Financial Statement - Mug ltd

Accounting

TABLE OF CONTENTS
INTRODUCTION...............................................................................................................................3
QUESTION 1......................................................................................................................................3
QUESTION 2......................................................................................................................................6
QUESTION 2: ACCOUNTANCY THEORY – BUDGETING.........................................................8
SECTION C.........................................................................................................................................9
CONCLUSION.................................................................................................................................10
REFERENCES..................................................................................................................................11

INTRODUCTION
Financial Statements includes preparation of Profit & Loss, Balance Sheet and Cash Flow
Statement in order to disclose the financial information and relevant data to investors, accountants,
regulators, auditors, Government, Bankers, Managers etc. in order to take certain decisions based
on the data available. Analysis of Financial Statements can be done through ratio analysis as it
shows more clearly that where the company is underperforming and should focus on that particular
department in order to increase the profitability of the organisation.
QUESTION 1
Financial Statements Preparation
MUG ltd.
Statement of Financial Position as at 31 March 2018
Liabilities Amount
Capital 122000
-drawings -5000
+net profit 57800 174800
Trade Creditors 18000
O/S advertisement expenses 300
Accrued wages 6000
199100
Assets Amount
Machine 120000
-depreciation -20000
100000
Trade Debtors 8000
Advance rent 2000
Cash 79100
Closing inventory 10000

199100
MUG ltd.
Income Statement for the year 31 March 2018
Particulars Amt. Particulars Amt.
to opening stock 0 by sales 145000
to purchases 40000
by closing
stock 10000
to gross profit 115000
155000 155000
to rent a/c 14000 by gross profit 115000
-2000 12000
to depreciation 20000
to electricity bill 24000
to advertisement exp. 300*4 1200
to net profit 57800
115000 115000
Notes to Accounts :-
Trade Creditors Account
to opening creditors 10000 by cash paid 32000
by purchases 40000
by closing
creditors 18000
50000 50000

Trade Debtors Account
to cash received 30000
by opening
debtors 13000
to closing debtors 8000 by sales 25000
38000 38000
Cash Flow Statement
Debit amt. credit amt.
to opening cash 5000 by drawings 5000
to cash sales 120000 By rent paid 14000
to debtors 30000
by electricity
bills paid 24000
by adv. Exp
paid 900
by creditors 32000
by closing
cash 79100
155000 155000
Rent Prepaid for 2 months - $1,000*2=$2,000
Depreciation charged= (120000-20000)/5 = 20,000 for every year.
Outstanding Electricity paid for 1 quarter = ($300*1) =$300

QUESTION 2
Ratio Analysis & Company Performance
a. Ratio analysis
1. Return on capital employed
Particulars Formula 2017 2018
Operating profit 234 167
Total assets 955 1083
Current liabilities 199 238
Capital employed Total assets – current liabilities 1180 1200
OP ratio Operating profit / capital
employed * 100 19.8% 13.9%
2. Operating profit margin
Particulars Formula 2017 2018
Operating profit 234 167
Sales revenue 1180 1200
OP ratio Operating profit / sales * 100 20% 14%
3. Gross profit margin
Particulars Formula 2017 2018
Gross Profit 500 450
Sales revenue 1180 1200
GP ratio Gross profit / sales * 100 42% 38%
4. Current ratio
Particulars Formula
201
7 2018
Current assets 253 396
Current liabilities 199 238
Current ratio Current assets / current liabilities 1.27 1.66
5. Acid test ratio
Particulars Formula 2017 2018

Current assets 253 396
Current liabilities 199 238
Inventory 148 236
Prepaid expenses
Quick assets 105 160
Quick ratio Current assets - (stock + prepaid expenses) 0.53 0.67
6. Settlement period for trade receivables
Particulars Formula 2017 2018
Trade receivables 102 156
Sales 1180 1200
Trade receivables collection
period
Trade receivables / credit sales *
365
32
days
47
days
7. Settlement period for trade payables
Particulars Formula 2017 2018
Trade payables 102 156
Cost of Sales 680 750
Creditors payment
period
Trade receivables / cost of goods sold *
365
55
days 76 days
8. Inventories turnover period
Particulars Formula 2017 2018
Cost of goods sold 680 750
Average Inventory 148 236
Stock turnover ratio (In days ) (Stock / COGS) * 365 79 days 115 days
b.
Boxa ltd. Performance has been decreased as from 2017 to 2018. From the above data,

company's ROCE, Operating Profits Margin, Gross Profit Margin are decreased from 2017 to
20185 which shows the poor performance of the company. Also, account receivables has been
increased which shows that debtors are converted into cash takes more time and also company is
taking more time to pay to its creditors which results to increase in high finance cost because in
year 2017 there were no finance cost but in year 2018 finance cost raised to $8 which decreased the
profits and also inventory turnover period has been increased which means that inventory
conversion into sales is taking more time as compared to year 2017. So, the company should put its
main focus on account receivables, account payables and inventory turnover period so as to
increase the profits and to reduce its cost.
QUESTION 2: ACCOUNTANCY THEORY – BUDGETING
a.
Budget is prepared in order to control all the expenses and costs for the present and to prepare
for future so as to help managers to take decisions to control the cost and earn higher
profits(Bogsnes 2016.).
Advantages of Budget Preparation are-
 It increases the profitability of the company which helps the company to achieve its goals
and targets.
 It compels forward-looking process within the organisation.
 It anticipates all the problems in the organisation and provides remedial actions.
Disadvantages of Budget Preparation are-
 Many times it does not take into account various expenses such as inflation rates, interest
rates etc.
 It is time consuming process because it takes a longer time to prepare one budget and than
to take decision based on those budgets(Roncalli 2016).
Q2(b)
Budget can be used for the company employees to work in a coordination which will help

them to complete work more quickly as compare to those who are working individually and also
this will save their time and cost will also be reduced whereas budget can also be used to motivate
the employees to work so that they can achieve their personal goals by achieving the company
goals but they would be working individually so how they will work in coordination because their
will be competition between the employees itself to compete with another employee of the
organisation(Wildavsky 2017.).
SECTION C
Accounting concepts and conventions
Most important and relevant concepts/conventions are-
Prudence-
Prudence means that the company should not overestimate its profits, gains, revenues, and
assets and should not underestimate its costs, expenses, losses and liabilities. Company should use
conservative approach while accounting its profits, gains, expenses, costs etc. as and when they are
actually realised. One of the example of Prudence is “Provision for Bad and Doubtful Debts”.
Accruals-
Accruals refers to the adjustments made before the financial statements are issued. These
includes expenses, losses, and liabilities have been incurred but not yet recorded while profits,
gains and assets have been earned but are not recorded in the accounts. Example of the Accruals is
Rent for 12 months is $24,000 but rent of December is not paid i.e. $2,000 so it will be recorded in
the accounts even they are not paid but are incurred.
Consistency-
Consistency means company is using consistently same accounting methods, accounting
standards, accounting principles from one year to another year and can be changed only in three
conditions i.e. any change in law, change will bring better disclosures of financial statements and
statutory requirement. Example of consistency is using same Depreciation method i.e. Written
Down Value method.
Going concern-

In this Principle, company assumes that entity will remain in business for the foreseeable
future and will never be going to liquidate (Basic accounting concepts, 2019). Example of Going
Concern is the computation of Depreciation on the basis of expected economic life rather than
current market value.
Dual Aspect Concept-
It states that every business requires to record its transaction in two different accounts. This
concept is basis of double entry accounting. The concept is derived from the accounting equation,
which states that: Assets=Liabilities Equity. Example of Dual Aspect Concept is company
purchases goods in cash than there will be two entries recorded i.e. Purchases A/C will be debited
and Cash A/C will be credited.
CONCLUSION
Boxa ltd. Should more focus on its account receivables, account payables and inventory
turnover period ratios to increase the profitability of the company and convert its inventory into
sales. However, Company is following all Accounting Standards, Accounting Principles and
Accounting Concepts & Conventions on yearly basis.