Business Decision Making: Financial Statements, Ratio Analysis and Implications

This report discusses financial statements, including P&L and balance sheet, and their practical implications and preparation. It also covers an analysis of ratios and their use in business decision-making. The report includes examples and practical insights.

BUSINESS DECISION-
MAKING

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
TASK-1............................................................................................................................................3
TASK-2 ...........................................................................................................................................4
TASK-3............................................................................................................................................6
TASK-4............................................................................................................................................6
TASK-5............................................................................................................................................7
CONCLUSION................................................................................................................................9
REFERENCES................................................................................................................................1

INTRODUCTION
Business decision is one of the important task and aspect with regard to any company. It
plays a major role with regard to company and from investor perspective too. Financial
statements including P&L, Balance sheet plays a major role in this (Krylov, 2021). Likewise,
with the analysis of the ratio with the concerned company based on financial statements,
company's financial health can be determined and analysed. This report will discuss about the
concept of financial statement including Balance sheet, P&L with its practical implication and
preparation. Likewise, an analysis of ratio and its use in the business decision is also presented in
this report.
MAIN BODY
TASK-1
Financial statements:
Financial statements are the report that enable the entity's financial information, including
the assets, liabilities, profits, financial position, cash flows and various other (Osadchy and et.al.,
2018). With the help of financial statements company can measure its performance in terms of
determination of loopholes and on that basis taking of corrective actions.
P&L Statement:
It refers to a statement that outline the revenue, cost, expenses and net profit that is being
earned by company within the financial year. It is one of the important financial statement which
is used by company to determine their financial health and performance (Oncioiu, Calotă and
Tănase, 2021). As this statement shows the amount of profit which is earned by company so
through this statement company can determine its financial health along with plan its future
strategies. Likewise, this statement also shows the amount of gross profit that is a reflection of
profit after making deduction of cost element.
Particular Amount
Sales 290357
Less: Cost of sales -150060

Gross profit 140297
- Delivery cost -11037
- Salaries and wages -41263
- Advertising -5478
- Insurance -8456
- Rent and rates -15130
- Depreciation for fixtures and fittings -12584
- Depreciation for motor vehicles -9440
- Heat and light -12223
Net profit 24686
Notes:
 Cost of sales: Opening stock+ purchase- closing stock
= 18310+157300-25550
= 150060
 Insurance: Insurance- prepaid insurance
= 9306-850
= 8456
 Heat and light: Heat & light+ accrued expenses
= 11013+1210
= 12223
 Rent and rates: Rates-prepaid rates
= 18612-3482
= 15130
 Delivery cost: Cost+ accrued expenses
= 10132+905
= 11037

 Here, it is to be noted that the prepaid expenses are reduced and charged from the profit
and loss account because of the concept of the Generally Accepted Accounting Principles
which shows that the expenses are to be changed in the same accounting period as the
benefit will be generated from related assets.
 In the same manner accrued expenses are those that are recognized at the time of incur
even though payment is not being made. Thus, in order to meet the matching concept it is
to be deducted in the same accounting period.
TASK-2
Balance Sheet:
This is also an important and major financial statement. This is usually prepared at the
end of financial year. In other words Balance sheet refers to a statement that shows the
company's assets, liabilities and equity at a specific period of time. It acts as base that provide a
base for the computation of return and evaluation of capital structure (Fleckenstein and
Longstaff, 2020). Thus, with the help of balance sheet company can determine the position of
assets, liabilities along with equity. It work on the principle of Assets = Liabilities+ Equity which
shows that the assets must match with the total of liabilities and equity.
Particular Amount
Assets
Fixed assets
Fixtures and fittings at cost 153227
- Accumulated Depreciation -54126
- Depreciation -12584 73933
Motor vehicles 172,600
- Accumulated Depreciation -74060
- Depreciation -9440 79660
Current assets

Cash 950
Inventories 25550
Debtors 31099
Prepaid insurance 850
Prepaid rates and rates 3482
Total 215524
Equities and liabilities
Current liabilities
Bank overdraft 17900
Creditors 31511
Accrued heat and light 1210
Accrued delivery cost 905
Total 51526
Equities
Capital 170,600
- drawings -31,288 139312
Net Profit 24686
Equities and liabilities 215524
TASK-3
Limitation of P&L account:
 The major limitation includes the implication of accrual concept of accounting. As under
P&L of Dysn Ltd recording of expenses and income occurs when they have occurred
rather than waiting for the exchange of cash. Following of this concept will act as major
limitation (Jain, 2017). For example: When a company may put an order regarding the

supply of inventory and records it as an expense in its financial statements. But on the
due date if the supplier didn't make supply of inventory then this entire transaction with
regard to expenditure will be wrong and unnecessarily company's profit decline
irrespective of occurrence of transaction.
 As the financial statements are prepared at the end of financial period. But this will lead
to difficulty in comparison of different company's financial position because every
company have different preparation time (Barth, 2018). This will lead to difficult
comparison and thus analysis of the financial position would be wrongly predicted.
 As the Dysn Ltd follows matching concept while preparing P&L under which revenue
must match with expenses. But in case if they do not match then it will lead to difficulty
in its preparation. Likewise following of this concept will also have chances to be not
practically equal because of the existence of difference between revenue and expenses.
TASK-4
Limitation of Balance Sheet:
 Overlooking of non monetary asset is the major limitation with respect to the Balance
sheet of Dysn Ltd. As non-monetary assets like intelligence are also an important element
with respect to company and its business so its non recording emerges as a main
disadvantage. In order words overlooking and ignorance of non monetary assets
irrespective of its major role with regard to company success itself act as a disadvantage
with regard to balance sheet.
 Dysn limited records its assets at its historical value which itself act as a disadvantage. As
the value of assets changes with time but is non-consideration itself emerge as its
limitation (Kausar and Lennox, 2017). However, depreciation is calculated and deducted
from asset value but it is calculated just for tax purpose and it does not reflect the wear
and tear of assets.
 As the balance sheet depicts the financial position of the company of a particular date, but
this is a major disadvantage because companies usually make payment of their debts on
last date and clear their debts. This will lead to the presence of healthy financial health of
the company but it will be wrong with the perspective of investors. This is also counted

and considered as unethical because it will lead to make playing with the decision and
perspective of the stakeholders.
TASK-5
Ratio analysis:
It is a quantitative method that can be used to make analysis of the financial health of the
company. With the help of ratio analysis the company's liquidity, efficiency, capacity and
various aspects can be determined that will again act as base for business decision-making
because both the customer and the investor will make their decision on the outcome of this
analysis (Hasanaj and Kuqi, 2019). However, it will also assist the company to determine the
future strategies along with taking of corrective actions in case of finding of adverse results.
Calculation of ratio:
Ratio Calculation
Inventory days: 365/ inventory turnover = 365/5.87
= 62.18 days
Trade payable days: Accounts
payable/COGS*100
= 31511/150060*365
= 76.64 days
Trade receivable days: Trade receivable/
sales*365
= 31099/290357*365
= 39.09
Notes:
Inventory turnover: COGS/Inventory
= 150060/25550
= 5.87
Inventory days:
This ratio shows the number of days, company must hold its inventories before making it
sales. In other words this ratio is also used to determine the period under which the inventory is
being hold in the storage before making it use (SUTHAR, 2018).

With respect to Dysn Ltd the inventory days are 62 days which is almost 2 months. Since
the ideal inventories days are around 1 to 2 months which means holding of stock in the
company will not need to be extended to more than 2 months. And in case of Dysn Ltd this
period is around 2 months which shows the company's good policies with regard to stock
holding.
However, it can further be improved with the adoption of the practice of proper
forecasting regarding the requirement of inventory, focus over the sales of old stock, smart
pricing, encourage the customers for making pre order, negotiate the prices regularly and various
other. This will lead to have improvement in the inventories days along with enabling the
business not to bind the resources and investment. Adoption and implementation of these
practices are also important because it will lead to have better earning of profits and adequate
distribution and making of investment of funds.
Trade payable days:
This is an important ratio which shows the number of days company take in order to
make the payment of its creditors. As no company can survive its business without credit, so it is
an important ratio which shows the time period taken by company in order to make repayment to
its creditors (Ilter, 2019). Longer the period would be more efficiently the funds will be invested
by company in some other sources and earn revenue.
From the above analysis of table it can be determined that the trade payable days with
regard to Dysn Ltd is 76 days. As the ideal days are 20 with regard to making payment to
suppliers, however, in Dysn Ltd it is 76 days which are more than ideal days. On the one side it
would be right in terms of making further investment and earn good revenue. But being
possessing such a long period of credit will lead to adversely impacts the company in terms of
affecting relation between suppliers and company. Hence, it needs to be maintained so that the
company may arrange the funds from market without affecting any worry.
In order to manage the Trade payable period, Dysn Ltd can adopt the practice of tracking
its creditors. Likewise, making change in the credit period can also be opt by the company in
order to make payment with the creditors. Making adequate and timely arrangement of funds and
setting of credit automated reminder period will also help the company in order to make timely
payment to creditors. Thus, with these practices and strategies Dysn Ltd can improve its period.

Trade receivable period:
This is related with the number of days company take in order to make recovery of its
debtors. As every company perform its transactions with the enabling of credit sales and thus this
ratio play its role because it shows the number of days taken by company debtors in order to
make repayment to company (Jones, 2019). The shorter the period would be company will be
benefited because it will raise the funds and company can make investment in some other modes.
With regard to above calculation and analysis it can be interpreted that the trade
receivable period for Dysn Ltd is 39 days. As the ideal period of trade receivable days should
always be low so that the company can make faster recovery and make investment of funds in
some other alternatives. However, in case of Dysn Ltd this period is 39 days which is almost 1
month, this means that the company will make arrangement and recovery of its debt within a
period of 1 month,
In order to manage the trade receivable period, Dysn limited can make diversification of
its clients. Likewise, it can also opt discounting policy under which it will entitle discounts to its
clients in order to make early repayment. Timely invoicing and reducing the payback period will
also be helpful for Dysn Ltd in order to reduce the period. Similarly, creation of AR report and
make demand of AR will also be helpful to Dysn Ltd in order to perform faster recovery of its
debtors.
CONCLUSION
From the above report it would be concluded that financial statements in the form of
Profit and loss, Balance sheet plays an important role with regard to business decision-making.
These acts as self evaluator that enable the company to make analysis of its financial health and
performance. Likewise, investors and other stakeholders can also take decision on the basis of
the analysis of the financial statements. This report also summarizes the ratio analysis which will
also plays a major role in business decision-making that will allows the investors and concerned
stakeholders to determine company's financial position and thereby taking adequate decision of
making investment.

REFERENCES
Books and journals
Barth, M.E., 2018. The future of financial reporting: Insights from research. Abacus. 54(1).
pp.66-78.
Fleckenstein, M. and Longstaff, F.A., 2020. Renting balance sheet space: Intermediary balance
sheet rental costs and the valuation of derivatives. The Review of Financial
Studies. 33(11). pp.5051-5091.
Hasanaj, P. and Kuqi, B., 2019. Analysis of financial statements. Humanities and Social Science
Research. 2(2). pp.p17-p17.
Ilter, C., 2019. A Discussion Paper on Accounts Payable Ratio. Acta Oeconomica
Pragensia. 2019(3-4). pp.85-94.
Jones, S.A., 2019. Trade and Receivables Finance. In The Trade and Receivables Finance
Companion (pp. 389-419). Palgrave Macmillan, Cham.
Kausar, A. and Lennox, C., 2017. Balance sheet conservatism and audit reporting
conservatism. Journal of Business Finance & Accounting. 44(7-8). pp.897-924.
Krylov, S., 2021. The Content of Contemporary Analysis of Financial Statements. Available at
SSRN 3845542.
Oncioiu, I.V., Calotă, T.O. and Tănase, A.E., 2021. An Overview of Diversities in the Use of the
Profit and Loss Statement. Encyclopedia of Organizational Knowledge, Administration,
and Technology, pp.124-134.
Osadchy, and et.al., 2018. Financial statements of a company as an information base for
decision-making in a transforming economy.
SUTHAR, K., 2018. Financial Ratio Analysis: A Theoretical Study. International Journal of
Research in all Subjects in Multi Languages, Gujarat, India.
Online references
Jain, P., 2017. The disadvantages of profit and loss accounts. [Online]. Available through
<https://www.pocketpence.co.uk/disadvantages-profit-loss-accounts-8543243.html>
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