Preparation of Financial Statement and Evaluating Balance Sheet

This document provides information on the preparation of financial statements and evaluating why the statement of financial position balances. It also includes a detailed analysis and interpretation of the financial performance and position of Chocco plc.

Accounting

TABLE OF CONTENTS
QUESTION 1.............................................................................................................................3
a) Preparation of financial statement......................................................................................3
b) Evaluating why the statement of financial position balances............................................4
QUESTION 2.............................................................................................................................4
a) Schedule of ratios for Chocco plc for 2019 and 2018........................................................4
b) Analysing and interpreting the financial performance and position of Chocco plc..........6
REFERENCES.........................................................................................................................11

QUESTION 1
a) Preparation of financial statement
Eccles plc
Income Statement for the year ended 31st December
2019
Particulars Amount (in £)
Sales 827630
Less: Cost of sales 578650
Gross profit 248980
Less: Expenses
Administrative expenses 30000
Directors remuneration 5000
Distribution costs 28000
Outstanding commission to salesmen 3000
Profit before interest and tax 182980
Interest paid 2000
Earnings after interest 180980
Tax 68000
Net profit 112980
Eccles plc
Statement of financial position as at 31st December 2019
Particulars Amount (in £)
ASSETS
Current assets
Stock 330600
Debtors (170125+980) 171105
Cash and bank (12900-68000) -55100
Total current assets 446605
Non-current assets
Plant and equipment 632730
Total Non-current assets 632730
Total assets 1079335
LIABILITIES
Current liabilities
Accounts payable (Creditors) 171355
Outstanding commission to salesmen 3000
Total current liabilities 174355
Non-current liabilities

Share capital (310000+300000) 610000
4% Debentures 100000
Retained profits at 1st January 2018 (132000-
50000) 82000
Net profit for the year ended 31st December 2019 112980
Total Non-current liabilities 904980
Total liabilities 1079335
b) Evaluating why the statement of financial position balances
The statement of position is one of the most important financial statements as it
provides information on the firms’ assets, liabilities and any difference between the two as of
the date of that accounting period. This statement must reflect the basic accounting principles
and the standards. The balance sheet is prepared in such a way that all the assets of a business
entity is equivalent to the sum total of entire amount of liabilities and the equity (Daniel,
Marioara and Isabela, 2017). The reason why balance sheet is always at the equilibrium is
because of the reason that the assets of the firm might have being financed from the internal
sources, for instance, the share capital and the profits of the company or from the external
sources like lenders, loan from the bank, trade creditors and so forth. Therefore, the total
assets of the business must be equivalent to the amount of the capital invested by the business
owners in the form of share capital or profits or any other form of borrowings, thus, the total
assets of the entity must to equivalent to the sum total of the total liabilities and equity of that
entity. This has resulted into the accounting equation of Total assets = Total liabilities +
Equity.
QUESTION 2
a) Schedule of ratios for Chocco plc for 2019 and 2018
Ratio analysis of Chocco plc
2019 2018
Liquidity ratio
Current assets 2303 2355
Current liability 2511 3046
Inventory 708 659
Quick Assets 1595 1696
Current ratio Current assets / current liabilities 0.92 0.77
Quick Ratio
(Current Assets - Inventory) / Current
Liabilities 0.64 0.56
Profitability ratio

Employed Capital 7225 7041
Net operating profit 805 699
Return on capital
employed Net operating profit/Employed Capital 11.14% 9.93%
Net Income 431 366
Shareholder's Equity 3088 2912
Return on Equity Net Income / Shareholder's Equity 13.96% 12.57%
Cost of Sales 3235 3096
Sales 6738 6441
Gross Margin Total Sales – COGS/Total Sales 51.99% 51.93%
Net profit 431 366
Sales 6738 6441
Net profit ratio Operating Income/ Net Sales 6.40% 5.68%
Efficiency Ratios
Inventory 708 659
Trade Receivables 1249 1287
Net Assets 3088 2912
Cost of Sales 3235 3096
Sales 6738 6441
Accounts payable 583 655
Asset turnover ratio Sales / Net assets 2.18 2.21
Inventory turnover ratio Sales / Inventory 4.57 4.70
Account receivable
turnover ratio Sales / Accounts Receivable 5.39 5.00
Accounts Payable
Turnover Ratio
Net credit purchase or COGS /
accounts payable 5.55 4.73
Leverage ratios
Total assets 9736 10087
Total Equity 3088 2912
Total debt 4137 4129
Proprietary Ratio
Total Shareholders' Equity / Total
Assets 31.72% 28.87%
Debt equity ratio Total debt/total equity 1.34 1.42
Market value ratios
Market price per share 5.12 4.00

Earnings per share
Number of shares = 300/0.5 = 600
shares 0.72 0.61
Net book value 3088 2912
Market capitalization 600 shares*MPS 3072 2400
Price earnings ratio 7.1 6.6
Market to book value ratio Market Capitalization / Net Book Value 0.99 0.82
Dividend paid 255 242
Net income 431 366
Dividend pay-out ratio Dividend paid/Net income 59.16% 66.12%
b) Analysing and interpreting the financial performance and position of Chocco plc
For the purpose of determining the financial position and performance of the Chocco
plc, analysing the financial ratio is very useful and a detailed analysis and interpretation is
given below.
Liquidity ratios
Current ratio
The current ratio of the Chocco plc is 0.92 times which has increased from 0.77
times in the year 2018. But then too this is very low therefore company requires to implement
actions which will help in increasing its current assets and in reducing its current obligations
as well (Hantono, 2018). The current ratio of the company should be more than 1 which will
help in ensuring that the company can easily meet with its current obligations in an effective
way without any requirement to
Quick Ratio
The quick ratio is very low which indicates that the company has invested most of
its cash in its inventory which has resulted into reduction in quick assets as inventory is
excluded from the list (Ravichandran and Subramanian, 2016). Therefore, relevant steps are
required to be undertaken which will help in decreasing the contribution of the inventory in
its current assets. This will result into effectively managing the short-term liquidity position
of the company.
Profitability ratios
Return on capital employed
The ROCE of the company has increased in the year 2019 to 11.14% from the
9.93% which is a good indicator of growth. This rise in ratio conveys that the company is
effectively making use of the capital employed in generating income. Along with that, the
outcomes will attract more investors for the purpose of investment (Ningsih, 2020). This ratio

presents the long-term profitability of the company in terms of how well the assets of the
company is performing.
Return on Equity
The ROE of the company has shown an upward trend as it has increased to 13.96%
in contrast to 12.57% in the year 2018. Higher and growing ratio is more favourable from the
investor’s point of view (Mahdaleta, Muda and Nasir, 2016). This ratio depicts the efficiency
and effectiveness of the company in making use of the investor’s funds. Therefore, this
increase in percentage makes it favourable for the company.
Gross Profit Margin
The GP margin ratio of Chocco plc has not shown a major change which is because
of the reason that there is not such variation in the sales volume in comparison to its cost of
sales, which has resulted into similar ratio. In order to improve it further, it advisable for the
company to implement strategies which will help in reducing the cost of sales and along with
increasing revenue of the business.
Net Profit ratio
The NP margin of the company has risen to 6.40% in 2019 which means that the
company is working effectively which has resulted into the increase in the ratio (Behera and
Das, 2019). This rise is because of the increase in the revenue of the company along with its
net profit. Therefore, company should work in the similar and make efforts in further
reducing its operating and non-operating expenses gaining higher NP.
Efficiency ratios
Asset turnover ratio
The ATR of Chocco plc is reduced which means that company is lacking behind in
terms of effectively making use of its assets in generating greater revenue. Therefore, it
becomes important for the firm to impose new strategies which will help in analysing the
reason behind the fall in the ATR (Farooq, 2019). Along with that efforts are required to
implemented for ensuring optimum utilization of resources.
Inventory turnover ratio
The ITR of the company has declined which means that the company is facing
problem in respect to selling its goods. It is desirable to have higher ratio and in case of lower
ratio it depicts that the company overspend through the way of purchasing too much stock of
goods and is wasting its resources by storing the non-saleable stock items. This highlights
that company is not effective in quickly selling its inventory.
Account receivable turnover ratio

This ratio is important in measuring the efficiency of the entity in terms of how
many times it is able to convert its accounts receivables in cash. Higher the ratio better it is
for the company. This ratio of the company has shown an increase which is very minor as it
has increased to 5.39 times in contrast to the 5 times in 2018 (Umniati, Titisari and
Chomsatu, 2019). This depicts that the company is effective in collecting the due amount
from its account receivables 5.39 times in a year. From the cash flow point of view, the
company is able to collect the amount sooner which can be used making payment of the
obligations.
Accounts Payable Turnover Ratio
This ratio of the Chocco plc has increased which is favourable for the company. This
means that the company can make payment to its creditors 5.55 times in a year which helps in
building trust among the supplier’s and the vendors. The difference between the a/c
receivable and a/c payable turnover ratio is not much, therefore, the company requires to
implement strategy which will result into increasing its a/c payable turnover ratio so that after
receiving cash from its debtors it a make payment to its creditors efficiently without any need
for additional funds to be borrowed.
Leverage ratios
Proprietary Ratio
This ratio highlights the proportion of the shareholder’s equity in against the total
assets of the company. This ratio has shown an upward trend which is favourable for the
company as it highlights that the entity is making more use of the equity funds instead of debt
in the business dealings. The percentage has increased to 31.72% from 28.87% and is
therefore having additional space for the taking the debt in case of requirement
(BRÎNDESCU–OLARIU, 2016). Along with that, there is a decline in the total assets of the
company and an increase in the equity funds which has resulted into higher ratio. It is
important to note that the debt component has also increased in 2019 therefore, the good
percentage is due to the reduction the total assets.
Debt equity ratio
The debt equity ratio helps in determining the composition of the debt and equity in
the capital structure of the company. It is desirable to have the ratio of 1 but in case of
Chocco plc the ratio is 1.34 which has reduced in comparison to the previous year but is not
very low. This depicts that the entity is having more debt as compared to its equity which
incur risk for the entity therefore, measures are required to be undertaken which will help in
attaining the desired ratio.

Market value ratios
Price earnings ratio
The PER of Chocco plc has shown an increase in trend which highlights the growing
stocks of the company. Along with it, the ratio is high which depicts the stronger and positive
future performance of the entity and along with the same, the expectations of the investors in
regard to the future earnings will also increase and will be willing to pay more
(Altahtamouni, Matahen and Qazaq, 2020). But on the other hand, it is important to take a
look at the other side as well, which is, growth stocks are higher volatile in the which exerts
huge pressure on the entity to put in more efforts to justify with the higher valuation.
Market to book value ratio
This ratio is the financial metrics which is utilized for the purpose of evaluating the
current value of the stock of the company in contrast to its book value. The ratio has rise to
0.99 from 0.82 in 2018. The ratio lower than 1 indicates that the stock of the company is
undervalued which is considered as the bad investment which could mean that there is soe
thing wrong with the entity and also depicts that the company will be paying much more than
what will be left after entity goes bankrupt. The ratio grater than 1 refers to the overvaluation
of the stock conveying that the organization is performing well. The 0.99 is approximately 1,
thus, Chocco plc should implement the methods which will help in attaining the ratio of
greater than 1. Therefore, the stock value of the company is good or accurate.
Dividend pay-out ratio
The DPR of the company has declined in respect to its previous year which
highlights that the entity is reinvesting its earning into the projects which results into further
expansion of the business. Through, this company will be able to attain high growth
objectives which will consequently result into earning high level of capital gains for the
investors (Subburaj, 2019). Therefore, Chocco plc is in the position to attract more investors
who are more keen on earning higher potential profits from a significant increase in the share
price of the company and least interest in the income generated through dividend. This is
useful in determining what type of return the company is offering to the investors.
Thus, based on the ratio analysis of the financial statements of the Chocco plc, it can
be stated that the company is currently having a good financial position and performing very
well and sound. The most important things that the company requires to work upon is on
improving its short term liquidity position along needs to increase the number of time in a
year it collect due amount from its debtors as it is very low. In terms of solvency ratio, the
company needs to put more efforts in respect to reducing the amount of debt component in its

capital structure which will help in further reducing the financial burden borne by the
company.

REFERENCES
Books and Journals
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