Accounting Fundamentals: Financial Statements, Ratios, and Analysis

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%

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...................................................6
QUESTION- 2.................................................................................................................................6
REFERENCES..............................................................................................................................17

INTRODUCTION
Accounting is the language of business and accounting fundamentals are base for
preparing income statement, cash flow statement and balance sheet. This project shall cover
income statements, balance sheet and financial ratios of the company data that are available.
Income statements will show profit and loss of the company and balance sheet will highlight
financial position (Glover, 2017). Moreover, financial ratios help in analysing company
performance in detail. Through this financial statement, company can analyse their performance,
profitability, efficient utilization of fund etc.
MAIN BODY
QUESTION- 1
a) Financial statements of Kedison PLC
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