Business Decision Making: Income Statement, Financial Position, Efficiency Ratios and Limitations

This report covers the calculations of income statement and statement of financial position, limitations of income statement and balance sheet, and efficiency ratios of London Venture company along with their effective management. The report also includes subject BA4008QA Business Decision Making, course code BA4008QA, and college/university not mentioned.

BA4008QA BUSINESS
DECISION MAKING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
(a) Preparation of Income Statement for the year ended 31st March 2021................................3
(b) Preparation of Statement of financial position as at 31st March 2021..................................4
TASK 2............................................................................................................................................6
Three possible limitations of the Income Statement for Ventures..............................................6
TASK 3............................................................................................................................................6
Three possible limitations of statement financial position for ventures.....................................6
TASK 4............................................................................................................................................7
Explanation of how London venture company effective manage following efficiency ratios:. .7
CONCLUSION................................................................................................................................8
REFERENCES..............................................................................................................................10

INTRODUCTION
The business decision-making is a process which helps the company in evaluating
various alternative and selecting the best alternatives on the basis of its cost-benefits analysis.
This report will cover four tasks out of which in task one the report will cover the calculations of
income statement and statement of financial position. Further, in task two, three and four the
report will cover the calculations of inventory days, trade payable days and trade receivable days
of London Venture company along with the discussion of their effective management. Lastly, the
report will discuss the three limitations of income statement and balance sheet for Ventures.
TASK 1
(a) Preparation of Income Statement for the year ended 31st March 2021
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:
Calculation of delivery cost = £10000 + £905 = £10905
The closing accruals is related to this year thus it is added in the expense cost of current year and
will be recorded as current liabilities in the balance sheet.
Note 2:
Calculation of Insurance = £9306 — £850 = £8456
The closing prepaid of amount insurance of 850 is not related to current year thus it is subtracted
from the current year insurance expenses. Further, it will be shown in the current assets side pf
the statement of financial position.
Note 3:
Calculation of rent and rates = £18612 — £2482 = £16130
The amount of £2482 is closing prepaid rates expenses which is subtracted from the year 2021
because it is not related to this year but paid by the company in advance. Thus, it will record as
current assets in the assets side of the balance sheet.
Note 4:
Calculation of Heating and Lighting = £11013 + £1100 = £12113

The closing accrued heat and light expenses of £1100 is related to current year i.e., 2021 thus it
is added back to the specific expenses and recorded as current liabilities in the balance sheet.
(b) Preparation of Statement of financial position as at 31st March 2021
Statement of Financial Position for London Ventures
As at 31st March 2021
Particulars Details Amount (£)
ASSETS
Non-current assets:
Fixtures and Fittings (at cost) 153227
Motor Vehicles (at cost) 172600
Current assets:
Inventories 20550
Trade receivables 31099
Cash in hand 950
Prepaid insurance cost 850
Prepaid rates cost 2482 55931
Total assets 381758
EQUITY AND LIABILITIES
Current liabilities
Trade payables 31379
Bank Overdrafts 17900

Accumulated depreciation of fixtures
and fittings (note 5)
78294
Accumulated depreciation of motor
vehicles (note 6)
92940
Accrued heating and lighting 1100
Accrued delivery costs 905
Total current liabilities 222518
Equities:
Opening capital 160600
Add Net profit for the year 2021 29928
Less Drawing during the year 2021 31288
Capital at the end of year 2021 159240
Total equities and liabilities 381758
Working Notes
Note 5:
Calculation of accumulated depreciation of fixtures and fittings
= £66710 + £11584 = £78294
Note 6:
Calculation of accumulated depreciation of motor vehicles
= £83500 + £9440 = £92940
The depreciation is an expenses and liability for the company thus recorded in the liabilities side
of financial position.

TASK 2
Three possible limitations of the Income Statement for Ventures
The limitations of income statement which affects the company and ventures are as follows: Ignores non-revenue factors: This indicates only the monetary income and expenses in
the income statement. However, it does not consider the qualitative factors such as how
wages are determined, how company earns from its consumers etc. because they are not
in monetary terms (Aanestad and Szekely, 2021). Profit is an opinion: The income statement is known for identifying the health of the
business based on the profit and loss. But it does not provide the actual profit that earn by
the company. It is because this also includes the non-cash items such as depreciation in
their calculations which leads to low profits.
 Provide predictive value: One more limitations of income statement is that it is prepared
using the various accounting policies and methods. Thus, the continuous change in
methods and policies of the accounting will lead to negative impact on income statement
of business (Sobczak-Szelc and Fekih, 2020).
TASK 3
Three possible limitations of statement financial position for ventures
The limitation or disadvantage of the financial position of the company is as follows: Assets being recorded at historical cost: All the fixed assets of the company are recorded
at historical cost less depreciation. The change in the value of the assets as per the market
demand is not recorded by the ventures is one of the disadvantage of balance sheets
(Sasmita, 2021). Use of estimates: Some assets of the ventures such as goodwill are recorded on
estimation basis which does not reflect the correct value of business position. Thus, it is
one of the limitation of balance sheet.
 Non-disclosure of accounting policies: In order to prepare the balance sheet, the
ventures basically uses various accounting policies such as inventory valuation,
depreciation methods, provision for doubtful debts. But they do not disclose it which is

one of the biggest disadvantage of balance sheet that need to be removed by the company
(Plosser, 2018).
TASK 4
Explanation of how London venture company effective manage following efficiency ratios:
(a) Inventory Days
Formula = Total Inventory / Cost of goods sold * 365 days
= £20550 / 145060 × 365 days = 52 days
Recommendation on management of inventory days:
On the basis of calculation of inventory days, it is indicated that the company will hold its
inventory for 52 days in the warehouse. In order to further manage stock holding days, it is
advisable to the London venture that they have to adopt the efficient restocking system such as
EOQ and Just-in-time inventory (Brambilla and et.al., 2018). Along with this, it is also
recommended to the company that they should also use the appropriate marketing strategies
because it helps them in attracting more and more customers which further increase the sales of
the company. One of the key area where the company need to improve its system is delivery or
shipping. It is because delay in shipment of goods and services to the ultimate customers will
leave negative comments on the social media sites and online shopping channels. Proper
forecasting is also one step which helps the London Venture in managing inventory days.
(b) Trade Payable Days
Formula = Trade payable / COGS * 365 days
= £31379 / 145060 × 365 days = 79 days
Recommendation on management of trade payable days:
The high trade payable days will affect the credit worthiness of the London Venture thus
they need to manage and control it. In order to manage trade payable days, it is advisable to the
company that they should negotiate the payment terms with the supplier. Also, the company have
to build the strong relation with its supplier in which they have to make sure that they are paying
them timely (Alarussi, 2021). For this, the company can arrange money from the sale of the

outdated and non-used fixed and current assets. This helps them in managing the liquidity
position of the company as well along with the management of efficiency position.
(c) Trade receivable days
Formula = Trade receivable / Net sales * 365 days
= £31099 / £290357 * 365 days = 39 days
Recommendation on management of trade receivable days:
The trade receivable days of the company indicate the time the company take to collect
the payment from its debtors or customers. The company have to reduce its receivable days by
adopting and implementing proper strategies. One of the best strategy advisable to London
Venture which help them in managing trade receivable days is discount facility for early
payment (Rodriguez, 2017). The company can also apply late charges over the customers who
pay their due later than the specified credit period. This will help London Venture in reducing
their receivable days and manage it properly.
CONCLUSION
The report has concluded the various tools and technique of accounting which helps the
managers of the company in their decision-making. The report has concluded the income
statement and financial position calculation of London venture via providing proper working
notes. Further, the report has concluded the limitation of income statement and financial position
which affects the business health in negative way. Lastly, the report has concluded the three
ratios such as inventory days, trade payables days and trade receivable days. In addition to this,
the report has also concluded how the London venture can manage this ratios in order to improve
its business.

REFERENCES
Books and Journals
Aanestad, H. and Szekely, N., 2021. Understanding the Norwegian additive manufacturing
market: Its attractive aspects, limitations, potential and future opportunities within a
circular framework (Master's thesis, uis).
Sobczak-Szelc, K. and Fekih, N., 2020. Migration as one of several adaptation strategies for
environmental limitations in Tunisia: evidence from El Faouar. Comparative Migration
Studies. 8(1). pp.1-20.
Sasmita, R. P. H., 2021. Off-Balance Sheet Analysis Toward Risk-Adjusted Performance. The
Indonesian Journal of Accounting Research. 24(1).
Plosser, C. I., 2018. The risks of a Fed balance sheet unconstrained by monetary policy. The
Structural Foundations of Monetary Policy, pp.1-16.
Brambilla, A. and et.al., 2018. Life cycle efficiency ratio: A new performance indicator for a life
cycle driven approach to evaluate the potential of ventilative cooling and thermal
inertia. Energy and Buildings. 163. pp.22-33.
Alarussi, A. S. A., 2021. Financial ratios and efficiency in Malaysian listed companies. Asian
Journal of Economics and Banking.
Rodriguez, I. F., 2017. Music Tempo and Manufacturing Efficiency Ratio: An Experimental
Research. J Glob Econ. 4(232). p.2.