Financial Accounting and The Financial Statements

This document provides information about financial accounting and the financial statements. It covers topics such as annual depreciation, carrying amounts of non-current assets, operating profit ratio, profit-after tax ratio, gearing ratios, debt ratio, and cash conversion cycle. The document also includes calculations and analysis for Sainsbury's Group Plc for the years 2019 and 2018. The subject is Financial Accounting and the course code is not mentioned. The document type is not mentioned and it is not specified if it is an assignment.

Financial Accounting
And
The Financial
Statements

Contents
TASK A...........................................................................................................................................4
1. Annual Depreciation to be charged in income statement of Smilie Nyero for 30th
Sep. 2019:..................................................................................................................................4
2. Carrying amounts of the non-current assets that will be shown in the Statement of
Financial Position at 30 September 2019:............................................................................4
TASK B...........................................................................................................................................4
Operating Profit Ratio:..............................................................................................................4
Profit-after tax Ratio:.................................................................................................................5
TASK C...........................................................................................................................................6
Gearing Ratios:..........................................................................................................................6
Debt Ratio:.................................................................................................................................7
TASK D...........................................................................................................................................7
1. Cash Conversion Cycle (CCC):..........................................................................................7
2. Calculation of the Cash Conversion Cycle for Sainsbury’s Group Plc for the years
2019 and 2018:..........................................................................................................................8
3. Comment:...............................................................................................................................9
REFERENCES............................................................................................................................11

TASK A
1. Annual Depreciation to be charged in income statement of Smilie Nyero for 30th
Sep. 2019:
Motor Vehicle:
£ 44000 x 25% = 11000
Plant and Machinery:
£ 153250/8 years = 19156.25
2. Carrying amounts of the non-current assets that will be shown in the Statement of
Financial Position at 30 September 2019:
Opening
Balance Depreciation
Carrying
Amount
Motor Vehicle: £ 44000 £ 11000 £ 33000
Plant and Machinery: £ 153250 £ 19156.25 £ 134093.75
TASK B
Operating Profit Ratio:
It implies to a profitability performance ratio which is used by companies to assess a
certain percentage of profits, company has produced through basic operations, before
deducting interest expenses and taxes. Simply it assesses though dividing company's
aggregate operating profits by entire amount of revenue (Williams and Dobelman,
2017). Outcome of this ratio is recognised as percentage. It is also termed as EBIT
Margin.
Operating Profit %

(GBP in Million) Year 2019 Year 2018
Operating Profit 312 518
Turnover or Sales 29007 28456
Operating Profit Ratio (%): Operating Profit /
Sales 1.08% 1.82%
Comment: As above computation of operating profit shows that company's percentage
operating profit in year 2019 is 1.08% and in year 2018 was 1.82% (Sainsbury plc
Annual Report, 2019). It indicates that company's operating-profit ratio has been
declined. It reflects that company is generating adequate cash though its ongoing or
continuous trading operations in order to paying off its all variable costs and different
fixed costs.
Profit-after tax Ratio:
The profit after tax ratio is determined by dividing net-income by total revenues. The
profit margin of a corporation after taxation is substantial since it reflects how well a
business manages its expenses. A large profit margin after tax usually shows that a
corporation operates effectively and provides investors with more money in form of
profits (Palepu and Healy, 2013).
Profit After Tax %
(GBP in Million) Year 2019 Year 2018
Profit after tax 219 309
Turnover or Sales 29007 28456
Profit After Tax Ratio (%) : PAT / Sales 0.75% 1.09%
Comment: As table shows company's net-profit after tax percentage in year 2019 is
0.75% which was 1.09% in year 2018, reflecting a declining trend. Overall decline

shows that company's efficiency to generate net-income after adjusting all expenses
has been decreased.
TASK C
Gearing Ratios:
Gearing ratio is a form of financial-efficiency ratio which compares corporate debts to
various financial factors, for example overall equity. This ratio may be used by
stakeholders to determine how organization structures themselves and the level of risk
associated in structure preferred. This is also recognised as debt to equity ratio, as it
shows relationship between shareholder’s equity and company’s overall debts. Gearing
is a leveraging of a corporation, indicating how much funding comes from creditors
relative to investors (Robinson and et.al., 2015). The ratio demonstrates financial risk
that a company faces as excessive debt will lead to fiscal problems. High gearing ratios
are high debt-to-equity proportions, whereas low gearing ratios are low debt-to-equity
proportions. A higher gearing ratio shows a massive level of leveraging in which a
company uses debts to pay towards its ongoing operations. In a decline, these
businesses might have difficulty in meeting their loan repayment on due dates and may
be at possibility of bankruptcy. Following are gearing ratios (Debt-to-Equity Ratios) of
two years of respective company, as follows:
Debt-to-Equity Ratio
(GBP in Million) Year 2019 Year 2018
Debt 15085 14590
Equity 8456 7411
Debt-to-Equity Ratio: Debt / Equity 1.7839403974 1.9686951828
Comment: Presented table exhibits that company’s debt-to-equity ratio in year 2019
and 2018 are 1.7839 and 1.9687 respectively. This increase in Debt-to-equity shows
that company’s debts have been decreased as in comparison of company’s equity
funds also reflecting reduction in dependency over debt funding. It indicates that
company is financially sound and structured effectively.

Debt Ratio:
The debt ratio calculates the scale of leveraging of business. The debt ratio is described
in decimal form or percentages as ratio of total debts to total assets. The proportion
of assets of corporation funded by debts can be interpreted easily though it. A ratio
above 1 indicates that the debt is financed by assets in a significant part. In other terms,
more liabilities in company than assets lie with the client. A higher ratio also means that
in case interest rates unexpectedly increase, a business may be prone to failure on its
debts. Ratio below 1 means that a larger share of the wealth of an entity are financed by
debt (Delen, Kuzey and Uyar, 2013). As debt ratio rises, the more business is
leveraged, which entails higher financial risk. At same time, leveraging is a significant
means by which businesses expand, and many corporations find productive debt uses.
Debt Ratio:
(GBP in Million) Year 2019 Year 2018
Total Debts 15085 14590
Total Assets 23541 22001
Debt Ratio: Total Debts / Total Assets 0.6407969075 0.6631516749
Exhibited table reflects that in year 2019 debt ratio is 0.6408 which was 0.6631 in
year 2018. In both year debt ratio is below 1 but increase in ratio shows that company’s
financial risk has been increased. However, ratio below the specified criteria shows that
company’s debts are not majorly financed by assets.
TASK D
1. Cash Conversion Cycle (CCC):
It is a tool which is used by companies to measure time required to convert
investments into inventory and turn other recourse into cash. This metric is used to look
how much time company takes to sale its inventory and time taken in collecting
receivable and to pay bills on times. CCC is quantitative metrics that allows to
determine the efficacy of business activities and overall management of enterprise.
Decline in CCC over continuous periods is recognised as good situation (Bragg, 2012).

There are three different aspects in cash cycle. The first portion of method shows
current stock level as well as how long this stock will take to be sold. This phase is
determined applying days-inventory outstanding. Second phase cash cycle shows
current revenues and period(days) it takes in collection of cash from sales. It is
computed by applying days-sales outstanding. While the third phase involves current
level of outstanding payables. It simply indicates how much corporation owes its all
suppliers for purchased goods and days company takes to pay-out its suppliers. It is
assessed through applying days-payables outstanding (Carraher and Van Auken,
2013).
2. Calculation of the Cash Conversion Cycle for Sainsbury’s Group Plc for the years
2019 and 2018:
Year 2019 Year 2018
Days inventory outstanding: 365 Days /
Inventory Turnover 365 Days / 14.44 365 Days / 14.83
= 25.277 = 24.62
Days sale outstanding: 365 Days /
Receivable Turnover 365 Days /222.28 365 Days /255.21
= 1.642 = 1.43
Days payable outstanding: 365 Days /
Payable Turnover 365 Days /9.1588 365 Days /9.5987
= 39.85 = 38.03
So, Cash Conversion Cycle = Days
Inventory Outstanding + Days Sale
Outstanding - Days Payable Outstanding −12.94 −11.98
Working Note:
Inventory Turnover:

(GBP in Million) Year 2019 Year 2018
Cost of sales 27000 26574
Average inventory
(1810+1929)/2 =
1869.5
(1775+1810)/2 =
1792.5
Inventory Turnover = Cost of sales/ Average
Inventory 14.44 14.83
Receivable Turnover:
(GBP in Million) Year 2019 Year 2018
Net sales 29007 28456
Account receivable
(117+144)/2 =
130.5
(106+117)/2 =
111.5
Receivable Turnover = Net sales/ Account
Receivable 222.28 255.21
Payable Turnover:
(GBP in Million) Year 2019 Year 2018
Cost of sales 27000 26574
Account Payable
(3044+2852)/2 =
2948
(2852+2685)/2 =
2768.5
Payable Turnover = Cost of sales / Account
Payable 9.1588 9.5987
3. Comment:
As per above computation of Cash Conversion Cycle of company Sainsbury Plc
it has been analysed that company's CCC during year 2019 and 2018 are -12.94 and -
11.98 respectively. During both year company's CCC is negative which means that

corporation requires less time in order to sell its goods or inventories and collect cash
from its clients in comparison to time in which company is required to pay it's suppliers.

REFERENCES
Books and Journals:
Williams, E.E. and Dobelman, J.A., 2017. Financial statement analysis. World Scientific
Book Chapters, pp. 109-169.
Palepu, K.G. and Healy, P.M., 2013. Business analysis and valuation: Using financial
statements, text and cases.
Robinson, T.R. and et.al., 2015. International financial statement analysis. John Wiley &
Sons.
Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial
ratios: A decision tree approach. Expert Systems with Applications. 40(10). pp.
3970-3983.
Carraher, S. and Van Auken, H., 2013. The use of financial statements for decision
making by small firms. Journal of Small Business & Entrepreneurship, 26(3),
pp.323-336.
Bragg, S.M., 2012. Business ratios and formulas: a comprehensive guide (Vol. 577).
John Wiley & Sons.
Online
Sainsbury plc Annual Report, 2019. [Online]. Available through:
<https://www.about.sainsburys.co.uk/~/media/Files/S/Sainsburys/documents/
reports-and-presentations/annual-reports/sainsburys-ar2019.pdf>