Accounting Fundamentals: Income Statement, Financial Position, Ratios, and Analysis

ACCOUNTING
FUNDAMENTALS

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
QUESTION 1..................................................................................................................................1
Income Statement of the Wales plc for the year ended 31st December 2019..............................1
Statement of the financial position of Wales plc for the year ended 31st December 2019..........1
QUESTION 2..................................................................................................................................2
a) Calculation of Ratios for Jerry plc for year 2019 and 2018....................................................2
b) Situation revealed by ratio analysis.........................................................................................4
QUESTION 3..................................................................................................................................7
a) Different user groups of the company accounts and discussing why the user groups are
interested in information provided in the financial statements....................................................7
b) Discuss advantages and disadvantages of the highly regulated financial reporting regime.
From the perspective of users and preparer of financial statements............................................9
c) Limitations of the financial statements..................................................................................10
REFERENCES..............................................................................................................................11

QUESTION 1
Income Statement of the Wales plc for the year ended 31st December 2019
Income statement, 31st December 2019
Particulars £’000 £’000
Sales 30,300
Cost of sales 16,220
Add: depreciation on plant 2,560 18,780
Gross profit 11,520
Revaluation income (land) 5000
Administration expenses 2920
Add: Bad debts written off 240
Add: Discount on account receivables 160
Add: Depreciation on building 320
Add: Outstanding insurance fees 500 4140
Distribution expenses 2160
Debenture interest paid 240
Dividends paid 560
Tax paid 1600
Net profit 7,820
Statement of the financial position of Wales plc for the year ended 31st December 2019
Statement of position as at 31st December 2019
Liabilities £’000 Assets £’000
Share capital 29000 Bank 320
Retained profit 8380 Land at cost 20000
Share premium 5000 Buildings at cost 16000
Net profit 7,820
Less: Accumulated
depreciation (4260 +
320) 4580 11420
12% debentures 2024 4000 Plant at cost 25600
1

Outstanding insurance fees 500
Less: Accumulated
depreciation (4960 +
2560) 7520 18080
Trade payables 4480
Trade receivables
(8240-240- 160) 7840
Income tax liability 1600 Inventory 3120
Total liabilities 60780 Total assets 60780
Workings
Working note
Building cost 16000
Depreciation (2% * 16000) 320
Plant cost 25600
Depreciation (10% * 25600) 2560
QUESTION 2
a) Calculation of Ratios for Jerry plc for year 2019 and 2018
Particulars Formula
2018 2019
Earnings before interest and taxes 29.7 23
Total assets 293.8 286.1
Current liabilities 148.4 151
Capital employed Total assets-Current liabilities 145.4 135.1
Return on capital
employed
Earnings before interest and
taxes/Capital employed 20% 17%
Net income 18.3 12.9
Shareholders equity or funds 80.3 93.2
Return on equity Net income/Shareholders equity 23% 14%
2