Financial Accounting: Ratio Analysis and Financial Statements

This report focuses on ratio analysis and financial statements in financial accounting, with a specific focus on ASOS PLC's financial performance and profitability ratios. It includes an interpretation of ratios, efficiency ratios, liquidity ratios, and financial structure ratios. Additionally, it includes a profitability statement and a statement of financial position for Ovid Ventures. Finally, it covers the impact of adjustments on the P&L account and balance sheet, as well as the reasons for additions and deductions from the cash flow statement.

AC4052QA Financial Accounting

TABLE OF CONTENT
INTRODUCTION ..........................................................................................................................3
INTERPRETATION OF RATIOS..................................................................................................3
Analyzing financial performance of ASOS PLC for the last three years from 2018 to 2021
through ratio analysis ..................................................................................................................3
CONCLUSION ...............................................................................................................................7
SECTION B.....................................................................................................................................7
QUESTION 1...................................................................................................................................7
Preparing Profitability statement ................................................................................................7
Drafting statement of financial position ....................................................................................8
QUESTION 2...................................................................................................................................9
1. Presenting the impact of following adjustments on Profit & Loss (P&L) Account and
Balance Sheet (BS):.....................................................................................................................9
2. Defining reason pertaining to the addition and deduction from cash flow statement ..........10
REFERENCES..............................................................................................................................11

INTRODUCTION
Financial accounting is concerned with involving the process of recording, summarizing
and reporting information so that proper decision-making can become possible. In the current
era, it is highly important for the business to give emphasis on having proper financial
accounting procedure in turn significant competitive advantages can be derived. There are
several advantages of having financial information which basically aids in evaluating the current
performance so that relevant strategy can be developed to get success. The current report will
focus on calculating ratios and interpreting so that significant data can be derived. It will allow
to get the crucial information about the ASOS's profitability, efficiency and liquidity.
INTERPRETATION OF RATIOS
Analyzing financial performance of ASOS PLC for the last three years from 2018 to 2021
through ratio analysis
Profitability ratios
Return on Capital Employed (%)
Year ROCE (in %)
2018 22.72
2019 6.99
2020 12.52
2021 9.39
The above depicted table clearly exhibits deteriorated trend in the profitability aspect of
ASOS Plc. In the period of 2018 ROCE accounted for 22.72% respectively, whereas at the end
of 2021 it reached on 9.39%. This in turn presents that there is fluctuating trend in the return of
capital employed which is required to be improved. In the current era, return on capital employed
has declined that can be improved by reducing the cost, inclining revenue, etc (Subalakshmi and
Manikandan, 2018).

Efficiency ratios
Stock Turnover (%)
Year (in %)
2018 5.93
2019 5.09
2020 6.13
2021 4.85
It is concerned with how quickly the organization makes selling of inventory (Sadi’ah,
2018.). This is helpful in evaluating the efficiency of ASOS so that proper suitable action can be
implemented. Stock turnover ratio for the years like 2019, 2019, 2020 and 2021 is 5.59, 5.09,
6.13 and 4.85% respectively. This is indicating that there is declined performance in the current
year as compared to previous which is negative sign for growth. It needs to be improved by
having proper inventory management system, having better forecasting, increasing sales,
reducing price, etc.
Debtor Collection (days)
Year (in days)
2018 2.13
2019 2.54
2020 2.36
2021 3.88
This is helpful in understanding efficiency of firm to collect due payments from
customer whom goods are sold in credit. The above presented table is reflecting that from the
year 2018 to 2021, the outcomes are 2.13, 2.54, 2.36 and 3.88 days. It is presenting that
efficiency decreasing which can impact adversely to ASOS's liquidity position. This can be

modified by having proper credit policy, good relationship with customers, clear terms &
conditions, offering discounts, etc.
Creditors Payment (days)
Year (in days)
2018 14.8
2019 -
2020 39.5
2021 36.81
It aids in ascertaining how quickly firm pays off its payments to suppliers that provides
assistance in making relevant judgment about its credibility (Supriyanto and Darmawan, 2018).
From the assessment of the above presented information it can b articulated that there is rise in
the days taken for overcoming credit payments which is poor indication of company's efficiency.
There is requirement to make changes for building good relationship with suppliers and
maintaining credibility in market this can be exerted by increasing the credit limit, making clear
and concise deed, etc. These courses of actions can permit to get the ability to uplift firm's ability
to meet organization's objective of overcoming credit payments in less duration.
Liquidity ratios
Current ratio
Year (in times)
2018 0.9
2019 0.81
2020 1.19
2021 1.56

By doing assessment of financial statements fluctuating trend has found in the current
ratio of ASOS Plc during the period of 4 years. From 2018 to 2021, current ratio of the firm was
far from ideal ratio. Moreover, as per the ideal framework business unit must have 2 assets in
against to the 1 liability so that short term obligations can be met effectually. On the basis of
comparison, it can be interpreted that particular organization's performance is improving as
compared to the earlier outcomes. Having good current ratio can permit to meet the objective of
having higher efficiency to overcome the short term liabilities with help of current assets. It aids
in attracting & retaining stakeholders like suppliers, creditors, etc. in turn achieving
organizational objectives can become possible. This is showing how business is having good
competitive advantage to coordinate with market.
Liquidity ratio
Year (in times)
2018 0.17
2019 0.11
2020 0.57
2021 0.75
This is the ability of the organization to pay off current debt obligations n without
making any external capital (Hsieh and Liu, 2021). Liquidity ratio is on of the significant metric
that aids in evaluating the performance of business so that strategic decision can be taken. The
ideal liquidity ratio is considered be higher than 1 which is referred as positive indicator for
organization. From the evaluation it can be interpreted that business is having upward moving
trend from the year 2018 to 2021. From comparison to the ideal performance it can be
recognized that firm need to make improvements to have better outcomes so that higher
capability to meet objectives of paying off short term liability can become possible. Moreover,
the improvement can be executed by having proper course of actions like managing receivables,
payable, having long term financing, etc.
Financial Structure ratios
Gearing (%)

Year (in %)
2018 2.32
2019 20.88
2020 42.86
2021 85.13
Gearing ratio assist in comparing from of owner's equity to debt which provides idea about
organization's financial leverage (Jebelli, Dadashi and Zare Bahnamiri, 2021). There are
different kinds of the stakeholders who considered the particular ratio important in order to make
sound decision as it helps in understanding the risk associated with the investment in company.
Usually gearing ratio below 25% considered to be low risky and till 50% is found to be optimal.
On the basis of the above table it can be interpreted that from the year 2018 to 2021 the derived
results are 2.32, 20.88, 42.86 and 85.13%respectively. In 2019 the financial leverage is lower
risky for the lender and investors which boost them to invest in company. In the year 2021 there
is 8.13% of gearing ratio which is reflecting that particular firm is having higher level of risk
which can force the investors and lenders to take negative decision and hamper growth &
development of ASOS PLC. The actions that can be taken to improve performance includes
reducing operating cost, inclining profits, etc.
CONCLUSION
From the evaluation it can be interpreted that ASOS PLC is having good financial health
in the industry. There are certain lacking areas which are required to be improved in order to
achieve competitiveness in market. From the assessment it can be articulated that firm is having
good return on capital employed that is one of the significant advantage to have higher
profitability. The present study is required to improve its stock turnover for gaining greater
efficiency in generating revenue. In addition to this, debtors collection is reflecting good
liquidity position & relationship with customer that can permit attaining economies of scale.
Present situation of firm showing that there is need to declination of creditors payments days to
have good trustworthiness and credibility in market. There is good performance as per the

liquidity ratio which can benefit firm to get leading position via ensuring effective compliance
with market forces such as demand & supply. On the basis of financial structure ratio, ASOS
need to apply actions to reduce risk to get positive image in market.
SECTION B
QUESTION 1
Preparing Profitability statement
Income statement of Ovid Ventures as at 31st December 2021
Particulars
Amount
(in £)
Amount
(in £)
Amount
(in £)
Sales 280,000
Opening stock 14,000
Add: purchases 160,000
Less: Closing stock 18000 156,000
Wages and salaries 21,000 177,000
Gross profit 103,000
Audit and Accountancy 500
Advertising 900
Delivery 8,500
Electricity 2,800
Add: Outstanding electricity
expenses 250 3,050
Insurance 1,700
Less: Prepaid insurance 400 1,300
Office expenses 700
Rent and rates 7,500
Depreciation on fixture & fittings 20000
Depreciation on Motor Vehicle 2365
Bank Interest 200 45015
Net profit 57,985
Drafting statement of financial position
Balance sheet of Ovid Ventures for the year ended on 31st December 2021

Particulars
Amount
(in £)
Amount
(in £)
Assets
Fixed assets
Fixtures and Fittings: 80,000
Less: Depreciation 20000 60,000
Motor Vehicle: 25,000
Less: Depreciation 2365 22,635
Total fixed assets 82,635
Current assets
Bank 1,500
Debtors 41,350
Closing stock 18000
Prepaid insurance 400
Total current assets 61,250
Total assets 143,885
Liabilities & shareholders’ equity
Non-current liabilities
Accumulated depreciation on motor
vehicle
1,350
Accumulated depreciation on F&F 40,000
Long Term Bank Loan 2,200
Total Non-current liabilities 43,550
Current liabilities
Creditors 8,900
Outstanding electricity expenses 250
Total current liabilities 9,150
Shareholders’ equity
Ordinary £1 shares (issued and fully paid) 20,000
Add: net profit 57,985
Retained profit 13,200
Total shareholders’ equity 91,185
Total liabilities & shareholders’ equity 143,885

QUESTION 2
1. Presenting the impact of following adjustments on Profit & Loss (P&L) Account and Balance
Sheet (BS):
a. Prepaid Expenses
Impact on P&L Impact on BS
 It is deducted from the income
statement as not referred to expenses
which inclines profitability (Rahman
and Leqi, 2021).
 Recorded on assets side in current
assets category which reduces cash of
firm
b. Accrued Expenses
Impact on P&L Impact on BS
 It increases expenses side which
decline profitability
 Company is obligated to pay so
recorded in current liability side
which inclines total liability
c. Prepaid Income
Impact on P&L Impact on BS
 It inclines revenue for which the
goods or service has not been
delivered
 This appears on current liability side
which inclines obligation of firm
d. Accrued Income
Impact on P&L Impact on BS
 Charged against income which  It causes an increase in firm's retained

increases profits earnings as refereed as receivables &
recorded in assets side
2. Defining reason pertaining to the addition and deduction from cash flow statement
a. Depreciation - It is added in cash flow as it is non cash items
b. Disposal of non-current asset- It is added back to net income in formulation of cash flow as
in case of loss or vice versa due to difference between net sale price & book value.
c. An increase in inventories- It is deducted from net earnings as considered to be additional
outflow of cash

REFERENCES
Books and Journals
Hsieh, S. J. and Liu, S., 2021. The cost-of-equity implications of off-balance sheet pension
liabilities. Journal of Contemporary Accounting & Economics. 17(1). p.100238.
Jebelli, N., Dadashi, I. and Zare Bahnamiri, M. J., 2021. Presenting a New Bankruptcy
Prediction Model Based on Adjusted Financial Ratios According to the General Price
Index. Advances in Mathematical Finance and Applications. 6(4). pp.717-732.
Rahman, J. M. and Leqi, L.I., 2021. Corporate social responsibility (CSR): focus on tax
avoidance and financial ratio analysis [enter paper title]. Accountancy Business and the
Public Interest.
Sadi’ah, K., 2018. The effect of corporate financial ratio upon the company value. The
Accounting Journal of Binaniaga. 3(02). pp.75-88.
Subalakshmi, S. and Manikandan, M., 2018. Financial Ratio Analysis of SBI [2009-
2016]. ICTACT Journal on Management Studies. 4(01). pp.2395-1664.
Supriyanto, J. and Darmawan, A., 2018. The effect of financial ratio on financial distress in
predicting bankruptcy. Journal of Applied Managerial Accounting. 2(1). pp.110-120.