Financial Accounting: Analysis of Accounting Ratios and Preparation of Financial Statements

Essay

Contents
INTRODUCTION.....................................................................................................................................3
MAIN BODY...........................................................................................................................................3
Section: A...............................................................................................................................................3
Section: B...............................................................................................................................................4
CONCLUSION.........................................................................................................................................7
REFERENCES..........................................................................................................................................9

INTRODUCTION
Financial accounting is a process in which there are several transactions which takes place in
an accounting year. These events are to be recorded in a systematic manner. Financial
accounting is a process which involves various activities such as documenting, summarising
and reporting. It helps various internal and external users to take financial and operational
decisions of the organisation. This report is divided into two sections. In section one, it
includes the interpretation of various accounting ratios of four consecutive year starting from
2018 (Churyk, Reinstein and Smith, 2018. ). The financial ratios helps in comparing the
financial performance of own enterprise with other competitors. In part two, it includes the
preparation of income statement and balance sheet of a firm named Ovid ventures. These are
the main financial statements which are written records of the transactions of the enterprise. It
also encompasses the explanation for the adjustment of certain items such as prepaid
expenses and income, accrual expenses and income. There are various items of cash flow
which are added or subtracted from the cash flow, the reason for the same is also entailed in
this report.
MAIN BODY
Section: A
1. Analysing the accounting ratios of four consecutive years.
Financial ratio: These are the numerical figures taken from the different financial statements.
It assists in comparing the financial performance of two different firms. There are various
accounting ratios such as liquidity ratios, profitability ratios, solvency ratios and activity
ratios (Dadkhah, 2019). The ASOS plc, ratios can be interpreted in the following way:
a.) Profitability ratios: It reflects the ability of an enterprise to effectively create the
profits and utilising them in the effective manner. There are various profitability ratios
such as gross profit margin, operating profit margin, net profit margin and return on
capital employed.
 Return on capital employed (ROCE): This ratio is used to measure the
organisation’s complete return on the investment of shareholders and
bondholders. It considers earnings before interest tax and capital employed.
From the above ratio, it can be interpreted that In the year 2018 it was 22.72%.
It indicates that capital is utilising effectively. From the year 2019, it started
falling and in the year 2021, it reached to 9.39%.
B.) Efficiency ratios: It shows the ability of an enterprise to effectively utilise the assets of
the organisation. There are various activity ratios such as debtor collection period, stock
turnover ratio and creditor collection period.
 Stock turnover ratio: From the given information of stock turnover ratio, it
was observed that in the year 2018 it was 5.93% and it starts decreasing in
year 2019. The higher inventory turnover ratio signifies that firm is capable to
sell its inventory in less time and more goods are demanded by the consumers.