Business Decision Making: Profitability Statement, Balance Sheet, Limitations, and Working Capital Management

This report covers the preparation of profitability statement and balance sheet for London Ltd, identification and assessment of limitations of income statement and balance sheet, and effective management of working capital through inventory days, trade payable days, and trade receivable days. The subject of the report is Business Decision Making.

Business Decision Making

TABLE OF CONTENTS
TASK1.............................................................................................................................................3
a. Preparing profitability statement for London Ltd....................................................................3
b. Drafting balance sheet for the year ended on 31 March 2021.................................................3
TASK 2............................................................................................................................................4
Identifying 3 possible limitations of the Income Statement for London Ltd..............................4
TASK 3............................................................................................................................................5
Assessing 3 possible limitations of balance sheet for London Ltd..............................................5
TASK 4............................................................................................................................................6
Explaining how London Ltd can effectively manage the aspects of working capital.................6
a. Inventory Days.........................................................................................................................6
b. Trade Payable Days.................................................................................................................6
c. Trade receivable Days..............................................................................................................6
REFERENCES................................................................................................................................7

TASK1
a. Preparing profitability statement for London Ltd
Profitability statement of London Ltd for the year ended at 31 March 2021
Particulars Figures (in £) Figures (in £)
Sales 290,357
Inventories at 1 April 2020 13,310
Add: Purchases 152,300
Less: Closing stock 20,550
COGS 145,060
GP 145,297
Indirect expenses
Delivery Costs 10,000
Add: Accrued delivery cost 905 10,905
Salaries and Wages 41,263
Advertising 5,478
Insurance 9,306
Less: Prepaid insurance 850 8,456
Rent and Rates 18,612
less: Prepaid rent 2,482 16,130
Heat and Light 11,013
Add: Accrued heat & light 1,100 12,113
Depreciation (Fixture & fittings) 11,584
Depreciation (Motor vehicle) 9,440
Total expenses 115,369
NP 29,928
b. Drafting balance sheet for the year ended on 31 March 2021
Statement of financial position for the period of 2020-2021
Particulars
Figures (in
£)
Figures (in
£)

Assets
Fixed assets
Fixtures & Fittings at cost 153,227
Lees: Depreciation 11,584 141,643
Motor Vehicles at cost 172,600
Lees: Depreciation 9440 163,160
Total fixed assets 304,803
Cash in Hand 950
Closing stock 20,550
Trade Receivables 31,099
Prepaid rent 2482
Prepaid insurance 850
Total current assets 55931
Total assets 360,734
Liabilities and shareholder’s equity
Current liabilities
Accrued heat & light 1100
Accrued delivery cost 905
Bank Overdraft 17,900
Trade Payables 31,379
Total current liabilities 51284
Non-current liabilities
Accumulated Depreciation Fixtures & Fittings at 1 April
2020 66,710
Accumulated Depreciation Motor Vehicles at 1 April 2020 83,500
Total Non-current liabilities 150210
Shareholder’s equity
Capital 160,600
Less: Drawings 31,288
Add: NP 29,928 159,240
Total Liabilities & shareholders’ equity 360,734
TASK 2
Identifying 3 possible limitations of the Income Statement for London Ltd
Profitability statement presents income generated by the firm over the expenses during
specific time period. Limitations associated with income statement are enumerated below:

 Profit assessment or evaluation is highly depending on accounting method of process
undertaken by London Ltd.
 Further, for performing business operations smoothly company incurs several expenses
which cannot be recorded and reliably presented (Income Statement in detail, 2021).
Thus, due to the lack of evidence regarding some income, expenses etc London Ltd due
to record the same in income statement.
 In order to fulfill motives sometimes company’s do manipulate the figures recorded in
income statement.
Hence, at the time of making profitability statement accountant of London ltd should
keep in mind above mentioned aspects.
TASK 3
Assessing 3 possible limitations of balance sheet for London Ltd.
Financial analyst of London Ltd should also keep in mind limitations related to SOFP
while preparing and analyzing the same:
 Balance sheet is based on historical information which in turn does not communicate
fruitful information for decision making.
 At the time of preparing balance sheet assets are valued and recorded by accountants
referring varied rules (What Is the Limitation (Disadvantages) of the Balance Sheet?,
2021).
 Balance sheet also contains information about fictitious assets which also inflate the
value of assets. Moreover, it is difficult for the accountant to assess actual value of
fictitious assets.

TASK 4
Explaining how London Ltd can effectively manage the aspects of working capital
a. Inventory Days
There are several ways through which London Ltd can manage inventory days in the best
possible way. By applying the model of EOQ and JIT firm can ensure effectual management of
inventory. Thus, by undertaking efficient restocking strategy London Ltd can sell or replace
wines frequently (Bhattacharya, 2021). Besides this, by placing emphasis on social media
marketing firm can attract large number of customers and thereby would become to sell stock
quickly. In this way, by converting stock into cash firm can improve working capital to a great
extent.
b. Trade Payable Days
Higher payable days enable firm to capitalize other investment opportunity with the help
of additional fund. In order to increase payable days London Ltd can assess suppliers who are
offering products on credit basis for longer duration. By applying this strategy firm can improve
its payable days and thereby gets benefits from it.
c. Trade receivable Days
By monitoring receivable days’ management team of London ltd can make significant
modifications in the existing credit policy or framework. Through monitoring firm would
become able to know the extent to which debtors are making defaults in repayment (Aguilar,
Torres and Salazar, 2017). By identifying this, London Ltd can tighten credit policies which
helps in getting payment from debtors timely. Further, by offering discounts on early repayment
firm can get due amount on time and thereby improves liquidity.

REFERENCES
Books and Journals
Aguilar, J. G., Torres, S. G. and Salazar, A. A., 2017. Importancia de la administración eficiente
del capital de trabajo en las Pymes.//Importance of efficient management of working capital
in SMEs. Ciencia unemi. 10(23). pp.30-39.
Bhattacharya, H., 2021. Working capital management: Strategies and techniques. PHI Learning
Pvt. Ltd..
Online
Income Statement in detail. 2021. Online. Available through: <
https://www.edupristine.com/blog/income-statement-in-detail>
What Is the Limitation (Disadvantages) of the Balance Sheet?. 2021. Online. Available through:
< https://www.wikiaccounting.com/limitation-disadvantages-of-balance-sheet/>