Accounting Fundamentals: Profit and Loss, Financial Position, and Ratio Analysis

This article covers the basics of accounting fundamentals, including profit and loss statements, financial position statements, and ratio analysis. It includes a sample statement of financial position and a comment on the financial position of Chocco Plc.

FUNDAMENTALS

Table of Contents
Question 1........................................................................................................................................3
Profit and loss & Financial position............................................................................................3
Statement of financial position balance......................................................................................4
Question 2........................................................................................................................................5
Ratio analysis..............................................................................................................................5
Comment on financial position of company...............................................................................6
REFERENCES................................................................................................................................7

Question 1
Profit and loss & Financial position
Profit and loss statement
Sales 826650
Less:
Cost of sale (578650)
Gross profit 248000
Administrative expenses (30000)
Interest paid (4000)
Distribution cost (28000)
Salesman commission (3000)
Corporation tax (68000)
Director remuneration (5000)
Net profit 110000
Ordinary dividend paid (20000)
Preference dividend paid (30000)
Net income 60000
Statement of financial position
Assets Amount
Plant and equipment 632730
Stock 329620
Debtor 171105
Cash at bank 12900

1146355
Liabilities Amount
£1 ordinary shares 300000
10% £1 preference shares 310000
Retained earning 82000 (132000 - 50000)
Net profit 110000 802000
4% Debentures 100000
Current liability
Trade creditor 171355
Accrue sales commission 3000
Accrue interest 2000
Tax payable 68000 244355
1146355
Special notes:
 This is assumed that the corporate tax liability is not paid already.
 Sales of the company also comprises with the £33000 of sale made in December.
 The payment of £980 is done in advance which is recorded as an asset to the company as
the payment is paid before the due date is arrived.
 Interest paid is only 2000 but the total interest is 4000 on the 100000 worth of debenture
at a 4% rate of interest.
 The ordinary dividend and preference dividend is paid out of the retained earning of
previous financial year.
Statement of financial position balance
The statement of financial position is balanced as the treatment is fair and stated properly
in the company books of accounts. The financial position is balanced in a significant manner as

the business decisions are made properly that could generate positive results in favour to the
business organisation (Guthrie, Manes-Rossi and Orelli, 2017). This made it more significant for
the business entity to derive the positive form of results in respect to the organisation that could
allow the positive and favourable results in respect to the business venture. Balanced financial
position depict the proper liquidity position of the business entity.
Question 2
Ratio analysis
Ratio Formula 2020 2019
ROCE Earning before interest
and tax / Capital
employed
846 / 7225 (9736 –
2511)
= 11.4%
720 / 7041 (10087 –
3046)
= 10.2%
ROE Net income / average
shareholders equity
431 / 3500(3088 +
2912 / 2)
= .12
366 / 2856(2912 +
2800 / 2)
= .13
Earning per share Net income for equity
share holder / Total
number of equity
shares
431 / 59 (300 / 5.12)
= 7.31
366 / 75 (300 / 4)
= 4.88
Net profit margin Net profit / sales *
100
431 / 6738 * 100
= 6.4%
366 / 6441 * 100
= 5.68%
Asset turnover ratio Net sale / average total
asset
6738 / 9912 (9736 +
10087 / 2)
= .68
6441 / 10669(10087 +
11250 / 2)
= .6
Stock holding days Average stock / cost of
sale * 365
684 (708 + 659 / 2) /
3235 * 365
= 77 days
640(659 + 621 / 2) /
3096 * 365
= 75 days
Debtor collection Debtor / sales * 365 1249 / 6738 * 365 1287 / 6441 * 365

period = 68 days = 73 days
Current ratio Current asset / current
liability
= 2303 / 2511
= .92
2355 / 3046
= .77
Gearing ratio Total debt / Total asset 4137 / 9736
= .42
4129 / 10087
= .41
Interest cover ratio EBIT / Total interest 846 / 226
= 3.74
720 / 181
= 4
Comment on financial position of company
On the basis of the assessment of the ratio of the business entity this has clearly identified
that all the records denote the very positive position of the business entity. Net profit margin has
also increased in the year 2020 as compare to the earlier financial year. Current ratio is also
increased which identified that the current nature of assets of company are more empowered as
compare to the current liability maintained by the business unit (Chang and et.al., 2020). ROE
could decrease at a certain level. Net asset turnover ratio is increased which depict that the
company could generate improved results out of the overall outcomes against the net assets
available with the business unit. Stock holding day is increased that could effect the liquidity
positing of company. ON the other side debtor collection period is decreased which could
improve the liquidity of company as the organisation need less time to collect its finances. On
the basis of the overall representation it can indicate that the organisation could generate more
effective results in the last financial year as compare to its earlier financial year. Chocco Plc has
performed better in context to its overall reflection of the financial records.

REFERENCES
Books and Journal
Chang, V. and et.al., 2020. How Blockchain can impact financial services–The overview,
challenges and recommendations from expert interviewees. Technological
forecasting and social change. 158. p.120166.
Guthrie, J., Manes-Rossi, F. and Orelli, R. L., 2017. Integrated reporting and integrated thinking
in Italian public sector organisations. Meditari Accountancy Research.