Accounting Fundamentals: Financial Statement Preparation and Financial Ratios

This content provides a comprehensive overview of accounting fundamentals, including the preparation of financial statements and the calculation of financial ratios. It covers topics such as income statements, balance sheets, profitability ratios, liquidity ratios, efficiency ratios, and investment ratios. Suitable for students studying accounting or finance.

ACCOUNTING
FUNDAMENTALS

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................1
Question 1....................................................................................................................................1
Question 2....................................................................................................................................1
CONCLUSION................................................................................................................................1
REFRENCES...................................................................................................................................1

INTRODUCTION
Accounting fundaments are basic principle on which the whole structure of accounting has
been run. Business organization follow principles and rules , and theses provides guiding
regarding how managers needs to record, analyse and interpret their financial as well as
accosting information in from of their stockholder. This report has been prepared to solve
problems of Eccles Plc and Choco Plc by preparing income as well as financial statement. It also
define value of ratio for analysing financial performance of companies.
Question 1
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
Add: goods sold at 31st
-
980.00
Gross Profit 248,000.00
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 182,000.00
Interest paid 2,000.00
Net income before tax 180,000.00
Less: Tax 68,000.00
Net income 112,000.00
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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
Less: Goods sold at
31st
-
980.00
Debtors 170,125.00
Add: goods sold at
31st 980.00
Cash and bank 12,900.00 513,625.00
Total Assets 1,146,355.00
Current Liabilities
Trade creditors 171,355.00
Sales commission 3,000.00
Tax 68,000.00
-
242,355.00
Noncurrent
Liabilities
4% Debentures 100,000.00
-
100,000.00
Net Assets 804,000.00
Equity
£1 Ordinary shares 310,000.00
10% Preference shares 300,000.00
Retained earnings 132,000.00
Add: Net income
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112,000.00
Less: Ordinary
Dividend
-
20,000.00
Preference dividend
-
30,000.00 194,000.00
804,000.00
Interpretation of balance of financial statement
Financial statement is a format which manager use to recognise there profit and loss as
well as financial liabilities. Business organisation use these statements for providing information
to their stakeholder regarding with position and performance of business within given time
period manager of prepared financial statement to analyse their financial performance as well as
this also use their to compare profit and position of organisation with their competitive business
Industries as well as previous year prepared income statement and balance sheet. Income
statement is formulated to define net income m business organisation able to generate from there
trade activities at the end of 2018 is Eccles plc able to generate 112000 income. From their
business activities they generate 248008 profit from selling their goods and services. Their net
revenue generate was 826006 50 after deducting all the essential operating expenses and
adjustment of tax income able to gain 112000 profit. Alyssa PLC balance sheet value of their
assets 804000 and liabilities also balance at 804000 (Burger, and Curtis, 2017).
Their value of current assets 513625. The organisation that its financial statement by using
International Financial standard as well as applying rule of GAAP. By working in ethical manner
and follow rules of corporate governance as well as financial government regulations they
prepare financial statement in effective manner does there all items match according to you there
financial transaction.
Question 2
Calculation of financial ratio of Chocco plc
Profitability ratio: This is calculated by organisation to recognise ability of their entity to
generate profit by their trade business activities. Higher profitability ratio show higher rate of
capacity and availability of financial resources vice versa. Profitability ratio includes gross profit
ratio and net profit ratios both ratio are used to calculate rate of revenue generation and
capability of organisation to attain business profit.
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Particular 2018 2019
Gross profit 3345 3503
sales 6441 6738
Gross profit ratio =
GP/Sales*100
51.9% 52.0 %
Net profit ratio:
Particular 2018 2019
Net profit 366 431
sales 6441 6738
Net profit ratio =
NP/sales*100
5.68 % 6.40 %
Operating profit ratio
Particular 2018 2019
Operating profit 699 805
sales 6441 6738
Operating profit ratio =
OP/sales*100
10.85 % 11.95 %
Liquidity ratio = Manager Use liquidity ratio for analysing ability of organisation to full
short term debt liabilities and day-to-day business work. By using liquid assets this ratio
particularly used to recognise or identify cash availability and entity have to fulfil their day to
day working liabilities it is really essential ratio as by using this organisation able to understand
reason of decrement in liquid assets on the basis of that they formulate effective business
strategies it considered current ratio and quick ratio through which they can understand
availability of cash flows within a particular given period of time (Hutton, 2017).
Particular 2018 2019
Current assets 2355 2303
current liabilities 3046 2511
Current ratio = Current 0.77 times .92 times
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assets/current liabilities
Quick ratio
Particular 2018 2019
Quick assets 1696 1595
Current liabilities 3046 2511
Quick ratio = 0.56 times .64 times
Efficiency ratios: This ratio is also part of initial management technique manager use
efficiency ratio to recognise capability of organisation to fulfil that liabilities for their creditors
and capacity to generate or recover money from their debtors it also used to identify time
required to converting stock into cash by selling their products this is to help in determining
efficiency rate of business organisation (Kanodia, and Sapra, 2016).
Stock turnover
Particular 2018 2019
Cost of goods sold 3096 3235
Stock. 659 708
Stock turnover = Cost of
goods sold/stock
4.70 times 4.57 times
Receivable turnover
Particular 2018 2019
sales 6441 6738
Receivables 1287 1259
Receivable turnover = Sales /
Receivables
5.00 times 5.35 times
Assets turnover ratio
Particular 2018 2019
sales 6441 6738
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Total assets 10087 9736
Assets turnover ratio = Net
sales/total assets
0.64 times 0.69 times
Investment ratios: These ratio particular use to recognise value of portfolio investment an
organisation have they also used dividend pay-out ratio through which they can recognise ability
of organisation to pay dividend on the basis of generating revenue (Khetselius, 2018).
Return on capital employed
Particular 2018 2019
Operating profit 699 805
Capital employed = Total
assets - Current liabilities
7041 7225
ROCE % Operating profit \
Capital employed
0.10
0.11
Return on equity ratio
Particular 2018 2019
Net income 6,441 6,738
Shareholder equity 2,912 3,088
ROE = Net income /
Sharholder’sequity
2.21
2.08
Dividend pay-out ratio
Particular 2018 2019
Total dividend £242m 255m
Net income 6,441 6,738
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Dividend pay-out ratio =
Total dividend \ Net
income* 100
37.51
37.84
Earnings per share
Particular 2018 2019
Net profit 366 431
£4.00) £5.12
EPS = Net profit /price of
equity share
Brief description related with financial position of Choco plc
Financial position is a situation symbol which use by stakeholders to understand or
recognise performance of organisation for particular period of time strong financial position help
in making strong Goodwill within market. Incorporation is defined as strong capable when they
are able to generate more income and profitability ratio as compared to previous years and their
value of Assets and liabilities is equal as well as they don't have any negative balance regarding
with their assets or liabilities (Agrawal, Sehgal and Vasishth, 2020).
In case of Choco PLC it has been organised by calculating profitability ratio that Choco PLC
is in better condition as computer 2018 because it generate 52% of gross profit as compared to
2018 there value of gross profit as well as net profit ratio has increased even the operating profit
is also increased from 10 % 852 11.9% .Which show that organisations are able to sale their
product at Higher level as well as the use effective managerial policies to attract their customers
there value of current ratio is also high as compared to 2018 which show that they have a
maximum cash balance and assets to fulfil their day-to-day liabilities as compared to previous
year by calculating their stock turnover ratio it has been recognised that organisations need 4.57
to convert their stock into cash and take more time to take convert there that amount from
debtors into cash which may show that it either their sales revenue has been increased but they
didn't use defective policies regarding to their debtor or stock management strategies there
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investment ratio state that the use effective portfolio policies because the able to generate more
income for investing in operating profit and they are also able to provide more evident their
stakeholders as compared to 2018 anyone there Earning per share value in also high as the able
to generate 5.12 and as computer 2018 there any personal values only valued at This this shows
that organisation is a strong position as compared to 2018 as their revenue has increased as well
as the able to provide more dividend to their stakeholders .
Their value of capital employed has been also be increased even through their use policies
which may not be beneficial for them regarding taking collection of cash from their debtors
however organisation manage their cash flows very well by using effective business strategies all
these help in achieving their goals.
CONCLUSION
From the above analysis it has been concluded that, financial stamen help in recording and
interpretation financial data in systematic manner. With the use of calculating financial ratio,
manager able to recognize performance and position of their business corporation for particular
period of time.
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REFRENCES
From books and journals
Burger, M. and Curtis, A., 2017. Aggregate margin debt and the divergence of price from
accounting fundamentals. Contemporary Accounting Research, 34(3., pp.1418-1445.
Hutton, A. P., 2017. Discussion of “Aggregate Margin Debt and the Divergence of Price from
Accounting Fundamentals”. Contemporary Accounting Research, 34(3). pp.1446-1452.
Kanodia, C. and Sapra, H., 2016. A real effects perspective to accounting measurement and
disclosure: Implications and insights for future research. Journal of Accounting
Research, 54(2), pp.623-676.
Khetselius, O.Y., Glushkov, A.V., Dubrovskaya, Y.V., Chernyakova, Y.G., Ignatenko, A.V.,
Serga, I .N. and Vitavetskaya, L.A., 2018. Relativistic quantum chemistry and
spectroscopy of exotic atomic systems with accounting for strong interaction effects.
In Concepts, Methods and Applications of Quantum Systems in Chemistry and
Physics (pp. 71-91). Springer, Cham.
Agrawal, T. J., Sehgal, S. and Vasishth, V., 2020. Firm Attributes, Corporate Fundamentals and
Investment Strategies: An Empirical Study for Indian Stock Market. Management and
Labour Studies, 45(3). pp.366-387.
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