Accounting Fundamentals: Income Statements, Balance Sheets, and Financial Ratios

This report covers the preparation of income statements and balance sheets, as well as the measurement of financial ratios in accounting. It discusses the importance of recording financial transactions accurately and provides insights into Chocco plc's performance based on profitability, liquidity, efficiency, and investment ratios.

ACCOUNTING
FUNDAMENTALS

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Question 1....................................................................................................................................3
Question 2....................................................................................................................................5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
For different kinds of business sectors, accounting plays a key role as it is associated with
recording financial transactions in a systematic manner (Schroeder, Clark and Cathey, 2019).
The report is based on two separate tasks in which first task contains information about
preparation of income statements and balance sheet. While in second task, different ratios are
measured to assess given company's financial position.
MAIN BODY
Question 1
(a)
Income statement:
Particulars Amount
Revenue (amount of goods or service sold for period) 827630
Cost of sales 578650
Gross profit 248980
Distribution cost 31000
Administration cost 85000
Other income 0
Operating profit 135980
Income from investment 0
Finance cost 2000
Profit before tax 130980

Taxation 68000
Net profit 62980
Balance sheet
ASSETS 1147335
Liabilities and stakeholders
equity 1147335
Non current assets Current liabilities 174355
Property, plant 632730 Non current liabilities 100000
Intangible assets 0
Total non current assets 632730 Liabilities. 274355
Current assets Share capital 310000
Stock 330600 Share premium 300000
Trade receivable 171105 Other reserves 0
Cash 12900 Retained earnings 132000
Profit before tax 130980
Total of current assets 514605 EQUITY/CAPITAL 872980

(b) Why statement of financial position balances.
The statement of financial position balances because in liabilities side information about long
term and short term loan is included while in assets side information about current & non current
assets is included (Jiambalvo, 2019). So it is essential for companies to present their statement of
financial position equal so that stakeholders can assure about their financial health and can take
decisions wisely.
Question 2
(a)Ratios
Profitability
Gross profit ratio GP/Sales*100
2019 2018
Gross profit. 3503 3345
sales 6738 6441
Gross profit ratio 52.0 % 51.9%
Net profit ratio NP/sales*100
2019 2018
Net profit 431 366
sales 6738 6441
Net profit ratio 6.40 % 5.68 %
Operating profit ratio OP/sales*100
2019 2018
Operating profit 805 699
sales 6738 6441
Operating profit ratio 11.95 % 10.85 %

Liquidity
Current ratio
Current assets/current
liabilities
2019 2018
Current assets 2303 2355
current liabilities 2511 3046
Current ratio 0.92 times 0.77 times
Quick ratio
Quick assets/current
liabilities
2019 2018
Quick assets 1595 1696
Current liabilities 2511 3046
Quick ratio 0.64 times 0.56 times
Efficiency ratios
Stock turnover Cost of goods sold/stock
2019 2018
Cost of goods sold 3235 3096
Stock. 708 659
Stock turnover 4.57 times 4.70 times
Receivable turnover
Net sales/accounts
receivables
2019 2018
sales 6738 6441
Receivables 1259 1287
Receivable turnover 5.35 times 5.00 times
Payable turnover Net sales/accounts payable

2019 2018
sales 6738 6441
Payables 583 655
Payable turnover 11.56 times 9.83 times
Assets turnover ratio Net sales/total assets
2019 2018
sales 6738 6441
Total assets 9736 10087
Assets turnover ratio 0.69 times 0.64 times
Investment ratios
Return on equity ratio Net income/equity
2019 2018
Net income 431 366
equity 3088 2912
Return on equity ratio 0.14 0.13
Schroeder, R.G.,
Clark,
M.W. and
Cathey,
J.M.,
2019.Jiamb
alvo, J.,
2019.
Return on capital
employed EBIT/capital employed
2019 2018
EBIT 805 699
Capital employed 7225 7041
Return on capital 0.11 0.10

employed
(b) Comment on company's performance.
Profitability ratio: Under this, there are three types of ratios which are computed and each of
ratio is showing better growth in year 2019 compared to year 2018. This indicates that company
managed their overall cost in more efficient manner in order to produce higher profitability.
Liquidity- In regards to this ratio, this can be assessed that company is not able to generate ideal
current and quick ratio which are 2:1 and 1.5:1 times. In both years, company's performance is
lower than ideal ratio. Though, in year 2019 company's liquidity performance enhanced but not
enough.
Efficiency ratio: In terms of efficiency ratio, this can be stated that company's performance is
average as some ratios are showing positive outcome while others performance is negative. This
is so because of lack of management of stock, assets etc. In regards to assets turnover ratio,
company's performance is poor as ratio is below one.
Investment ratio: In addition, the investment ratio of company is also poor in terms of ROCE and
ROE. This is so because both ratios' outcome is lower than one which is not a positive aspect for
company.
CONCLUSION
On the grounds of above report, this can be concluded that Chocco plc' s performance is average
in both of years. Though, in year 2019 company's performance is better compared to year 2018.
As well as report articulates that financial transactions need to be recorded in accordance of rules
of accounting so that accurate financial statement can be produced.

REFERENCES
Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2019. Financial accounting theory and
analysis: text and cases. John Wiley & Sons.
Jiambalvo, J., 2019. Managerial accounting. John Wiley & Sons.