Financial Accounting: Ratios Analysis, Income Statement, Balance Sheet, Cash Flow Statement, and Accounting Concepts

This article provides a comprehensive analysis of financial accounting through ratios analysis, income statement, balance sheet, cash flow statement, and accounting concepts. It also includes a detailed analysis of the financial situation of ASOS plc through its financial ratios. The article concludes with a short memo to Mrs. Harma highlighting the findings from the statement of cash flow.

Financial accounting

Contents
Section I...........................................................................................................................................1
INTRODUCTION.......................................................................................................................1
Interpretation of ratios..................................................................................................................1
CONCLUSION............................................................................................................................3
Section II .........................................................................................................................................4
Question 1....................................................................................................................................4
Preparation of Income Statement.................................................................................................4
Preparation of Balance Sheet.......................................................................................................5
Identify Five Accounting concepts and explain their meaning...................................................6
Question 2....................................................................................................................................6
Preparation of statement of cash flow..........................................................................................6
Short Memo to Mrs. Harma.........................................................................................................7
REFERENCES................................................................................................................................9

Section I
INTRODUCTION
The fiscal ratios review of ASOS plc is described in the subsequent sections. The
comprehensive balancing statements and revenue account of ASOS PLC were used to calculate
finance indicators such as return on assets, net working capital, and working capital proportions
(Commerford, Hatfield and Houston, 2018). In addition, the study includes a detailed ratios
assessment of ASOS PLC's. The study's main goal is to describe and assess ASOS PLC's fiscal
situation. Asos plc is a global apparel retailer with locations all over the world. Its distinctive
selling point is its user-friendly open-source web application. Asos offers its consumers a highly
comprehensive consumer environment with a choice of well-curated 200 thousand items
acquired from the finest merchants all around the world. ASOS Designer, ASOS Limited, ASOS
4505, and Connivance are among some of the company's in-house clothing companies. Asos is a
customer-centric company which provides industry-leading services, as evidenced by its state-of-
the-art distribution centre in the United Kingdom, France, and the United States, as well as
relatively simple payments and distribution of goods methods. Asos plc owns 896 facilities in
160 nations that allows it to monitor ASOS clothing and cut completion and manufacturing
period. ASOS Designs, ASOS 4505, AsYou, and ASOS Luxury are among its well-known
products and brands. Factory workers trim, stitch, and polish ASOS branded items in the major
manufacturing locations that are subsequently transported to ASOS stores.
Interpretation of ratios
Profitability ratios
 Return on Shareholders’ Funds- It can be said that the ratio is not at a satisfactory
position though it was in the year 2018 but it dropped drastically from 23.25 to 7.3 in the
year 2019, and was recouped back at around 17 percent in the year 2020 and 2021.
 Return on Capital Employed- This ratio of the company is also not in a very good
position as it is declining since 2018 from 22.72 as it was 6.99 in 2019 and 12.52 and
9.39 in the year 2020 and 2021 which is not a good sign for the firm at all.

 Return on Total Assets- This ratio is also on a trend on declining as it was 10.13 in the
year 2018 and since then it is less than that as it was 2.66, 7.14, and 6.14 in the year 2019,
2020, and 2021 respectively (Fan and Chatterjee, 2018).
 Profit margin- This ratio is in a better position as compared to in the year 2018 to 2021
though it declined from 4.22 to 1.21 in the year 2018 to 2019 but it rose again and were
standing at 4.35 and 4.53 in the year 2020 and 2021 respectively.
 Gross margin- This ratio is also declining when we see it while taking the base year as
2018 as in that year the ratio was 51.18 while from the next three years that is 2019,
2020, and 2021 it was standing at 48.81, 47.42, and 45.43 respectively.
Operational ratios
 Net Assets Turnover- This ratio also declined but the exception was the year 2019
where it rose as compared to the year 2018 as it rose from 5.38 to 5.78 respectively while
for both the year that is 2020 and 2021 the ratio was standing at 2.87 and 2.07
respectively (Kovalenko, 2019).
 Fixed Assets Turnover- This ratio kept on declining since 2018 as it was standing at 4.8
in that year while it was 4.39 for the year 2019, 3.37 for the year 2020 and 2.95 for the
year 2021.
 Interest Cover- This ratio shows a declining trend and that too very steeply as it was 511
in the year 2018 and it came down to 17.55 in the year 2019 which was down by a huge
margin and further it dropped to 15.96 and 14.42 in the year 2020 and 2021 respectively.
 Stock Turnover- This ratio declined too except in the year 2020 as compared to the year
2018 as it was standing at 5.93 in the year 2018 while it rose to 6.13 in the year 2020
while for the rest of the year that is 2019 and 2021 it was down and was standing at 5.09
and 4.85 respectively.
 Debtor Collection- This ratio is also not at a favourable position as it is increasing as it
was 2.13 in the year 2018 while it rose to 2.54 in the year 2019 while it came down a bit
in the year 2020 and was standing at 2.36 but again it rose and stood up at 3.88 in the
year 2021 (Sonnenberg, 2018).
 Creditors Payment- This ratio can be said to be in a good position as it rose and was
standing at 14.8 in the year 2018 while it rose to 39.5 in the year 2020 but again it fell a
bit and stood up at 36.81 in the year 2021.

Structure ratios
 Current ratio- This ratio is not at a satisfactory level in the year 2018 as it was only .9
but is increasing slowly and gradually which is a good sign for the company as it rose to
1.19 and 1.56 in the year 2020 and 2021 except for the year 2019 where it fell to .81.
 Liquidity ratio- This ratio of the firm is also increasing except in the year 2019 when the
base is taken as 2018 as it was .17 in the year 2018 after which it fell to .11 in the year
2019 and after that it again rose to .57 and .75 in the year 2020 and 2021 respectively
(Suykens, De Rynck and Verschuere, 2019).
 Gearing- This ratio is increasing significantly as compared to 2018 as it was just 2.32 at
that time and then it drastically rose to 20.88 in the year 2019 and then again it rose more
than twice times higher as it was in 2019 as was standing at 42.86 in the year 2020 and
85.13 in the year 2021.
Per employee ratios
 Profit per employee- It rose in every year except in the year 2019 as it was 23910 in the
year 2018, 6961 in the year 2019, 37160 in the year 2020, and 58710 in the year 2021.
 Turnover per employee- This ratio rose in every year as it was 566643 in the year 2018,
574869 in the year 2019, 853426 in the year 2020, and was 1296155 in the year 2021.
 Salaries/Turnover- This ratio is on a declining mode since 2018 as it was 6.68 in that
year and then it was 6.58 in the year 2019, 5.61 in the year 2020, and 4.14 in the year
2021 (Zimon and Zimon, 2019).
CONCLUSION
It can be concluded that the firm which is ASOS plc is not doing well in the market in many
areas and thus it is very crucial as well as critical for the firm to keep a tab on its overall
activities so that it can find out the errors in the operation so that appropriate measures can be
taken in that context which can further help the firm to establish its market value in the industry
in which it is operating.

Section II
Question 1
Preparation of Income Statement
Particulars Amount
Net Sales 285000
Less: Cost of sales-
 Purchases 160000
 Opening stock 14000
 Less: Closing stock -18000 156000
Gross Profit 129000
Less: Expenses
Audit and Accountancy 500
Advertising 900
Director remuneration 8500
Electricity 2800
Insurance 1700
-Prepaid Insurance 400 1300
Depreciation on Fixtures and
Fittings
80000*25/100 20000
Depreciation on Motor
Vehicle
23650*10/100 2365
Office Expenses 5700
Rent and Rates 7500
Wages and salaries 21000
Bank Interest 200

Provision for electricity 250
Total Expense 71015
Net Profit 57985
Preparation of Balance Sheet
Particulars Amount (£ )
ASSETS
Current Assets
Stock 18000
Bank 1500
Prepaid Insurance 400
Debtors 41350
Total Current Assets 61250
Non-current Assets
Fixed Assets
Fixtures and Fittings {80000- (40000+20000)} 20000
Motor Vehicle {25,000- (1,350+2365)} 21285
Total Non-current Assets 41285
Total ASSETS 102535
EQUITY AND LIABILITIES
Liabilities
Current Liabilities

Creditors 8900
Provision for electricity 250
Total Current Liabilities 9150
Non-current Liabilities
Long Term Bank Loan 2200
Total Non-current Liabilities 2200
Equity
Ordinary £1 shares (issued and fully paid) 20000
Add: Accumulated profit 13200
Net Profit 57985
Total Equity 91185
Total Liabilities 102535

Identify Five Accounting concepts and explain their meaning
The accounting concepts presented in the financial statements are:
 Revenue Recognition Principle: This principle says that all the concerned revenue of
the business is required to be recognized in the income statement of the business.
 Historical Cost Principle : this principle says that the assets are recorded in the books of
accounts on the basis of the cost it was initially acquired.
 Matching Principle : In this the business is required to record the incomes and expenses
of the similar transactions in the accounting period itself. This concept is based on
accrual concept.
 Full Disclosure Principle: The financial statements of the business should be used as the
means of conveying and not concealing.
 Objectivity Principle : according to this principle, the accounting information is
required to be definite, verifiable and free from the personal bias of the creators of
financial statements.
Question 2
Preparation of statement of cash flow
Cash flow for the year ended 31 December 2021.
Particular Amount
Net profit before tax and extraordinary items 6000
Adjustment for non operating expenses-
Add: depreciation 10000
Operating profit before working capital changes 16000
Adjustment for working capital changes
Add:decrease in current assets/increase in current
liabilities
(+)Trade payable 4000

Less:Increase in current assets/Decrease in current
liabilities
Inventory -17000
Trade receivable -12000
Cash generated from operating activities(A) -1000
(-)income tax paid Nil
Net cash flow from operating activities
B.) Cash flow from investing activities
-10000
Sale of investments 15000
Net cash flow from investing activities 15000
C.) cash flow from Financing activities
Repayment of loan -10000
Net cash flow from financing activities -10000
Net increase or decrease in cash equivalents
Add- opening balance of cash and cash equivalents 2000
Closing balance of cash and cash equivalents -10000
Short Memo to Mrs. Harma
MEMORANDUM
DATE: 31 December 2021
TO: Mrs. Harma
SUBJECT: Findings from Cash Flow Statement
Please review the following points as the findings of the statement of cash flow:
 The net cash flow from operating activities is showing a negative outcome which means
that the major cash of the business is getting used up in this activity. The business

should find ways to reduce the outflow of cash in its inventory and cash receivables. For
doing so, the business should focus on declining the collection period from the
customers.
 The net cash flow from financing activity shows a balance of negative 10000 which
means that the cash was used up in this activity. It can be seen that the only particular
there is of repayment of loan. The business should find other ways to overcome this and
create a better liquidity position in the business.
 The net cash from investing activity is showing a positive balance which is good for the
business. The business have sold investments worth of 15000.

REFERENCES
Books and journals
Commerford, B.P., Hatfield, R.C. and Houston, R.W., 2018. The effect of real earnings
management on auditor scrutiny of management's other financial reporting decisions.
The accounting review, 93(5), pp.145-163.
Fan, L. and Chatterjee, S., 2018. Application of situational stimuli for examining the
effectiveness of financial education: A behavioral finance perspective. Journal of
Behavioral and Experimental Finance. 17. pp.68-75.
Kovalenko, A., 2019. Determinants of personnel policy in the process of management of
financial and economic security of business entities. Вісник Черкаського
національного університету імені Богдана Хмельницького. Серія Економічні
науки, (3), pp.70-77.
Sonnenberg, S. J., 2018. 22 The Economic Psychology of Financial Decision-Making and
Money Management in the Household. CENTRE FOR DECISION RESEARCH,
UNIVERSITY OF LEEDS, UK, p.354.
Suykens, B., De Rynck, F. and Verschuere, B., 2019. Nonprofit organizations in between the
nonprofit and market spheres: Shifting goals, governance and management?. Nonprofit
Management and Leadership, 29(4), pp.623-636.
Zimon, D. and Zimon, G., 2019. The impact of implementation of standardized quality
management systems on management of liabilities in group purchasing
organizations. Quality Innovation Prosperity, 23(1), pp.60-73.