Business Decision Making: Income Statement, Financial Position, and Management Techniques

This report covers the preparation of income statement and financial position for London Ventures, limitations of income statement and balance sheet, and effective management techniques for inventory, trade payables, and trade receivables. It also discusses the importance of financial statements in decision-making and the limitations due to assumptions and estimations. The report suggests ways to manage trade payables, receivables, and inventory.

BA4008QA BUSINESS
DECISION MAKING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
TASK 1a..........................................................................................................................................3
(a) Preparation of Income Statement for London Ventures........................................................3
Task 1b.............................................................................................................................................4
Statement of financial position as at 31 March 2021 for London Ventures...............................4
TASK 2............................................................................................................................................6
Limitations of Income Statement................................................................................................6
Task 3...............................................................................................................................................7
Limitations of balance sheet or statement of financial position for London Ventures...............7
Task 4...............................................................................................................................................8
(a) Inventory Days......................................................................................................................9
b) Effective management of London Ventures trade payables...................................................9
c) Effective management of London Ventures Trade receivables............................................10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Business decision-making is the most crucial task that need to be done by the top
management of the company (Villarreal and et.al., 2018). The report will cover four tasks which
is based on the London Venture company. The first task of the report will calculate the income
statement and financial position of London Venture based on the trail balance given in the
question. Further, the task two of the report will discuss the three possible limitations of the
income statement which affects the business of London Venture. In addition, the third task of the
report cover the three possible limitation of the financial position statement of London Venture
which affects their reputation and image in the market. Lastly, the fourth task cover the
calculations of inventory, trade payable and trade receivable days which they need to be
managed. Lastly, the report has suggested various ways with the help of which manager can
managers can manager the following days of London Ventures.
MAIN BODY
TASK 1a
(a) Preparation of Income Statement for London Ventures
Income Statement for London Ventures
For the year ended 31st March 2021
Particulars Details Amount (£)
Sales Revenue 290357
Cost of Sales:
Opening inventory 13310
Add Purchases 152300
Less Closing Inventory 20550
Less Total cost of sales 145060
Gross Profit 145297
Operating Expenses:

Delivery cost (note 1) 10905
Salaries and wages 41263
Advertising 5478
Insurance (note 2) 8456
Rent and rates (note 3) 16130
Heating and lighting (note 4) 12113
Depreciation charge on fixture and fittings 11584
Depreciation charge on motor vehicles 9440
Less Total operating expenses 115369
Net Income 29928
Working Notes
Note 1
Delivery Cost = £10000 + £905 = £10905.
£905 = Accrued expenses at the end of the year, thus recorded under current liabilities
Note 2
Insurance cost = £9306 — £850 = £8456.
£850 = Prepaid expenses at the end of year, thus recorded under current assets.
Note 3
Rent and Rates = £18612 — £2482 = £16130.
£2482 = Closing prepaid expenses recorded under current assets.
Note 4
Heat and Light = £11013 + £1100 = £12113.
£1100 = Accrued expenses at the end of year and recorded under current liabilities side of
balance sheet.

Task 1b
Statement of financial position as at 31 March 2021 for London Ventures
Particulars Amount (£)
Non-current assets
Motor Vehicles (at cost) 172600
Fixtures and Fittings (at cost) 153227
Current assets
Trade receivables 31099
Prepaid insurance cost 850
Inventories 20550
Prepaid rates cost 2482
Cash in hand 950 55931
TOTAL ASSETS 381758
EQUITY AND
LIABILITIES
Current liabilities
Bank Overdrafts 17900
Accumulated depreciation of
motor vehicles (**)
92940
Trade payables 31379
Accumulated depreciation of
fixtures and fittings (*)
78294

Accrued delivery costs 905
Accrued heating and lighting 1100
Total current liabilities 222518
Equities
Opening capital 160600
Add: Net profit made during
the year 2021
29928
Less: Drawing made during
the year 2021
31288
Closing Capital as at 31st
March 2021
159240
TOTAL EQUITIES AND
LIABILITIES
381758
Working notes:
* Calculation related to fixtures and fitting 's accumulated depreciation to be shown as at 31st
March 2021 in statement of financial position
= £11584 + £66710 = £78294
** Calculation related to motor vehicle's accumulated depreciation that has to be shown in
statement of financial position as at 31st March 2021
= £9440 + £83500 = £92940
It is to be noted that depreciation is considered as an expense for the business which reduces the
amount of asset held by the business. Accordingly, it has been treated as a liability while
preparing statement of financial position.

TASK 2
Limitations of Income Statement
The three possible limitations of income statement that affects the business of London
Ventures are as follows: Ignores non-revenue factors: The one and most significant disadvantage of statement of
income is that it considers only those data which impact the revenue and wages. It means
it does not consider the qualitative factors which affects the data recorded in income
statement. For example, the income statement of London Ventures reflect the salaries and
wages paid to employees of the company but does not reflect the factors such as how
such wages are determined by the company. Beside this, the income statement also not
reflect the ways through which they earn the returns or profit from its customers despite
being declaring the sales revenue and profits. It is because this is not in the monetary
term (Aanestad and Szekely, 2021). Thus, this is one of the cons of income statement
which sometime cause difficulty for the manager of London venture to understand that
how such amount is determined by the accountant. It will also affect the business
decision-making process of financial managers. Does not Provide actual cost: Another disadvantage of the income statement is that it
will not provide the actual cost information. For example, London Ventures buys the
motor vehicles which is recorded in balance sheet but its depreciation expenses is
recorded in the income statement. In order to compute the depreciation expenses, the
company estimate the life of the assets in advance only. But in reality, the assets last for
longer than what is estimated by the company (Lee, 2021). So, it can be said that the
amount of depreciation expenses shown in the income statement of the London Venture
is not actual. In simple term, it means that the data represented by the income statement
of the company does not provide actual cost of the assets rather than it provides a fair
estimation of the expenses.
 Provides Confirmatory value: Also, the income statement generally provides
confirmatory value which is disadvantage of it. This means that income statement is
basically prepared by the London Venture after the auditing of all the financial data
recorded by them. So, it is a limitation that the company can easily manipulate the
income statement which leads to wrong decision-making by the users of FS. The

manipulation of data in the statement is done by the individuals with ill intentions which
affects the overall profitability and reputation of the business in the market (Ochoa-
Hernandez and et.al., 2020). At that time, it is the duty of the London Venture that they
should implement the proper internal control system within the business. The internal
control systems helps the company to identify the material misstatement in income
statement because of either fraud or error.
Task 3
Limitations of balance sheet or statement of financial position for London Ventures
Balance sheet or statement of financial position is helpful for both management and investors in
making financial decision and investment decision respectively as it indicates business financial
position at a particular date on which it has been prepared (Kahn and Baum, 2020). However,
there are certain limitations of statement of financial position as well due to which the financial
information provided it is not considered to be fruitful for decision – making. Some of these
limitations have been listed as follows:
Assets are shown on historical costs: In statement of financial position, the fixed assets of the
business are shown at historical costs after reducing the amount of depreciation for the period
and no consideration has been given to the current market value of assets. Thus, the statements
prepared on such basis are deemed as not indicating true asset's value. Due to this reason,
statement of financial position is being criticized on the ground that it doesn't reflect true value of
the business's assets (Robison and Barry, 2021). Also, valuation of current assets are done on the
basis of certain estimations which results in making this financial statement invalid to reflect
actual financial position of a concern. Furthermore, valuation of intangible assets is done on
imaginary basis which have no association with market value and indicates that business is quite
overvalued.
No inclusion of non – monetary items: Skills, honesty, loyalty and intelligence of company's
staff is being regarded as the biggest asset for any business. However, it cannot be measured in
terms of money and accordingly, it is the biggest limitation of statement of financial position that
it takes into consideration only those items which can be measured in terms of money. Therefore,

such biggest assets of the business remain unrecognised while preparing company's balance sheet
as these assets cannot be measured in monetary terms.
Window dressing may be possible: Financial statements are generally affected from window
dressing such as manipulation in sales amount, cash balances, etc. to indicate better financial
position among investors and creditors to secure additional capital amount easily (Bandiyono,
2020). This leads to misappropriation within statement of financial position and makes it uses
and application within all form of decision – making limited.
Task 4

(a) Inventory Days
Formula = Total Inventory / Cost of goods sold * 365 days
= £20550 / 145060 × 365 days = 52 days
Management of inventory days
On the basis of above calculations it is analysed that London Venture holds its stocks for
longer span of time. This also denotes that the capability of the company to sold its stock in the
market is poor. In order to manage it and further improve it, the company need to focus on their
stocks purchasing and order. The company have to implement the economic order quantity
technique which involve the identification of optimal quantity of raw material which is required
at a single point of time, where both holding cost and ordering cost is equal to each other. Also,
effective marketing is also one of the best strategy which helps the company in managing its
inventory holding day because it is crucial for the company that they should manage it. If they
fail in doing so, then it may lead to spoilage of stock in the warehouse which further cause heavy
loss to the company (Aljaaidi and Bagais, 2020).
b) Effective management of London Ventures trade payables
Calculation of trade payables days
Trade payables days = Trade payables / Cost of sales * 365
= £31379 / £145060 * 365 = 78.95 days
From the result obtained for trade payables days, it can be seen that company is taking
approximately 79 days to make payment to its suppliers for the credit purchases made by it
which is considered to be long duration or credit period. This ratio can be improved in the
following ways:
 Negotiation of better terms with creditors by developing good relationship with them
which is helpful in managing payments to them. This is done in the way where business
ask for such terms where they can make matching payments to their suppliers on
receiving of payment from their customers or debtors (Handoyo and Maulana, 2019).
 Setting timely reminders for invoices on the basis of their becoming due which would
help London Ventures in making timely payment to their supplier without forgetting or
missing.

c) Effective management of London Ventures Trade receivables
Calculation of trade receivables days
Trade receivables days = Trade receivables / Revenue from sales * 365
= £31099 / £290357 * 365 = 39.09 days
From the above ratio indicating trade receivables days, it can be determined that
customers of London Ventures are taking approximately 39 days to make payment to them
which is less than the ideal trade receivables days indicates that company's short term liquidity
position would be quite good at it is getting timely payment from its customers. Alternatively, it
indicates that company will take 39 days to clear its trade receivables (Surachyati, Abubakar and
Daulay, 2019). There are different ways in which the company can manage its trade receivables
days effectively, such as the following:
 Business must understand the payment history of their client before extending credit to
them, so that reasonability of credit extension can be determined easily.
 Applying techniques for getting payments earlier from customers such as incentivize
customers with discounts and charging interest on outstanding amount.
CONCLUSION
From the above report it has been concluded that financial statements play a very
important role in making decisions related to financing, investment and appropriation of profits.
In this report, it has been evaluation that despite of various benefits there are certain limitations
of these financial statements due assumptions and estimations made while preparing it. At last,
various ways in which business can manage its trade payables, receivables and inventory has
been discussed.

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