory. The calculation of this ratio helps in making better
decision for the company regarding the pricing, manufacturing and marketing. Chocco plc has
decreased its inventory turnover ratio from 9.77 to 9.52 in 2020 which is positive as it is
important for a company to have low inventory turnover. The lower the inventory turnover ratio
it is better for the organization as the business is able to meet the demand of the customers
quickly (Lawal and et.al., 2020).
CONCLUSION
With the help of this project it can be concluded that accounting is very important for any
business for the analysation of its performance and better decision-making in the future. This
project was successful in showing the profit and loss account along with the balance sheet for
Kedison Plc. Utilization of the different ratios of the finance the financial performance of the
Chocco plc has been evaluated and suggestions has been made for improving the operations.

REFERENCES
Books and Journals
Dong, M.C., Tian, S. and Chen, C.W., 2018. Predicting failure risk using financial ratios:
Quantile hazard model approach. The North American Journal of Economics and
Finance. 44. pp.204-220.
Gullett, N.S., Kilgore, R.W. and Geddie, M.F., 2018. Use of financial ratios to measure the
quality of earnings. Academy of Accounting and Financial Studies Journal. 22(2). pp.1-
12.
Lawal, A.I., and et.al., 2020. The impact of International Financial Reporting Standard (IFRS)
adoption on key financial ratios in Nigeria. Hum. Soc. Sci. Rev. 8(4). pp.289-300.
Rahman, T. and Fatmawati, K., 2020. The influence of financial ratios on non performing
financing of the sharia rural banks of Special Region of Yogyakarta (BPRS DIY) period
2015–2018. Asian Journal of Islamic Management. 2(1). pp.25-35.
Rashid, C.A., 2018. Efficiency of financial ratios analysis for evaluating companies’
liquidity. International Journal of Social Sciences & Educational Studies. 4(4). p.110.
Tenney, J.A. and Kalenkoski, C.M., 2019. Financial ratios and financial satisfaction: Exploring
associations between objective and subjective measures of financial well-being among
older Americans. Journal of Financial Counseling and Planning. 30(2). pp.231-243.