Accounting Principles: Functions, Career Opportunities, and Regulatory Constraints

This report discusses the concepts of accounting principles, including the functions, career opportunities, and regulatory constraints. It also elaborates on the benefits and limitations of budget and budgetary planning and control for an organization. The report covers the preparation of financial statements for a sole proprietary business, a partnership, and a non-for-profit organization. It also includes the calculation of important financial ratios and a comparison of the organization's performance over time using financial ratios.

Accounting Principles

Table of Contents
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
P1. Purpose of the Accounting Functions Within an Organisation........................................3
P2. Assessment of the Accounting Functions in Context of Regulatory and Ethical Constraints
................................................................................................................................................6
P6. Construct a memorandum on Cash Budget......................................................................8
P7. Elaborate the benefits and limitation of budget, budgetary control and planning of the
business organisation............................................................................................................10
Task B............................................................................................................................................12
P4. Prepare financial statements of sole traders, partnerships and not-for-profit organizations.
..............................................................................................................................................12
P5,6. Write a letter for the calculations of the financial ratios from a set of final accounts 20
CONCLUSION..............................................................................................................................22
REFERENCES..............................................................................................................................24

INTRODUCTION
In this report, accounting principles are discussed. Accounting principles are rules and
principles which are followed by the organisations while presenting financial data to
stakeholders (Almagtome, 2021). This report mainly discusses the concepts of accounting. In
first part of this report, various purposes and functions of accounting are considered in details in
the context of the regulatory and ethical constraints. Further in this report, benefits and
limitations of the budget and budgetary planning, and control for an organisation are discussed
along-with preparation of a cash budget. In the second part of report, financial statements for a
sole proprietary business, a partnership and a non-for-profit organisation and interpret them as
well. Afterwards, important financial ratios are calculated and a comparison of the organisation's
performance over the time using financial ratios are done.
PART A
P1. Purpose of the Accounting Functions Within an Organisation
The main purpose of the accounting is to provide assistance to the owners and managers
so that they will be able to take decisions in the best interest of the business entity. The primary
purpose of the accounting is to provide aid to the governing body of the organisation in
identifying the areas which require special consideration and efforts so that it will be beneficial
for the organisation as a whole (Eebo, 2020). Similarly, the main purpose of the accounting
functions is to provide feasibility to the business which will help it ultimately in preparing
necessary and useful qualitative reports to the governing body of the business. Reports are
generated in the form of financial statements of the organisation to the internal and external users
of the financial information.
Career opportunities in Accounting
 Financial accountant: The financial accountant is responsible for focusing upon the
preparation of monthly, quarterly and annual reports for the company. For conducting
annual audits, budgeting and management of the tax payments of the organization. The
financial analyst also acts as a consultant of the senior business managers to help them in
preparing reports regarding the conduction of cost and revenue analysis in the business.
 Forensic Accountant: The forensic accountant in an organization is responsible for
carrying out many detailed and in depth investigations and analysis regarding accounting,

auditing activities in the business. The investigations relate to the finding regarding the
irregularities which are present in company's financial documents, reports and books
maintained. It also includes checking upon the losses that the company incurred and also
to recover all the unlawful or illicit finds that the company has (Kovtun, Kopytina and
Pavlyuchenko, 2018).
 Management Accountant: The responsibilities of a management accountant involve
presenting the financial reports of the organization to all the senior managers in the
company to give them an overview and an insight of the financial performance and
situation of the company. The skills such as analytical and problem solving abilities help
them in managing the financial health and assist the senior business managers to plan,
strategize and make informed, correct decisions.
 Tax Accountant: the tax accountant in an organization is solely responsible for
maintaining all tax-related obligations and duties of the company. It includes preparing
tax provisions schedules, returns, reports and maintain the database of the organization.
Finding the errors and mistakes committed while in the preparation of the company's tax
filings is also to be evaluated and checked by the tax accountant of the company.
 Project Accountant: the responsibilities of a project accountant include managing the
operating budget of the company and to forecast and predict upon the process involved in
the projects. It also includes reviewing and analyzing the performance and of the project
to measure its success rate with the company management and stakeholders of the
enterprise.
Skills required for a position in accounting and finance:
 Analytical skills: The analytical skills involve the quality of an individual to analyze data
sets, make critical decisions for an organization in terms of its accounting related issues,
solve for the complex and difficult problem situations in the business so that to provide
for taking in all the necessary information and data relating to the company and mentally
process and analyze the same data in order to assess and determine solutions necessary
for the respective problems (Mulawarman and Kamayanti, 2018).
 Problem Solving: This skill helps accountant in an organization to understand and
interpret the business problems in order to provide for the suitable and reasonable

solutions to those. It involves thinking of the creative and effective ideas which can solve
for those problems and propose the necessary solutions helping an organization to
successfully solve for those problems.
 Integrity: It is one of the most fundamental and essential skill for an accountant as it
demands the accountant to be honest, straightforward and real with the client and the
financial information of the respective client so that they could do justice to the work
assigned. The accountant is also responsible for any personal gains or benefits with the
misuse of the information that they have of the client (Srivastava and Shabi, 2019).
 Numerical Skills: These skills establish for the base of accounting as a subject. As the
accountant is required to make tough calculations, work through the numerical queries
and support the results received with the required supporting information. Various
mathematical explanations, concepts and theories are applied and used in accounting to
reach to a numerical conclusion for interpreting the data in an efficient and useful
manner.
 Negotiation skills: It is one of the critical and essential skill for the accountants as it plays
a crucial role when they negotiate for monetary or the non- monetary issues with their
clients and their respective issues. This skill assists the accountant to get the work done,
establish greater relationships and help in achieving the objectives of the business.
 Customer Service: This skill plays an important role in assisting the accountant to help
clients in resolving their problems and issues, provide for licenses and permits and
promote relationship building skills while performing the necessary responsibilities
towards the organization and the client.
Accounting Function within the organization
 Accounts Receivable: It is the balance of the money which is due to a business enterprise
for the commodities or services which are delivered or have been utilised by the customer
or client but the payment for the same has not been made from their side. It is a form of
current asset to the organization and is mentioned below the same head in the company's
balance sheet (Butaev and Radjabov 2021).
 Accounts Payable: It is an accounting term used to explain the amount which is owned by
the firm to its creditors, vendors or the suppliers of the goods, services that the business
has purchased in terms of credit and have not made the payment for the same. It is the

current liability of the organization which owns this amount which is to be settled by
making payments.
 Inventory Account: Inventory accounting is the sphere of accounting which has dealings
relating to the stock management and the frequent valuations necessary in the inventory
management. It also manages upon the different values of changes and differences that
take place in the organizations inventory assets.
 Payroll Account: It is a type of separate bank account which is maintained to check and
manage the payroll transactions of the business. As the organizations make sure that to
avoid confusions they utilise this account only for the purpose of making the wage
payments to the employees of the business (Suleymanov and et.al., 2018).
 Fixed Asset Account: This account is exclusively maintained to keep a check regarding
all the long term fixed assets of the organization. It keeps a record of all the capital assets
of the business, the details regarding their lifecycle and usage in the business.
 Cash Account: A cash account is a kind of business to business or business to consumer
account which is maintained to make the immediate payments in the organization. This
keeps a check of all the cash payments made by the organization for the requisite
necessary time period and provides for all the transactions which took place in that
tenure.
P2. Assessment of the Accounting Functions in Context of Regulatory and Ethical Constraints
Accounting functions are required to perform to accomplish the ultimate purposes of the
accounting process of the organisation. Various accounting functions are identified above let us
take a detailed analysis of each function, which are as follows: Integrity: A professional accountant should be to the point and trustworthy in all
professional and organisational relations. An accountant should not be related with
reports, return or any other information where they assumed that data includes a
materially wrong or deceptive statement or it contains statements which are provided
carelessly or excludes information which is needed to be concluded. Objectivity: An accountant should not permit partiality, dispute regarding interest or
excessive impact of others to overrule professional or organisational judgements.
Accountant is unprotected towards circumstances that can harm objectivity. It is not

possible to describe all such situations. Relations that are bias and effect professional
judgements should be ignored. Professional Competence and Due Care: A professional accountant has a consistent
obligation to keep professional knowledge and competency at the stage which is required
to insure that a client or employee acquires competent professional service depended on
recent developments in practice, governance and methods. A professional accountant
should behave actively and according to applied technical and professional standards
while delivering professional services (Ferry and Ahrens 2021). Confidentiality: An accountant should honour the discretion and privacy of data obtained
as an outcome of professional and business interconnections a should not unwrap or
expose any such information to outsiders without adequate and specific governance
except there is a legal or professional right or obligation for such exposure.
 Professional Behaviour: A professional accountant should follow all the application
rules and regulations and should ignore any activities that dishonour the profession.
Assessment of accounting functions within the business in the respect of regulatory
constraints: Duty to keep accounting records: Every organisation must keep proper accounting
records. Proper accounting records means records that are adequate to present and
elaborate the organisation's transactions, to Disclose the financial position of company
with adequate accuracy at any point of time and to authorise the directors to insure that
any account prepared, must comply the requirements or regulations. Where and how long are reports to be kept: The main objective behind preserving
reports is to balance the books and accounts for flow of cash by an organisation. It is
initially done in large organisations which assist them in finding errors and frauds. The
minimum time to keep business records is 7 years while employment tax records are to
be kept for minimum 4 years from the date they were paid off. Accountants to give true and fair view: A true and fair view in accounting refers that a
financial statement is free from material misstatements and devotedly depicts the
financial performance of an organisation. In most of circumstances, a true and fair view is
accomplished by complying with accounting standards as the standards are planned to

give acknowledgement, measurement, presentation and disclosure for particular features
of financial reporting in a manner that review economic Reality.
P6. Construct a memorandum on Cash Budget
To: The firm
FROM: Graduate Trainee
SUBJECT: Budget for the year ended 31st December 2023.
DATE:
The estimation of cash inflow and outflow in a business is known as cash budget. It can
be prepared monthly, quarterly, weekly and yearly. To use of cash budget can be identify how
much cash available to continue the business. It is two type short term and long term. Using
Short term cash budget can be determined the cash is needed for monthly and weekly, long term
cash budget can be determined the cash is needed for long time. On the basis of this budget to
determine the surplus cash can invest in marketable securities.
The cash budget for the month of Jan2023-Dec2023

Cash budget
Particular Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Opening
Balance 0
796
00
12055
0
163862.
5
210425.
625
259898.
031
311905.
202
366136.
984
422846.
255
483148.
617
547923.
055
615113.
501
Cash Inflow
Capital
100
000
100
000
10000
0 100000 100000 100000 100000 100000 100000 100000 100000 100000
Sales
400
00
440
00 48400 53240 58564 64420.4
70862.4
4
77948.6
84
85743.5
524
94317.9
076
103749.
698
114124.
668
Bank loan
500
00
Total
190
000
223
600
26895
0
317102.
5
368989.
625
424318.
431
482767.
642
544085.
668
608589.
807
677466.
525
751672.
754
829238.
169
Cash Outflow
Payment to
Suppliers
232
00
166
00 18900 20300 22100 24400 27200 30000 32000 33500 37500 40000
Marketing
Budget
150
00
165
00 18150 19965 21961.5
24157.6
5
26573.4
15
29230.7
565
32153.8
322
35369.2
154
38906.1
369
42796.7
506
Utilities
400
0
400
0 4000 4000 4000 4000 4000 4000 4000 4000 4000 4000
Furniture
600
0
600
0 6000 6000 6000 6000 6000 6000 6000 6000 6000 6000
Salaries
300
00
300
00 30000 30000 30000 30000 30000 30000 30000 30000 30000 30000
Heat & Light
500
0
500
0 5000 5000 5000 5000 5000 5000 5000 5000 5000 5000
Administration
Cost
100
00
100
00 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000
Interest 200 200 200 200 200 200 200 200 200 200 200 200
Loan Principal
200
0
200
0 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000

Rent
150
00
127
50
10837
.5
9211.87
5
7830.09
375
6655.57
969
5657.24
273
4808.65
632
4087.35
788
3474.25
419
2953.11
607
2510.14
866
Total
110
400
103
050
10508
7.5
106676.
875
109091.
594
112413.
23
116630.
658
121239.
413
125441.
19
129543.
47
136559.
253
142506.
899
Closing
Balance
796
00
120
550
16386
2.5
210425.
625
259898.
031
311905.
202
366136.
984
422846.
255
483148.
617
547923.
055
615113.
501
686731.
27

P7. Elaborate the benefits and limitation of budget, budgetary control and planning of the
business organisation.
Budget shows the status of financial position in a company at any point of time. Budget
helps in controlling the money in future. Budget can be preparing a group, individual and
company to shows cash inflow and outflow in future (Wong, George and Tanima, 2018).
Benefits of budgeting as a tool of budgetary planning, and control
 Helps in planning- Budgets are pre-determined plans that are made on various estimation
and proper analysis. It helps the organisation to know the expected earning and
expenditure according to which operations can be planned.
 Enhanced efficiency- When everything is pre planned and decided, duties are allotted to
the accountable person it becomes easy for operating. This is good method for controlling
waste and eliminate unnecessary expenses.
 Proper communication- Budgets are pre-determined estimation of operation of the
organisation. The budgets are prepared taking consideration from each level. Thus it
maintains proper relation and coordination between all the level operating in the business
entity.
 Control- Budgets are desired results that organisation wants for its company. The actual
results are compared with budgeted performance. The deviation from the performed and
estimated activity is analysed based on performance.
 Delegation of authority- Budgets are set of predetermined standards that encourages
delegation of authority. It sets timelines and period to complete task which call for
sharing responsibilities so that works gets completed on time.
Limitations of budgeting as a tool of budgetary planning, and control
 Rigidity- Budgets are meant to set limits to the operation, which fixes time and cost
required for completion. Due to changing environment factors it is sometimes impossible
to achieve the desired results. Also there are time when things are overestimated, but
employees do the work in overestimated cost to meet the budgets requirements.
 Inaccuracy- Budgets are prepared on past trends analysis which are always good method
of estimation. Because dynamic environment does not follow trend therefore the budget
prepared based on the past analysis are often inaccurate and delivers inefficient results.

 Conflicts among different departments- Budgets are made on consideration given by
different departments, and it requires to complete a task with coordination. When the
actual performance does not meet the desired results the departments starts to blame each
other for the mistakes. Hence conflicts starts to take place in the organisation.
 Expensive- Budgets are made on whereas estimation and studies which requires lot of
time and expertise. Thus in a current business environment n organisation which is
earning a good amount of turnover can only afford preparing budgets.
 Discourages efficient employees- first and foremost budgets are made with most
discretion of the top level management there are manipulative and inaccurate,
overestimation and underestimation of results are very harmful for the productivity of the
organisation. The worker who can perform better than the budgets is demotivated and
inefficient and the one who is not able to achieve task but is a faithful employee may be
lost due to the results.
Budgetary Control is a method to prepare budget using various technique and activities and
compare the results with actual and if any deviation comes, rectify the budget this whole method
is known as Budgetary Control. It is a continuous process to planning and coordinating.
Budgetary control responsibility centre
 Revenue Centre: The original units are compared in monetary terms not compared in
input cost
 Expense Centre: Units are compared in previous budget not compare in actual output.
 Profit Centres: The differences have found in revenue and expense then inter department
is using in transfer price that is cost plus profit price.
 Investment Centres: producing rate of interest when output compared with assets.
Budgetary control process
Step 1: Budget Preparation – Collecting information’s from different sources, budget maker
analysis trend and details from the past. He also estimates and predict future events that might
takes place. According to which budgets are prepared for profit, expenses and credits.
Step 2: Comparison of actual results and budgeted data- When the budgets are prepared and
applied in the organisation duties are assigned and persons are given the task to perform. In a
period of 3 or 6 months the actual results are compared with desired performance. Deviation
from income and variance from expenditures must be studied. And the reason behind the

performance should critically analysed. This is useful for knowing and taking corrective
measures for the output received. Comparison is done for the particular period for which the
budgets were prepared.
Step 3: Performance variance calculation and analysis- There could be many reasons for
deviation in the performance which could be positive or negative. Some of the reasons are
human error which comes when things are over estimated or under estimated. Ineffective and
inaccurate budget profiling, increase in work efficiency of the worker. Favourable changes in the
environment. According to the error corrective measures are taken and applied.
Budgetary Controls helps in decision making:
Budget is to prepared by the organisation members, to participate of employees help in
taking decision of the market so budget can prepare in accordance to future requirement. To
make proper budget helps in finance department identify budgetary deviation and take corrective
action in strategic manner (Wochner and et.al., 2018). This budget helps cost management to
reduce cost using of budgetary control techniques. The company does not have knowledge new
technique and internal control, budget owner communicates to the finance department and taking
decision based on future events. It helps in coordinating all business activities then taking
decision of future according to new technology and method. Budget function are interlinked with
each other; effective implementation budget depends on all departments. To analyse of market,
gathered relevant information which helps in preparation of future budget and taking decision
based on future events.
Task B
P4. Prepare financial statements of sole traders, partnerships and not-for-profit organizations.
Financial statements are written statements that depict the summary of all financial events
and transactions occurred during a period. These financial statements covey the financial
position of the business entity. To check the accuracy and relevance of the financial statements,
business entities are required to conduct the audit for taxation and other purposes. Financial
statements portray an overall view of the assets, liabilities and equity for the owners of the
business entity. With the help of the information’s provided by the financial statements, users of
the financial statements can take various decisions regarding investing. Both the external as well
as internal users of the financial statements rely on the financial data presented by these
statements to analyse the overall performance of the entity. These statements assist these users to

make predictions about the future value of the entity, to evaluate the earning potentiality of the
entity.
Three star financial statements reports are balance sheets as of the last date of the
financial year, income statements and statements of cash flows.
1. Balance sheet: It provide a critical view of the various assets which the business entity
held and liabilities that are required to pay by the company at a specified date which is
end date of the financial year. Along with assets and liabilities of the entity, it also
presents the owner's capital invested in the business.
Assets can be current and non-current as well as liabilities can be current and non-current.
Equity is the residual amount after deducting all the liabilities from the total assets of the entity.
It represents the amount which is required to pay back to the owners when the business is going
to close. Retained earnings are also included in the equity, it is consolidated amount of profits
earned in the previous years.
2. Income statement: Profit and loss account is also known as income statement. It provides
information regarding total revenue earned by the entity, direct expenditure incurred,
operating profit earned, indirect expenses of the entity and net income for the financial
year.
Total revenue means the direct revenue earned by selling the products or services of the
business entity along-with other indirect incomes earned during the financial year. Direct
expenses are those expenses incurred which are directly related to the operations of the entity.
Operating income means the earnings after deducting all the direct expenses. Indirect expenses
are those expenses which are not directly related with the operations of the entity but required to
incur to smoothly run the business.
3. Cash Flow statement: It shows the actual position of the cash within a business entity. It
depicts the information regarding the cash generated by the entity during a financial year
and its utilization. It assists the management to keep an eye on the liquidity position of
the entity to analyse whether the cash generated during the financial year are enough to
pay its liabilities for the year. It also provides a reasonable basis to the investors to
identify the various sources of the funds and their application. These can be done through
three activities operating activities, investing activities and financing activities.
Financial statements of T King (sole trader)

Trading and Profit and Loss account for the year ended 31st December 2021
Particulars Amount (£) Particulars Amount(£)
Opening stock 5900 Sales 103701
Purchases 42160 Closing stock 7220
Gross Profit 62861
110921 110921
Rent 4200
Prepaid (600)
3600 Gross profit 62861
Bad debt 610
Light & gas 3700
Outstanding +580
4280
Stationery 2430
Telephone 680
Travel expenses 330
Salaries 15891
Advertisement expenses 5000
Insurance expenses 2000
Utilities expenses 4200
Administration expenses 7400
Depreciation 6000
Net profit 10440
Total 62861 Total 62861
Balance sheet of T King for the year ended 31st December 2021
Liabilities Amount(£) Assets Amount(£)

Capital- 52040
Net profit-10440
62480 Plant &Machinery-
60000
depreciation(6000)
54000
Current liabilities Current assets
Outstanding rent 580 Debtors 14310
Bank overdraft 1540 Prepaid light & gas
expense
600
Creditors 12700 stock 7220
Cash 1170
Total 77300 Total 77300
Working notes for T King (sole trader)
 Plant and machinery is depreciated in W.D.V. method which means the value of
depreciation is calculated subtracting the value of accumulated depreciation by the
original value of asset. The original value of plant and machinery is 87000 and
accumulated depreciation is 27000 that is (87000-27000 = 60000). The value of plant and
machinery is on 1st January 2022 £60000 and the depreciation is calculated on the basis
of W.D.V at the rate of 10%. In this year the expenses of depreciation are
£60000*10=6000.
 Outstanding expenses means those expenses which is occurred for current year but not
paid in current financial year. It is a liability of the business which is shown in balance
sheet in liabilities side as an outstanding expense. In this question the outstanding
expense of light and gas is £580 which is added in light and gas expense. The current
year expense of light and gas is 3700+ £580= £4280.
 Prepaid expense means those expense which is paid in advance but it is related to the
future year. It is an asset of the business which is shown in Balance sheet in asset side as
a prepaid expense. In this question the rent for the current year is £4200 which include
prepaid rent of £600, is excluded for the current year expense. The rent of financial year
2022 is £3600.

Financial statements of Rave Music (Partnership)
Trading and Profit and Loss Account of Rave Music for the year ended 31st march 2021
Particulars Amount (£) Particulars Amount (£)
Opening stock 20000 To sales 250000
Purchases 120000 To closing stock 30000
Wages and salaries 36700
Gross profit 103300
Total 280000 Total 280000
Shop expense 19200 By gross profit 103300
Salary to Veta 10000
Depreciation:
Freehold buildings 3000
Furniture’s and
fixtures
2000
To net profit 69100
Total 103300 Total 103300
Profit Appropriation Account for the year ended 31st march 2021
Particulars Amount (£) Particulars Amount (£)
Interest to partners: By net profit 69100
John 5000
Veta 4500
Net profit:
John 29800

Veta 29800
Total 69100 Total 69100
Partner's Current Account for the year of 31st march 2021
Particulars John Veta Particulars John Veta
Drawings 24000 18000 Balance b/d 4000 1000
Balance c/d 14800 27300 Interest on
capital
5000 4500
Salary 10000
Profit 29800 29800
38800 45300 38800 45300
Balance Sheet of Rave Music as at 31st march 2021
Particulars Amount (£) Particulars Amount (£)
Equity and Liabilities: Assets:
Capital Accounts: Freehold land and buildings 188000
John 50000 Furniture’s and fixtures 10000
Veta 45000 Trade Debtors 3000
Current Accounts: Inventories 30000
John 14800 Prepaid shop expenses 800
Veta 27300
Bank loan 80000
Bank overdraft 6000
Trade creditors 7000
Accrual wages and salaries 1700

231800 231800
Working Notes for Rave Music (Partnership)
1. Wages and salaries for the year 2021 were of £35000 and accrual balance of wages and
salaries amounting to £1700 which were due in the same year but the partnership firms is
not make the payment of the same within the same year so the amount debited to the
profit and loss account for the year will of £36700.
2. Shop expenses for the year 2021 were of £20000 and prepaid shop expenses for the year
were of £800 which were paid in the same year but will due on the next year so these
required to be deducted from the total amount of £20000 and the amount debited to profit
and loss for the year will be of £19200.
South Dempsey tennis club
Income & expenditure account of South Dempsey tennis club at the year ended 31st
December 2021.
Particulars Amount(£)
Income
Subscriptions-1875
prepaid-(175)
1700
Donation 100
Sale of raffle tickets 310
Total income 2110
Expenses-
Rent paid-2500
prepaid-(500)
2000
Electricity 295
Raffle prizes 120
Secretary's expenses 730

Sundry expenses 220
Depreciation-
Furniture & fittings- 200
Sports equipment-250
450
Total expenses 3815
Change in net asset (1705)
Balance sheet of South Dempsey tennis Club for the year ended 31st December 2022
Liabilities Amount(£) Assets Amount(£)
Accumulated fund 2891 Furniture & fittings-
1000
less-depreciation(200)
800
Net loss (1705) Sports equipment-
1750
less-depreciation(250)
1500
Bar profit 1810 Current assets
Subscription in
advance
175 Bank 51
Closing stock of bar 320
Rent prepaid 500
Total 3171 Total 3171
Subscription received in advance which is liability of the company because members are paid in
advance to the non-profit organisation.
Working Notes:
Bar asset account

Particulars Amount Particulars Amount
Opening stock 210 Sales 3700
Bar purchase 1210 Closing stock 320
Wages 790
Profit 1810
P5,6. Write a letter for the calculations of the financial ratios from a set of final accounts
Date: 20 March 2022
Finance Manager,
Squire Company,
XYZ Street, London.
Subject: Interpretation of Financial Statements for Years Ended 31st December 2021 and 2020.
Dear Sir,
I hope you are well. This letter is all about interpreting the financial statements. The followings
are the calculations. According to the calculation of the gross profit ratio it states that the
company is not able to generate enough profit and as compare to year 2020, there is a little
increase but company has to perform well and manage its cost of production more efficiently.
As per calculation company is using efficient part of sale revenue for net profit. There is
little increase in the net profit ratio as compare to previous year, it happened due to decrease in
the expenditures
According to the calculation of Return on capital employed it states that company is working
more efficiently as compare to previous year because above calculation shows increase in the
ratio from the previous year.
As per above calculation it state that company is managing their currents assets in
efficient manner. In year 2020 company's current ratio is over the ideal ratio but in year 2021 the
ratio is decreased which shows that firm is not working efficiently and they are not able to
manage current liabilities.

From the above calculated ratio it can be seen that the company has sufficient amount of
liquidity from its business operations which has decreased has decreased over the period of time.
Asset turnover ratio states the ability of the company to generate revenue from its assets
of the company. It can be seen that the company has been able to generate 0.63 times sales of its
total assets of the company in the year 2020 which has increase to 0.75 in the year 2021.
Inventory turnover period it can be seen that the company is able to rotate its activities.
Inventory turnover has reduced due to decrease in the sales of company.
Account Payable period concludes that the company is able to pay its current outstanding
to its creditors. It shows that the company has been able to reduce the amount of days in the
following period.
Account Receivable period is the amount that is able to generate enough amount from its
creditors. The receivable period of the company has reduced which means that the company is
been able to generate liquidity from its business operations.
Particulars 2021(£) 2020(£)
1. Gross Profit percentage
=Gross profit/total sales
70 60
2. Net profit percentage
=Net profit/total sales
38.69 29.93
3. Return on capital
employed
=Earnings before interest and
taxes/capital employed
0.45
where capital employed is
calculated as under:
=933250-117670
=815580
=61500/217395
=0.2828
where capital employed is
calculated as under:
=240000-22605
=217395
4. Current Ratio
=Current assets/current
liabilities
1.3 2.21
5. Quick ratio 1.08, where quick assets are 1.68, where quick assets are

=quick assets/current liabilities
calculated as under:
=153250-26250
=127000
calculated as under:
=50000-12000
=38000
6. Asset turnover
= Total sales/total assets
0.75 times 0.63 times
7. Inventory turnover
=average inventories/cost of
goods*365
33.24 days, where average
inventory is calculated as
under:
= (26250+12000)/2
=19125
36.5 days, where average
inventory is calculated as
under:
= (12000+0)/2
=6000
8. Average payable
period
=accounts payable/total credit
purchase
109.01 days 197.62 days
9. Average receivable
collection period
=average account
receivable/net sales *365
37.15 days 114.06 days
CONCLUSION
The above report concluded that the main purpose of accounting function which helps the
organization to take good business decisions which are mainly related to the firm stakeholders,
company and social group. It mainly involves some function of accounting which also help the
firm to take better decisions. It also effects the working of organization by their decisions, if the
decision of the company is working and implement correctly then it help them to achieve their
targets. In other part it involves some ethics and it also describe them in context of accountant.
Apart from this it also explains the accounting role which basically inform about the company
decision to meet firm and stakeholder’s expectations. Afterwards, it prepares the company
financial statement from an available trial balance of the proprietor along with the partnership

and non- profit organization to meet accounting principles. Also, it computes the firm financial
ratio which show the financial position of the business with the help of financial accounts and
compare the firm performance on the basis of the financial ratio. After that it create the cash
budget of the company with the help of spread sheet and at last it provides the advantages and
disadvantages of budgets, budgetary planning and control of the firm.

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