Financial Statements of Ajay Ltd for the year ending 31st March 2019

This assessment undertakes preparation of financial statements i.e. Income Statement and Statement of Financial Position of Ajay Ltd. for the year ending 31st March 2019. Further, limitations of income statement and statement of financial position are discussed in the assessment.

Business Decision Making
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Table of Contents
Introduction......................................................................................................................................3
Main Body.......................................................................................................................................3
Financial Statements of Ajay Ltd for the year ending 31st March 2019....................................3
Limitations of financial statements.............................................................................................5
Conclusion.......................................................................................................................................6
References........................................................................................................................................7
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Introduction
Financial accounting includes recording information of financial nature in the books of
accounts which are then summarised and compiled together in the form financial statements
(Pratt, 2016). This assessment undertakes preparation of financial statements i.e. Income
Statement and Statement of Financial Position of Ajay Ltd. for the year ending 31st March 2019.
Further, limitations of income statement and statement of financial position are discussed in the
assessment.
Main Body
Financial Statements of Ajay Ltd for the year ending 31st March 2019
Income Statement of Ajay Ltd.
for the year ending 31st March 2019
Particulars Notes No. Amount (in £)
Sales 290500
Cost of Goods Sold
Opening Stock 18310
Purchases 157443
Closing Stock 25550 150203
Gross Margin 140297
Operating Expenses
Advertising 5478
Insurance 1 8456
Rent and rates 2 14130
Heat and light 3 13223
Delivery cost 4 11037
Salaries and wages 41263
Depreciation 5 23024 116611
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Net Income 23686
Statement of Financial Position of Ajay Ltd.
as at 31st March 2019
Particulars Notes No. Amount (in £)
Assets:
Non-Current Assets:
Fixtures and fittings 6 140643
Motor Vehicles 7 172160 312803
Current Assets:
Cash in hand 950
Closing Stock 25550
Trade Receivables 31099
Prepaid Insurance 850
Prepaid rates 4482 62931
Total Assets 375734
Non-Current Liabilities:
Bank Overdraft 17900 17900
Current Liabilities:
Trade Payables 31511
Accumulated depreciation 8 160210
Accrued heating and lighting 2210
Accrued delivery cost 905 194836
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Net Assets 162998
Shareholders' Fund:
Capital 170600
Drawings 31288
Net Income 23686 162998
Notes to Financial Statements:
1. Insurance
Insurance 9306
Less: prepaid insurance 850 8456
2. Rent and Rates
Rent and Rates 18612
Less: prepaid rates 4482 14130
3. Heat and Light
Heat and light 11013
Add: Accrued heat and light 2210 13223
4. Delivery Cost
Delivery Cost 10132
Add: Accrued delivery cost 905 11037
5. Depreciation
Fixture and fittings 12584
Motor Vehicles 10440 23024
6. Fixtures and fittings
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Fixture and fittings 153227
Less: Depreciation 12584 140643
7. Motor Vehicles
Motor Vehicles 182600
Less: Depreciation 10440 172160
8. Accumulated Depreciation
Fixture and fittings 66710
Motor Vehicles 93500 160210
Limitations of financial statements
Limitations of Income Statements
 Different valuation methods - Inventories can be calculated using different valuation
methods such as FIFO or LIFO. This creates a difference in valuation of inventories and
makes them inconsistent in comparison with income statements of other organisations.
 Open to manipulation - Though it is prepared on the basis of certain accounting
principles, yet their treatment of expenses and incomes are subjected to be decided by
accountants. This makes the statement open to manipulation and frauds.
 Ignores non-material income and expenses - It ignore full disclosure of non-material
income and expenses. Moreover, it includes fictitious values such as calculated
depreciation which will result in true profit not being reported or being manipulated by
using favourable method of depreciation (Narayanaswamy, 2017).
Limitations of Statement of Financial Position
 Historical cost basis - Assets in the Balance Sheet are recorded on the historical cost
which makes them not so useful to compare against current market value and further,
some elements in the Balance Sheet are recorded on market value and some on historical
cost, this makes whole statement inconsistent in comparison with each other on similar
basis.
 Inconsistency in valuation - Balance Sheet only contains assets and liabilities that can be
defined in numerical terms and ignores the internal assets which are important. Further,
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assets though on recorded on historical cost basis includes treatment of depreciation and
other adjustments before being presented in Balance Sheet. However, depreciation can be
calculated by different methods by different companies, all of them are legally
permissible to an organisation. This results in difference in valuation of assets and render
them inconsistent and incomparable with each other (Maynard, 2017).
 Point Statement - It is a point statement i.e. it reflects the position of assets and liabilities
at a point of time. This makes users of the accounts unable to identify the transformations
that those assets and liabilities undergo throughout the year.
Conclusion
In the assessment above, income statement and statement of financial position of a
company has been prepared for a defined accounting period. Notes to financial statements has
also been developed in order to present a detailed and better understanding of the statements.
Further, limitations of these financial statements have been determined. It was observed that they
possess inherent limitations that they ignore non-revenue factors that determine those financial
value as well as they are prepared on book value rather than actual market value. This presents
incomplete and inaccurate picture to the users of those statements.
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References
Books and Journal
Maynard, J., 2017. Financial accounting, reporting, and analysis. Oxford University Press.
Narayanaswamy, R., 2017. Financial accounting: a managerial perspective. PHI Learning Pvt.
Ltd..
Pratt, J., 2016. Financial accounting in an economic context. John Wiley & Sons.
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