Accounting Fundamentals: Financial Performance Analysis of Chocco plc
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This project discusses the financial performance of Chocco plc based on accounting ratios such as ROCE, ROE, net profit margin, asset turnover, and more. It also suggests ways to improve the organization's revenue and efficiency.
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FUNDAMENTALS
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TABLE OF CONTENT INTRODUCTION..........................................................................................................................3 MAIN BODY...................................................................................................................................3 QUESTION 1..................................................................................................................................3 a. Profitability statement.............................................................................................................3 b. Balance sheet.........................................................................................................................4 QUESTION 2...................................................................................................................................5 a. Calculating ratios for Chocco plc for the period of 2020 and 2019........................................5 Financial performance analysation of organizations performance............................................12 CONCLUSION..............................................................................................................................15 REFERENCES..............................................................................................................................17
INTRODUCTION Accounting ratios are used for the calculation of the company's performance. There are different ratios which explains about the different factors about the organization. The business discussed in this product is Chocco plc. In this project the information about the financial statements and the ratio's calculation is done. This project compares the performance of the two years in which the organization operates. MAIN BODY QUESTION 1 a. Profitability statement ParticularsAmount (in £)Amount (in £) Sales revenue826650 Less: Cost of goods sold578650 Gross Profit248000 Less: Indirect expenses Administrative expenditure30000 Interest paid4000 Directors remuneration5000 Distribution costs28000 Sales commission300070000
EBT178000 Corporation tax68000 Net Profit110000 (-) Preference dividend30000 Earnings available to equity shareholders 80000 (-) Ordinary dividend20000 Retained earnings60000 b. Balance sheet ParticularsAmount (in £)Amount (in £) ASSETS Fixed assets Plant and equipment632730 Current assets Stock329620 Debtors171105 Cash and Bank12900513625 Total assets1146355 LIABILITIES Long term liabilities 4% Debentures100000 Current liabilities
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Creditors171355 Outstanding commission3000 Outstanding interest2000 Tax payable68000244355 Shareholders’ equity Ordinary shares310000 10% preference shares300000 Profit for the period110000 Retained earnings82000802000 Total liabilities1146355 QUESTION 2 a. Calculating ratios for Chocco plc for the period of 2020 and 2019 1- ROCE ParticularsFormula20202019 Earnings Before Interest and Tax846720 Total assets973610087 Current liabilities25113046 Capital employedTotal assets - Current liabilities72257041 ROCE ratioEBIT / Capital employed11.7%10.2%
2- ROE ParticularsFormula20202019 Net Income431366 Shareholders’ equity30882912 ROENet income / average shareholders’ equity13.96%12.57% 3- Earnings per share
ParticularsFormula 202 0 201 9 Net income431366 Preferred dividend00 Average common shares outstanding600600 Earnings per share (Net income - Preferred dividend) / Average common shares outstanding 0.7 2 0.6 1 4- Net profit margin ParticularsFormula20202019 Net profit431366 Revenue67386441 Net profit marginNet profit / sales * 1006.40%5.68%
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5- Asset turnover ParticularsFormula20202019 Revenue67386441 Total Assets973610087 Asset turnoverNet sales / Average total assets0.690.64 6- Stock holding days ParticularsFormula20202019 Inventory708659
Cost of sales32353096 Stock Holding days(Inventory / COGS)*3658078 7- Debtors collection period ParticularsFormula20202019 Debtors12491287 sales67386441 Debtors collection Period(Debtors / sales)*3656873
8- Current ratio ParticularsFormula20202019 Current assets23032355 Current liabilities25113046 Current RatioCurrent assets / Current liabilities0.920.77 9- Gearing ratio ParticularsFormula20202019 Total debt41374129 Shareholders’ equity30882912 Gearing ratio formulaLong-term debt / shareholders’ equity1.31.4
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10- Inventory turnover ratio ParticularsFormula20202019 Net sales67386441 Inventory708659 Inventory turnover ratioCOGS / average stock9.529.77
Financial performance analysation of organizations performance ROCE : The return of capital employed is the ratio which helps in the measurement of the company's performance. This ratio shows that the organization is generating profits with the help of its capital. For Chocco plc the ROCE ratio for the year of 2019 was 10.2% and in 2020 this ratio changed to 11.7%. This is a positive result for the company as its capital employed has improved. However, for improving the capital employed for this organization it can utilize many methods such as, by selling the old machinery which has lower production rates. This will decrease the assets of the company and improve the over all ROCE (Parapat, 2018).. This is known as removal of unnecessary assets. These old assets for the organization makes the employed capital to be less facilitated towards the amount of production. Paying of the old outstanding debts can also be considered to be a method of improving the capital employed in the organization (Suwantari, Ariana and Suprapto, 2020) ROE : Return of equity ratio is the type of ratio which provides the investors an idea about the how much money is generated by the company. This ratio is considered a lot while making comparison between two or more organization.For Chocco plc the ROE ratio for the year of 2019 was 12.57% which accounted to 13.96% in the year of 2020. Improved return on investment is considered to be a positive sign for the business. This means that more investors
will be interested in the business. However, ROE ratio of 15% to 20% is considered to be good for a company. Thus, for gaining an upper hand in the organization it needs to improve its equity ratio. The ROE of a company is improved when the profit margin of the organization is increased. This organization should also try to decrease its total labour cost with the help of strategies which can provide efficiency. Earning per share : Earning per share for an organization denotes the profit which the company makes per outstanding share. Its calculation is done on the annual basis. This organization had the earning per share of 12.57% which accounted to 13.96%. The increase in the earning per share is very good for the organization. The earning per share can be increased by increasing the total revenue of the company. With the help of decreasing the costs which the company incurs, the earning per share can also be decreased. It is important for the organization because the more the revenue is generated per share it means that the organization is utilizing its equity capital properly. It helps the organization to increase their equity capital as the investors understand that this company can generate more revenue from their invested money. Net profit margin : This is the measurement of the total income which is generated by the company as the percentage to the total revenue. It is the ration of the net profit to the revenue of the company or the business segment. This margin helps in illustrating the total amount of revenue which is generated is the actual profit. The net profit margin for this organization was 5.68% which accounted to 6.40% in the years 2020. This is a positive result for the organization which allows the business to influence its investors that the cost management of this organization is very good. It is important for the company to increase the net profit margin as that is the actual income of the company and essential for its growth. Asset turnover : The asset turnover ratio is the measurement of the value of the sales of the company to the relative value of the assets. Increase in the asset turnover ratio indicates that the company has efficiency in its operations. The investors are very interested in this ratio as it explains about the efficiency of the company. For this organization the assets turnover ratio in the year 2019 was
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0.64% which then accounted to 0.69%. This increase in the ratio is good for the organization however for improving this ratio more it needs to increase its total revenue and also liquidate the obsolete assets. Increasing the efficiency in all the resources which influence the business of the organization helps the company to increase its asset turnover. Stock holding period : This period denotes the amount of time which the investor holds on the particular investment during the period of purchase and sale of the security. ForChocco plc this period in the year of 2019 was 78 days and in 2020 it increased to 80 days. The increase in the stock holding period is considered as to be bad for the organization. This is because the longer the company holds on to the stock it is bad for their business. Quicker the organization can turn their stock into revenue with the help of sales it is considered to be better for the organization. This helps the organization with generation of revenue and decreasing the cost on goods sold. Shorter periods means that the organization can use its resources faster and with more efficiency. The investors decision depends on this period (Restianti and Agustina, 2018). Debtors collection period : Thedebtorscollectionperiodsdenotestheaveragetimewhichistakenforthe organization for the collection of its debts. The sales which the organization makes on credit are main reason for its success. No organization can survive in the market with making sales on credit. ForChocco plc this period in the year of 2019 was 73 and in the year 2020 this decreased to 68 days. This is good for the organization as it is able to recover its debts rather quickly. It is importantfortheorganizationtohaveexpectedamountofperiodwhichcanhelpthe organization to reduce the total debtor's collection period. Negotiation of payments is an effective way and offering of discounts for early payment is also considered to be an effective way of decreasing the debtor's collection period. Current ratio : This ratio is a liquidity ratio which helps in the measurement of the company's ability to pay the short-term obligations. It helps the investors in the analysation of how capable the organization is in maximization of its profit with the help of its current assets in order to satisfy the total debts. ForChocco plc this ratio in the year of 2019 was 0.77 which increased and
accounted to 0.92 in the year 2020. For a company the higher the current ratio is,it indicates that the organization is liquid. It means that it can easily pay of short-term obligations which are generally equity shares. Due to this the investors are keen on this particular ratio as it helps them decide whether investing in the organization is safe or not (Brewer and et.al., 2017). Gearing ratio : Gearing ratio is a financial ratio which is used for making comparison between the owner's equity to the debt and the funds which are borrowed by the organization. With the help of the gearing ratio the measurement of the financial leverage which explains the degree of the organizations operations are discussed. In this organization the Gearing ratio was 1.4and it accounted to 1.3 in the year 2020. The decrease in the gearing ratio indicates that the organization has conservative financial management. It can be good and bad for the organization as it affects the business of the organization. It helps the company to face inevitable downturns in its sales and profit. Inventory turnover ratio : This ratio of an organization indicates the rate at which the organization sells and replaces its stock of goods. For this company the calculated invetory turnover ratio was 9.77 in 2019 and it accounted to 9.52 in the year of 2020.For improving the inventory turnover ratio this organization can try to make proper forecasting of the different factors of consideration. Increasing the effeciency of the company by automation of certain process can also improve the inventory turnover ratio. Effective marketing is considered to be the best way of improve the inventory turn over ratio as it increase the sales of the organization (Sengupta, 2021). CONCLUSION With the help of this project it can be concluded that Chocco plc needs to improve its revenue with the help of implementing new strategies. In this project calculation has been made forthedifferentaccountingratios.Thisprojectalsohelpswithexplainingthefinancial performance of the organization based on the discussed ratios.
REFERENCES Books and Journals Brewer, H.R., and et.al., 2017. Family history and risk of breast cancer: an analysis accounting for family structure.Breast cancer research and treatment.165(1). pp.193-200. Parapat, E.P.S., 2018. Effect of Company Financial Ratio, Price Earning Ratio on Stock Return and Earning Per Share as Moderating Variables In Manufacturing Companies Listed In Indonesia Stock Exchange.International Journal of Public Budgeting, Accounting and Finance.1(4). pp.1-13. Restianti, T. and Agustina, L., 2018. The effect of financial ratios on financial distress conditionsinsubindustrialsectorcompany.AccountingAnalysisJournal.7(1). pp.25-33. Sengupta,A.K.,2021.THECONCEPTOFLIQUIDITYANDTHEDEPENDENCY RATIO.INDIAN JOURNAL OF ACCOUNTING, p.23. Suwantari, N.P., Ariana, I.M. and Suprapto, P.A., 2020. Accounting Analysis in Accounts Receivable Management to Minimize the Risk of Uncollectible Receivables at ALS Hotel and Resort.Journal of Applied Sciences in Accounting, Finance, and Tax.3(2). pp.117-124.