Accounting Fundamentals: Financial Statements, Ratios, and Analysis

This report covers accounting fundamentals, financial statements, and financial ratio analysis of Kedison PLC and Chocco plc. It includes topics such as return on capital employed, return on equity, earnings per share, net profit margin, assets turnover ratio, stock holding days, debtors collection period, current ratio, gearing ratio, and inventory turnover ratio. The report is relevant for accounting courses in colleges and universities.

ACCOUNTING
FUNDAMENTALS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
QUESTION- 1.................................................................................................................................3
a) Financial statements of Kedison PLC.....................................................................................3
b) Reason for balancing of the statement of financial position...................................................4
QUESTION- 2.................................................................................................................................4
Financial Ratio analysis of Chocco plc, A chocolate and confectionery manufacture...............4
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15
APPENDIX....................................................................................................................................16

INTRODUCTION
Accounting is an art of recording transaction in journal, classify into ledger, summarize
in terms of trail balance and further analysis and interpret through final statements then
communicate to investor, management, usable people. Accounting fundamentals are used for
preparing final accounts which include income statements i.e. also called profit and loss account,
balance sheet and cash flow statement. This report will include Income statements, that will
highlight profit and loss of company during the period and financial position can be identified
through balance sheet. Further this report will go ahead with financial ratios, that will help in
deep analysis of micro factors of the company (Jin, Pei and Tsukuda, 2019). This financial
statements use by company to get information about liquidity, efficient utilization of assets, uses
of fund etc.
MAIN BODY
QUESTION- 1
a) Financial statements of Kedison PLC
Enclosed in Appendix
Working note:
(1) Interest is to be paid on 100000 debentures that is 100000×4%=4000. Out of this 4000,
2000 is paid but remaining 2000 will be recorded as interest paid in expenses side of
income statement and on other side this 2000 will be recorded as outstanding liability on
liabilities side of balance sheet.
(2) Sales commission which belong to current year is to be paid to sales man in January. This
transaction will be adjusted by showing in income statement as an expense (Zargar and
et.al., 2017). In addition to this, transaction will be show in balance sheet as outstanding
commission.
(3) Dividend is income of shareholders which is not shown in income statements while
computing profit.
(4) Goods that had been provided to the customer on credit basis as on 31st December 2020,
are not recorded in books of accounts. This transaction will be shown by reducing
inventory from 980 and on other side debtors will be up by 980 because payment will be
received by next year.

(5) As above calculation, company earn profit of 110000 this will be recorded in balance
sheet on liabilities side under the sub heading of shareholder equity.
(6) Current year retain earning will be deducted 132000-50000=82000 for the payment of
dividend to preference shareholder 30000 and equity shareholder 20000 (Abusch, 2020).
In addition to that 82000 will be shown in balance sheet liabilities side under shareholder
equity segment.
(7) The transaction of corporate tax paid will be deducted in income statements from
earnings before tax and on other side liabilities side of balance sheet will be affected by
corporate tax paid.
b) Reason for balancing of the statement of financial position
Accounting is done on basis of double entry system and accounting equation is the
foundation of it. Balance sheet is to be structure on the basis of accounting equation where total
assets is equal to sum of total liabilities and shareholders’ equity. While preparing balance sheet
this equation must be satisfied to prove double entry system. Double entry system confirm that
every entry of the debit side should have matching entry on credit side. Balance sheet needs to be
matched and which is check through accounting equation or accounting equation is also known
as error observation tool (Vincow and et.al., 2019). Where if any transaction of debit side is not
recorded on credit side then this error will be detected by accounting equation.
QUESTION- 2
Financial Ratio analysis of Chocco plc, A chocolate and confectionery manufacture
Return on capital employed
particular formulas 2020 2019
Earnings before interest
and tax 846 720
Capital employed Total assets- current liabilities 7225 7041
Return on capital
employed
Earnings before interest and tax / capital
employed 11.71% 10.23%

0.09
0.1
0.1
0.11
0.11
0.12
0.12
RETURN ON CAPITAL EMPLOYED
2020
2019
YEAR
PERCENTAGE
Interpretation:
This ratio measure how much return company is getting back on their invested fund.
Stable and high return are the mark of growing and stronger company. As above evaluation,
earning of the company is increased by 1.48% which means fund of the company is utilizing
efficiently. It can be increase further by finding best source of fund, reducing debt, by analysing
return that are earned or interest that needs to be paid.
Return on equity
particular formulas 2020 2019
Net income 431 366
Shareholder's equity 3088 2912
Return on equity Net income / shareholder's equity 13.96% 12.57%

0.05
0.05
0.06
0.06
0.06
0.06
0.06
RETURN ON EQUITY
2020
2019
YEAR
PERCENTAGE
Interpretation:
This ratio evaluates how much profit is earned by company on shareholder's fund.
Through this ratio investor get to know how well owners fund is utilizing to generate profit. As
the above analysis, it has seen that return of equity is increased by 1.39% (Easton And et.al.,
2018). This can be increased by finding right investment which give more return, smart use of
leverage strategy, decrease the expenses.
Earnings per share
particular formulas 2020 2019
Net profit 431 366
No. of outstanding share 600 600
Earnings per share Net profit / No. Of equity shares 0.72 0.61

0.54
0.56
0.58
0.6
0.62
0.64
0.66
0.68
0.7
0.72
EARNING PER SHARE
2020
2019
YEAR
Interpretation:
Generally this ratio is used by investor to check profitability because it measures how
company's profit distributed on each share. This ratio should be higher, higher EPS attract more
investor and helps in selecting best company to invest. In accordance with the comparative
analysis of the company from the past performance EPS is increasing by 0.11 company need to
work on it to increase EPS (Hashfi and et.al., 2018). It can grow through expanding profit
margin, use cost reduction technique, through buy back of shares.
Net profit margin
particular formulas 2020 2019
Net profit 431 366
Net sales 6738 6441
Net profit margin Net profit * 100 / net sales 6.40% 5.68%

0.05
0.05
0.06
0.06
0.06
0.06
0.06
NET PROFIT MARGIN
2020
2019
YEAR
PERCENTAGE
Interpretation:
The main and primary objective of any company is to increase net profit margin. This
ratio also uses for comparative analysis from past to present and from different company in same
sector in corporate finance. With reference to above calculation, the result can be drawn that net
profit has increased by 0.72%. By analysing this increase, it can be stated that company need to
increase this ratio more. Hence, for this it is advisable to the company that they must invest in
marketing activities and must also use the latest technology. This is necessary because good
marketing and adherence with the latest technology will attract large consumer which will result
in increase in sales.
Assets turnover ratio
particular formulas 2020 2019
Net sales 6738 6441
Average total assets 9736 10087
Assets turnover ratio Net sales / Average total assets 0.69 0.64

0.61
0.62
0.63
0.64
0.65
0.66
0.67
0.68
0.69
ASSETS TURNOVER RATIO
2020
2019
YEAR
TIMES
Interpretation:
This ratio helps in determine how much company is earning on its assets. Through the
above analysis company get to know where to invest and what are the necessary equipment or
machinery to purchase for increasing productivity. With the above calculation it is reflected that
there is 0.05 times increment in assets turnover ratio. This ratio varies from company to company
but higher is batter (Kumhof and Noone, 2018). Liquidate unwanted assets is advisable to the
company as this will result in increase in cash which further can be invested in some productive
activity. In addition to this, it is also suggested to the company that they must invest in more
useful assets which will improve productivity.
Stock holding days
particular formulas 2020 2019
Average inventory 708 659
Cost of goods sold 3235 3096
Stock holding days Inventory * 365 / cost of goods sold 80 78

77
77.5
78
78.5
79
79.5
80
STOCK HOLDING PERIOD
2020
2019
YEAR
DAYS
Interpretation:
This ratio evaluates how quickly stock is converted into sales. This reflects that in how
many times company is replacing their stock and producing new one. If this ratio is high which
means company is taking more time in replacing. Here as evaluated above stock holding period
is increasing which is not good for company, need to work on it. It can be batter by smart
reorder, prioritize stock, analysis demand, adopt smart marketing idea, adopt favourable selling
strategy.
Debtors collection period
particular formulas 2020 2019
Average account receivable 1249 1287
Annual sales 6738 6441
Debtors collection period
Account receivable * 365 / annual credit
sales 68 73

65
66
67
68
69
70
71
72
73
DEBTORS COLLECTION PERIOD
2020
2019
YEAR
DAYS
Interpretation:
This ratio show how long period company is giving to its debtors for payment. Short
debtor collection period is better for the company. This is pertaining to the fact that if company is
providing short period of payment than it can generate another opportunity to invest. As reflected
in above table that company has reduced debtor collection period and trying to improve its
efficiency (Debelle, 2020). Hence, it is recommended to the company that they can adopt new
pricing policy, offer attractive discount, by accepting different payment policy, providing reward
for timely payment.
Current ratio
particular formulas 2020 2019
Current assets 2303 2355
Current liabilities 2511 3046
Current ratio Current assets / current liabilities 0.92 0.77

0.65
0.7
0.75
0.8
0.85
0.9
0.95
CURRENT RATIO
2020
2019
YEAR
TIMES
Interpretation:
This ratio check company is suffering from liquidity crises or not. If this ratio is one or
more than which means company has enough current assets to pay its debts. This ratio also
varies from company to company like those companies who are dealing in day to day cash
transaction, are required more current assets (Amalia, Fadjriah and Nugraha, 2020). It can be
interpreted that the company is trying to improve current ratio as it has increased by 0.15 times.
However, this ratio can be increased by efficient utilization of current assets, by forecasting
requirement of cash, by paying off short term debt.
Gearing ratio
particular formulas 2020 2019
Debt 4137 4129
equity 3088 2912
Gearing ratio long term Debt / shareholder equity 1.34 1.42

1.3
1.32
1.34
1.36
1.38
1.4
1.42
GEARING RATIO
2020
2019
YEAR
TIMES
Interpretation:
This ratio shows how much debt is being used in respect to shareholder equity and also
check how efficiently company is utilizing its financial leverage. Generally aggressive company
use high financial leverage to earn profit and on the other side conservative company use less
financial leverage. This is pertaining to the fact that gearing ratio is decreasing from 2019 to
2020. The reason may be, company wanted to be debt free or want to increase owners’ equity.
Hence, It is recommended to the company that they must have a balance between debt and equity
the reason behind the fact is that when it is balanced company won't suffer overburden of paying
interest and interference of shareholder simultaneously.
Inventory turnover ratio
particular formulas 2020 2019
Net sales 6738 6441
Average inventory 708 659
Inventory turnover ratio Net sales / average inventory 9.52 9.77

9.35
9.4
9.45
9.5
9.55
9.6
9.65
9.7
9.75
9.8
INVENTORY TURNOVER RATIO
2020
2019
YEAR
TIMES
Interpretation:
This ratio represents in what proportion company is converting their stock into sales and
how many times stock has been sold completely during the certain period. In addition to it helps
in analysing how company can adopt efficiently techniques to manage their inventories (Kim and
Im, 2017). From the above pictorial presentation, it is showing that inventory turnover ratio is
decreasing from 2019 to 2020. it is advisable to the company to improve product line by using
smart advertising ideas with the help of effective stock selection techniques.
CONCLUSION
From the above analysis, conclusion has been drawn that for preparing final accounts
accounting fundamental plays vary important role. Final accounts include balance sheet, profit
and loss account, cash flow statement. Profit and loss of the company can be known through
income statements and also expenses and income can be analysed. Balance sheet helps in
knowing financial position as on date. Further it was evaluated that balancing the balance sheet is
very important as it proves the accounting equation. Further the above studied also outlined that
financial ratio is helpful to the company in analysing and comparing the different aspect of
company like profitability, efficiency, solvency, liquidity and others.

REFERENCES
Books and Journals
Abusch, I. T., 2020. Biblical Accounts of Prehistory: Their Meaning and Formation. In Essays
on Babylonian and Biblical Literature and Religion (pp. 238-254). Brill.
Amalia, S., Fadjriah, N.E. and Nugraha, N.M., 2020. The Influence of the Financial Ratio to the
Prevention of Bankruptcy in Cigarette Manufacturing Companies Sub Sector. Solid
State Technology. 63(3). pp.4173-4182.
Debelle, G., 2020. The Reserve Bank of Australia’s policy actions and balance sheet. Economic
Analysis and Policy. 68. pp.285-295.
Easton, P. D. And et.al., 2018. Financial statement analysis & valuation. Boston, MA:
Cambridge Business Publishers.
Hashfi, D. H. And et.al., 2018. Evaluasi prosedur audit atas pendapatan dan beban pada laporan
laba rugi PT XYZ= The Evaluation of revenue and expense audit procedure of PT
XYZ's income statement.
Jin, R., Pei, Y. and Tsukuda, T., 2019. Controlling nanoparticles with atomic precision. Accounts
of chemical research. 52(1). pp.1-1.
Kim, J. and Im, C., 2017. Study on corporate social responsibility (CSR): Focus on tax
avoidance and financial ratio analysis. Sustainability. 9(10). p.1710.
Kumhof, M. and Noone, C., 2018. Central bank digital currencies-design principles and balance
sheet implications.
Vincow, E. S. And et.al., 2019. Autophagy accounts for approximately one-third of
mitochondrial protein turnover and is protein selective. Autophagy. 15(9). pp.1592-
1605.
Zargar, A. and et.al., 2017. Traditional Architects’ Accounts of the Processes of Rural and
Country Housing Design and Construction (Case Study of Garmsar & Surrounding
Townships). Journal of Housing and Rural Environment. 36(158). pp.3-20.
Online
Fundamental accounting: concepts and principles.2021.[Online]. Available through:
<https://www.bookstime.com/articles/fundamental-accounting>

APPENDIX
1 Financial statements
Income statement for the period ended 31st December 2020
particular £’000
Revenue / sales / income 826650
(-)Cost of sales 578650
Gross profit 248000
(-)Administration expenses 30000
(-)Distribution costs 28000
(-)sales commission 3000
(-)Directors remuneration 5000
(-)Interest paid 4000
Operating profit 178000
(-)Tax paid 68000
Profit after tax 110000
(-) preference dividend 30000
Amount for equity shareholder 80000
(-)ordinary dividend 20000
Retained earnings 60000
Financial position as on 31st December 2020
particular £’000

Assets
Plant and equipment 632730
debtors 171105
Cash and bank 12900
stock 329620
Total assets 1146355
Liabilities
long term liabilities
4% debenture 100000
Current liabilities
Trade creditors 171355
Outstanding commission 3000
Corporate tax 68000
Outstanding interest 2000
Shareholder equity
Ordinary share 310000
Preference share 300000
profit 110000
Retained earnings 82000
Total liabilities 1146355