Accounting Fundamentals: Income Statement, Balance Sheet, and Ratio Analysis

This report provides an overview of accounting fundamentals, income statement, balance sheet, and ratio analysis. It explains why balance sheet always balances and how to compute ratio metrics. The report also analyzes the financial performance of Chocco plc using various ratios such as ROCE, ROE, net profit margin, asset turnover, and more.

ACCOUNTING
FUNDAMENTALS

Table of Contents
INTRODUCTION...........................................................................................................................3
QUESTION 1...................................................................................................................................3
a) .................................................................................................................................................3
b) Explaining reasons for why balance sheet balances ..............................................................5
QUESTION 2...................................................................................................................................5
a) Computation of ratio metrics...................................................................................................5
b) Commenting on the financial performance of Chocco plc.....................................................7
CONCLUSION................................................................................................................................9
REFERENCES................................................................................................................................1

INTRODUCTION
Accounting fundamentals provides the basic knowledge regarding recording,
summarizing, analysing and interpreting information for making strategic decision. In current
era, it is important for companies to utilize accounting fundamental for gaining competitiveness
for proper functioning of organization. The current report will comprise information regarding
income statement and balance sheet. Present report will give emphasis on explaining the reason
for why balance sheet always balances. Current case study will include ratios calculations and
their interpretation for having analysing financial position of company.
QUESTION 1
a)
Profit and loss statement for the year ended 31st December 2020
Particulars Amount
Sales 826650
Less: Cost of Sales -578650
Gross Profit 248000
(-) Administrative expenses -30000
(-) Interest paid -4000
(-) Directors remuneration -5000
(-) Distribution costs -28000
(-) Sales commission -3000
(-) Corporation tax -68000
Net Profit 110000
(-) Preference dividend -30000
Earnings available to equity shareholders 80000
(-) Ordinary dividend -20000
Retained earnings 60000

From the above table it can be articulate that net profitability of Eccles plc is 110000 which is
showing firm is performing good. In order to earn the described level of net profit organization
has incurred various expenses in turn higher gain can be achieved (Connolly and Bank, 2021).
Expenses that are conducted by specified entity includes administration, interest, distribution
cost, sales commission, etc. in addition to this, these expenses has allowed firm to have ability
to sustain in industry (Müllner,2017). On the basis of this it can be interpreted that firm is
paying larger attention on maintaining ability to have required level of profitability in respect to
make functioning efficient.
Statement of financial position as on 31st December 2020
Particulars Amount Amount
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
Current liabilities
Creditors 171355
Outstanding commission 3000

Outstanding interest 2000
Tax payable 68000
Shareholders equity 802000
Ordinary shares 310000
10% preference shares 300000
Profit for the period 110000
Retained earnings 82000
Total liabilities 1146355
The above formulated balance sheet it can be identified that firm's financial position is
good as it has equal amount of liability plus equity and assets. The assets includes plant
equity, stock, debtors, cash and banks, etc. in addition to this liabilities side comprises creditors,
outstanding expenses and shareholders equity involves ordinary, preference shares and retained
earnings (Connolly and Jackman, 2017). On the basis of this it can be interpreted that firm is
having capability to pay its short term debt with help of available assets in form of cash &
equivalents. In addition to this, retained earnings, etc. equity ensures that company is
possessing good level of liquidity in turn economies of scales by having appropriate
functioning in continuing manner (Kennickell, Kwast and Pogach, 2017). In essence to this, it
can be identified that Eccles plc is having good financial health. Having such appropriate
level of balance between assets a& liability ensures that company can easily attract shareholders
for attaining continual operational practices.
b) Explaining reasons for why balance sheet balances
Financial position statement is formulated by comprising liabilities, assets and equity. In
addition to this, it is based on double entry system which is based on recording business
transaction in two or more accounts. The reason behind utilizing double entry system is to make
the proper recording of financial transactions so that full coverage can be conducted to have
information regarding whole picture (Lessambo, 2018. ). It is snapshot presenting the state of
company's finances reflecting for specified period of time. This provides guidance to various
stakeholders so that proper decision regarding investment can be provided. It allows to have

ability of making people aware of financial processing so that irrelevant legal obligations can
be avoided.
Balance sheet is based on equation of assets equals to liabilities plus equity which is
allows it to get balance (What is balance sheet? 2021). In its top and bottom half assets and
liabilities respectively are presented to work effectively and provide accurate information to
users. On the basis of mentioned assets and liabilities it can be identified that stated equation
and double entry system of bookkeeping are crucial factors which allows it to get always
balance.
QUESTION 2
a) Computation of ratio metrics
ROCE
Particulars Formula 2020 2019
Operating profit 805 699
(Total asset-Total
Current liabilities)
(9,736-2,511)
= 7,225
(10,087- 3,046)
=7,041
Return on capital
employed
Operating profit /
(Total asset-Total
Current
liabilities)*100
11.14 9.92
ROE
Particulars Formula 2020 2019
Net profit 431 366
Shareholders’ equity 3,088 2,912
Return on equity Net profit /
Shareholders’
equity*100
13 12
Earnings per share
Particulars Formula 2020 2019

Dividend per share 0.85 0.80
Market price 5.12 4
Earnings per share Dividend per share/
Market price
0.166 0.201
Net profit margin
Particulars Formula 2020 2019
Net profit 431 366
Revenue 6,738 6,441
Net profit margin Net profit/
Revenue*100
6.39 5.68
Asset turnover
Particulars Formula 2020 2019
Revenue 6,738 6,441
Total assets 9,736 10,087
Asset turnover Revenue/ Total assets 0.69 0.63
Stock holding days
Particulars Formula 2020 2019
Average Inventory 708 659
COGS 3,235 3,096
Stock holding days Average Inventory/
COGS *365
79.88 77.69
Debtors collection period
Particulars Formula 2020 2019
Trade receivables 1,249 1,287
Sales 6,738 6,441

Debtors collection
period
Trade receivables/
Sales*365
67.65 72.93
Current ratio
Particulars Formula 2020 2019
Current assets 2,303 2,355
Current liabilities 2,511 3,046
Current ratio Current assets /
Current liabilities
0.92 0.77
Gearing ratio
Particulars Formula 2020 2019
Total Debt 6,648 7,175
Total equity 3,088 2,912
Gearing ratio Total Debt/ Total
equity
2.15 2.46
Inventory turnover ratio
Particulars Formula 2020 2019
COGS 3,235 3,096
Average inventory 708 659
Inventory turnover
ratio
COGS/ Average
inventory
4.5 5.44
b) Commenting on the financial performance of Chocco plc
 Return on capital employed obtained fro the two years such as 2019 and 2020 includes
9.92 and 11.14 respectively. The ideal ratio is 15% which is more than the specified
figures on the basis of this, it can be articulated that company is required to make
certain level of modifications in turn higher profitability & sustainability may achieve.
This can negatively influence investors decision making procedure which can highly

affect the processing of organization (Kroll, Marchioni and Ben-Horin, 2021). It can be
improved by increasing operating profit by declining cost, increasings liquidity, etc.
 Return on equity is associated with measuring performance of firm to assess ability to
provide higher returns. Chocco plc performance regarding the same is 13 and 12
% which is lower than standard benchmarking. On the basis of this it can be signified
that firm need to make improvements such as raising price of products, negotiating
with suppliers, declining operating and labour related and having combination of such
process can provide larger emphasis on uplifting ROE.
 Earning per share helps in analysing that how much company is earning on particular
stock so that measuring profitability effectual manner can become possible. Chocco plc
's performance regarding the same is 0.166 & 0.201 for the period 2020 and 2019 which
has decreased and can negatively influenced functioning of company.
 Net profit margin helps in evaluating how effectively firm generates profits from
making sales. The performance of company in this respect is 5.68 and 6.39% for the
year 2019 & 2020 which is indicating inclining position growth but it is lower than the
ideal margin (Antalovschi and Cox, 202). Its representing lower financial growth which
can be improved by increasing profitability, sales, marketing and advertising to incline
products information.
 Assets turnover of the Chocco plc in 2020 and 2019 is 0.69 and 0.63 which has
increased as compared to earlier period. It can be improved by taking various different
steps such as disposing irrelevant assets that are not contributing in gaining success
(Nguyen, 2021).
 Stock holding days of Chocco plc for the year 2019 and 2020 is 77.69 and 77.88 which
is increasing in little manner. It need to be declined for achieving larger revenue which
can be done by providing discounts, decreasing cost of production, inventory
forecasting, etc.
 Debtors collection period is shows efficiency of getting payments from customers that
have purchased goods on credit (Husain and Sunardi, 2020). The obtained results
includes 67.65 & 72.93 days for specified period 2020 and 2019 which is positive sign
of increasing liquidity.

 Current ratio indicates ability to pay off short term liabilities with available cash &
equivalents assets (Sadjiarto, Monica and Budiarti, 2019). In 2019 & 2020 the derived
output are 0.77 & 0.92 times which is less than ideal margin of 1 times. It can be
improved by paying attention on gaining liquidity through getting required level of
inventory, bank balance, etc to increase credibility. Inventory turnover is decreasing
which reflecting positive financial position.
CONCLUSION
From the above report it can be concluded that accounting report it can be concluded that
accounting fundamental play important role in providing crucial information for taking
significant decision. In addition to this, the current case study has involved the financial
statement like income and balance sheet fro giving practical exposure. It has as well comprised
ratios' calculations such as current ratio, debtors collection period, etc to obtain deeper insights
regarding financial position. On the basis of computed figures financial health of specified
company has been analysed in current case study.

REFERENCES
Books and journals
Antalovschi, N. P. and Cox, R. A., 2021. Financial Factors Affecting Price-to-Earnings Ratios in
Canada. International Journal of Finance, 6(2), pp.43-61.
Connolly, E. and Bank, J., 2021. Access to small business finance. RBA Bulletin, September,
viewed January.
Connolly, E. and Jackman, B., 2017. The Availability of Business Finance. RBA Bulletin,
December, pp.55-66.
Husain, T. and Sunardi, N., 2020. Firm's Value Prediction Based on Profitability Ratios and
Dividend Policy. Finance & Economics Review, 2(2), pp.13-26.
Kennickell, A.B., Kwast, M.L. and Pogach, J., 2017. 7. Small Businesses and Small Business
Finance during the Financial Crisis and the Great Recession (pp. 291-350). University
of Chicago Press.
Kroll, Y., Marchioni, A. and Ben-Horin, M., 2021. Coherent portfolio performance
ratios. Quantitative Finance, pp.1-15.
Lessambo, F. I., 2018. Audit tools: Financial ratios analysis. In Auditing, assurance services, and
forensics (pp. 371-394). Palgrave Macmillan, Cham.
Müllner, J., 2017. International project finance: Review and implications for international
finance and international business. Management Review Quarterly, 67(2), pp.97-133.
Nguyen, T., 2021. Functions of receivable account team and payable account team at finance
department. The influence of average collection period on financial health and the
process of payable management at Ernst and Young Vietnam.
Sadjiarto, A., Monica, C. C. and Budiarti, W. R., 2019. Ownership structure and earnings
management in Indonesian listed banks. Journal of Economics and Business, 2(2),
pp.261-272.
Online
What is balance sheet? 2021. [Online]. Available through <https://online.hbs.edu/blog/post/how-
to-prepare-a-balance-sheet>
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