Business Decision Making: Income Statement, Balance Sheet, and Ratio Analysis

This report discusses the importance of strategic business decision making through the analysis of income statement, balance sheet, and ratio calculations. It also identifies limitations and areas for improvement. The subject is Business and there is no specific course code, course name, or college/university mentioned.

BUSSINESS DECISION
MAKING

TABLE OF CONTENTS
INTRODUCTION..........................................................................................................................1
MAIN BODY..................................................................................................................................1
TASK 1...........................................................................................................................................1
Profit or Loss account for the year ended 31 March 2020 for Dysn Ltd....................................1
TASK 2...........................................................................................................................................2
Dysn Statement of Financial Position as at 31 March 2020.......................................................2
TASK 3...........................................................................................................................................4
Describing 3 limitations regarding Dysn Ltd Statement of Profit or Loss.................................4
TASK 4...........................................................................................................................................4
Highlighting 3 limitations of Dysn Ltd’s balance sheet.............................................................4
TASK 5...........................................................................................................................................5
CONCLUSION...............................................................................................................................6
REFERENCES................................................................................................................................7
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INTRODUCTION
Business decision play an important role in deciding the direction of movement towards
success. In the present scenario, it is important to make strategic business decision to get
effectual outcome. The current report will include income statement, balance along with
identification of limitations. It will involve ratio analysis to provide lacking areas in order to
make improvements
MAIN BODY
TASK 1
Profit or Loss account for the year ended 31 March 2020 for Dysn Ltd
Particulars amount Particulars amount
To Salaries and Wages 41,263
By gross
profit 140297
To Advertising 5,478
To Delivery Costs 11037
To Heating and Lighting 12,223
To Rent and Rates 15130
To Insurances 8456
To Depreciation charge
for Fixtures and Fittings 12,584.00
To Depreciation charge
for Motor Vehicles 9,440
To net profit 24,686
140297 140297
Income statement is an important financial statement as it paly crucial role in analysing
earning and expenditure incurred by firm. The above illustrated able shows the net profitability
for the year 2020 which is 24686. There are several expenditures has been incurred by firm to
get good profit margin (Kimmel, Weygandt and Kieso, 2018). It involves advertising, delivery
cost, rent & rates, etc which has contributed Dysn Ltd to attained net profit. Profit and loss
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account shows good current financial liquidity which can aid in attracting investors to easily
derive fund raising capacity. From evaluation it can be interpreted that firm has spent certain
prepaid expenses to get sustainability in industry.
Gross profit Working note:
Particulars amount Particulars amount
To opening
stock 18,310 By sales 290,357
To purchase 157,300 By closing stock 25550
To gross profit 140,297
315907 315,907
TASK 2
Dysn Statement of Financial Position as at 31 March 2020
Amount
Current assets
Cash in Hand 950
Closing inventory 25550
Trade Receivables 31,099
Prepaid rent & rates 3,482
Prepaid insurances 850
Fixed Assets
Fixtures & Fittings 73933
Motor Vehicles 79660
Total Assets 215524
Current liabilities
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Bank Overdraft 17,900
Accrued Heating and
Lighting 1210
Accrued Delivery cost 905
Trade Payables 31,511
equity
Capital (Less
drawings) 139312
Retained earnings 24686
equity and liabilities 215,524
Balance sheet gives information regarding available assets, liabilities and equity through
h reflecting summarized figures as on particular date. From assessment it can be identified that
Dysn has good current assets to overcome short term liabilities. Current assets of mentioned
organization comprise closing stock, cash, etc. that ensures smooth functioning (Gardi, 2021).
There are certain accrued expenditures available which are delivery cost, etc. that need to be
overcome on time to maintain creditworthiness & trust in sector. It will help firm to get strong
relationship with suppliers, vendors, etc. to derive economies of scale. Firm’s equity comprises
capital and retained earnings of the current year. There are drawings withdrawn which required
to pay on time to increase liquidity of organization for getting fluent organizational processing.
Working Note 1:
Particulars Amount
Fixtures & Fittings 153,227
Accumulated
Depreciation F 66,710
Depreciation
charge 12,584
Net Fixtures &
Fittings 73,933
W.N 2:
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Particulars Amount
Motor Vehicles 172,600
Accumulated
Depreciation 83,500
Depreciation
charge 9,440
Net Motor
Vehicles 79,660
TASK 3
Describing 3 limitations regarding Dysn Ltd Statement of Profit or Loss
 The foremost drawback of the current year profit & loss account is that there is presence
of accrued expenses which are impact net profitability as difference in availability and
presented figure will be there.
 Income statement for the year 2020 is contains limitation that there is involvement of
non-financial aspects that is creating barrier in attaining knowledge regarding present
year’s net profitability (Andjelic and Vesic, 2017).
 Prepaid expenses are spent by organization which is reducing present year liquidity and
efficiency of meeting short term requirements.
TASK 4
Highlighting 3 limitations of Dysn Ltd’s balance sheet
 From the assessment it can be interpreted that there is involvement of accrued expenses
that are increasing current liabilities which is presenting lack of effeciecy with meeting
obligation.
 There is presence of bank overdraft and due to prepaid expenses incurred that is causing
current monetary position in industry. It is reflecting non efficiency in maintaining
smooth functioning.
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 Most important drawback of balance sheet is that there is presence of drawings which si
reducing its available capital.
TASK 5
Explaining the was to manage following in effective manner:
Ratio calculations:
a) Inventory Days
Particulars Formula 2020
Average inventory Opening inventory + closing
inventory /2
(18,310+ 25,550)/2
=21930
Cost of goods Sold Opening inventory+
purchase - closing inventory
18,310+157,300 - 25,550
=150,060
Inventory Days Ratio Average inventory / Cost of
goods Sold*365
53.34
From the above table it can be interpreted that Dysn Ltd’s results in particular aspect is
53.34 for duration 2020. The ideal days are 40 which are less than obtained outcome so there
is requirement of change (Khatri, 2017). Change can be implemented by having efficient
forecasting of demand variability, proper pricing strategy, etc. it will improve financial
position of the company through increasing efficiency of productivity
b) Trade Payable Days
Particulars Formula 2020
Trade Payable 31,511
COGS 150,060
Trade Payable Days Trade Payable/ COGS*365 76.64
With the help of above illustrated table it can be interpreted that performance of
company in 2020 regarding trade payable is 76.64 Days. The ideal figure of days in this
particular aspect is 20 days which ensure good credibility in industry (Midden, 2021). In order
to decrease these days firm can have efficient negotiation terms with suppliers,, improving stock
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control, etc can give assistance in increasing liquidity to make payments on time to maintain
credibility.
c) Trade receivable Days
Particulars Formula 2020
Trade receivable 31,099
Sales 290,357
Trade receivable Days Trade receivable / Sales*365 39.09
Trade receivable is one of the important measure for identifying financial position &
efficiency. In addition to this, frim collects its payments from the customer within 39.09 days
which is greater than benchmarking is 30. There is need of improvement which can be done by
making alteration in credit policy, sending reminders to customers, offering discounts, etc.
CONCLUSION
From the evaluation it can be identified that business decisions need to be taken through
adopting strategic approach. Current report involves income statement, profit and loss as well
limitations of these. Ratio calculation has been done to identify improvement areas. In present
report .
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REFERENCES
Books and Journals
Andjelic, S. and Vesic, T., 2017. The importance of financial analysis for business decision
making. In Book of proceedings from Sixth International Scientific
Conference Employment, Education and Entrepreneurship (pp. 9-25).
Gardi, B., 2021. Investigating the effects of Financial Accounting Reports on Managerial
Decision Making in Small and Medium-sized Enterprises. Available at
SSRN 3838226.
Khatri, D. K., 2017. Financial Ratios, Econometrics and Prediction of Corporate Bankruptcy-
an Empirical Study. International Journal Of Accounting Research, 4,
p.128.
Kimmel, P. D., Weygandt, J. J. and Kieso, D. E., 2018. Accounting: Tools for business decision
making. John Wiley & Sons.
Midden, J. H., 2021. Using process mining and event log analysis for better business strategy
decision-making (Bachelor's thesis, University of Twente).
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