Financial Accounting: Interpretation of Ratios, Balance Sheet Preparation, and Adjustments Impact

This report covers the interpretation of ratios, balance sheet preparation, and adjustments impact in financial accounting. It includes the analysis of profitability, efficiency, liquidity, and gearing ratios, income statement and balance sheet preparation, and the impact of adjustments on them. Additionally, it explains the reasons for addition and deduction of certain items in cash flow statements.

Financial Accounting

Contents
INTRODUCTION -...................................................................................................................................3
MAIN BODY-...........................................................................................................................................3
1. Interpretation Of ratios-.....................................................................................................................3
1. Income statement of Ovid Ventures:.................................................................................................5
2. Prepare Balance Sheet of Ovid Ventures-.............................................................................................6
3. Explain the impact of adjustments on profit & loss and balance sheet-................................................6
Reasons for addition and deduction of the following items in cash flow statements-..............................8
CONCLUSION.........................................................................................................................................9
REFERENCES........................................................................................................................................10

INTRODUCTION -
This report looks into the various aspects of financial accounting, it highlights the interpretation
of ratios of ASOS PLC. over the 4 years. This report also presents the important financial statements
with the adjustments of the certain items. Furthermore, it also encompasses the impact and adjustments
of some items in the balance sheet, income statements, and cash flow statements (Giner and
Mora.,2019).
.
MAIN BODY-
SECTION-A:
1. Interpretation Of ratios-
Financial Ratios- It is a metric which is used to determine the position of a company in
opposition to other firms. This mechanism is used by the investors and lenders to inspect and acquire
details on the financial aspects of the firm. Financial ratios provides description of an enterprise in
connection with market valuation, profit, leverage and liquidity. The analysis of such factors is
possible through the following ratios.
(a.) Profitability ratio- This ratio helps in understanding the organisation's potential to generate profit.
The common ratios under this are – return on equity, return on asset, gross profit margin.
Return on capital employed-
 Return on capital employed- The ratio of this kind is used to evaluate the effectiveness of an
enterprise to make profits with the capital employed. Based on the above figures the ROCE is
9.39; 12.52 ; 6.99; 22.72 for the year 2021, 2020, 2019 and 2018 respectively. For these 4 years
the ROCE keeps on fluctuating, in 2018 it was 22.72 which was later decreased to 6.99 in 2019.
The drop in this digit constitutes that company is not as efficient as it was in 2019. The ROCE
raised to 12.52 in 2020 which is favourable for the company, reasons for this lift can be the
reduction in costs and increase in sales, paying off the liabilities. For the year 2021, it is
declined to 9.39 which shows that an enterprise might loose the competitive advantage (Li.,
2019).

(b.) Efficiency ratio- It is the tool that measures the company's power to generate profits by using its
assets. The analysis of this ratio is described as follows-
 Stock Turnover ratio- From the given facts, the STR is 5.93, 5.09, 6.13, 4.85 for the years 2018,
2019, 2020 and 2021 sequentially. Higher the STR, more beneficial it is for the company.
Higher STR specifies that the business is able to sale its products and services speedily and
there is significant demand for the company's product. In this scenario the STR of ASOS PLC.
is highest in 2020 which states that the enterprise has sold its goods in abundance (Acosta-
González., Fernández-Rodríguez and Ganga, 2019).
 Debtors collection period- From the numbers mentioned above it is noticed that in the year
2018 the collection period for the dues is 2.13 which symbolise that organisation has very
smooth operating cycle as it is able to recover its debts in a very short period, and then in keeps
on lifting up till 2021, that means the company is unable to make collection from the debtors.
 Creditors Payment period- This ratio is used to evaluate the time period taken by the company
to pay its debt. The above case depicts that the CPP for the year 2020 is on peak i.e. 39.5 and it
means that this highest number compared to the given 3 years is better for the company as it
reflects that the company is able to conserve its capital as much as possible (Flower and
Ebbers., 2018).
(c.) Liquidity ratio- It calculates the company's ability to pay its short term obligations and business's
potential to sell the assets for the purpose of raising cash. The analysis of the above quantitative data
can be done by below mentioned ratios-
 Current Ratio- It is used across the industries in order to get the assessment of company's
capability to pay its short-term dues within one year. The ideal current ratio is 2:1, in this
scenario the CR of a company is 0.9, 0.11, 0.57 and 0.75 which is obviously less than 2:1 so it
is an indication that the company has liquidity problems since 2018 to 2021.
 Quick Ratio- It measures the company's ability to pay off its obligation without selling its
inventories. The ideal quick ratio is said to be 1:1 this indicates that the company is in trouble
to pay its short-term liabilities and it shows that the company is not financially sound.
(d.) Gearing Ratio- It is an indicator of the fiscal risk that is associated with the business enterprise.
The ratio in 2021 is highest i.e. 85.13 it implies that the company has lot of debt and it will have to
suffer the financial issues.

Section:B-
1. Income statement of Ovid Ventures:
Income statement for the year ended December31, 2021
Particulars Amount Particulars Amount
Opening Stock 14000 Sales 280000
Purchases 160000 Closing Stock 18000
Wages and salaries 21000
Gross Profit 103000
298000 298000
Advertising 900 Gross Profit 103000
Auditing and accounting 500
Delivery 8500
Electricity 2800
Add: Outstanding 250 3050
Insurance 1700
Less: Prepaid 400 1300
Depreciation- 41285
Fixtures and fittings 20000
Motor Vehicle 21285

Rent 7500
Office Expenses 700
Bank Interest 200
Net Profit 39065
103000 103000
2. Prepare Balance Sheet of Ovid Ventures-
Balance Sheet as on December31, 2021
Liabilities Amount Assets Amount
Capital 13200 Fixtures and fittings 20000
Net Profit 39065 Motor Vehicle 22635
£1 share (Issued and fully
paid)
20000 Bank 1500
Long Term loan 2200 Prepaid Insurance 400
Creditors 8900 Debtors 41350
83365 83365
3. Explain the impact of adjustments on profit & loss and balance sheet-
Prepaid Expenses- These are the future expenses that are paid in advance.
Impact on balance sheet- These are treated as current assets on the balance sheet until they are
consumed because the benefit of such expenses are recognized.
Impact on income statements- it causes positive impact to the company because the business receives
something of the value from the expenses of such kind and it is treated as the indirect expense. Prepaid
expenses are deducted from the specific expense in the profit and loss account.

Accrued Expenses- These are also termed as accrued liabilities, such expenses are recorded in
the financial reports before the company has made there payments (Shchepot'ev., 2018).
Impact on income statement and balance sheet- Adjustment of accrued expense, results to debit in
profit and loss account and increase in liabilities in the balance sheet.
Prepaid income- It is the unearned income which is received in advance i.e. prior to the
supply of goods and services.
Impact on Income Statement and balance sheet- Prepaid income is treated as assets initially, but the
value of such income is expensed over time into the statement of profit and loss account.
Accrued Income- It is an income which has been earned, but still not received.
Impact on income statement and balance sheet- It is feed into the assets side of the balance sheet and
will be added to the associated income in the profit and loss accounts, as these income shows a profit
that a company is going to earn in future in the form of cash payouts (Hajikermani, Moeinadin, and
Heirany., 2018).

Reasons for addition and deduction of the following items in cash flow statements-
1.) Depreciation- Depreciation is added in the cash flow statements, the reason behind the same is
that it is a allowable expense because it does not have direct effect on cash but it has impact on
tax liabilities of a firm. The addition of depreciation reduces taxes and increase the net income.
2.) Disposal of non-current assets- Fixed assets when purchased and sold are always treated in
investing activities. Disposal of non-current assets can be defined as the sale of fixed assets
which has its treatment in the head of cash flow from investing activities. In this head it is
added because it is the source of cash inflow in an organisation.
3.) Increase in inventories- Increase in inventory is shown as the negative amount in cash flow
statements because it indicates that the company has purchased more stock than it has sold.
Because the purchase of stock requires cash, which states to the additional outflows of cash
from the business enterprise (Michalczyk., 2018).

CONCLUSION
From the above report it is concluded that the main requirement of the ratio analysis is to provide
meaningful comparison to the organisation over the years. It is also clear how the balance sheet and
income statements are prepared from the given data. In the end, this report also shows the adjustments
and impact of certain items in balance sheet , income statement and also tells the adjustments of the
items in the cash flow statements.

REFERENCES
Books and Journals
Giner, B. and Mora, A., 2019. Bank loan loss accounting and its contracting effects: the new expected
loss models. Accounting and Business Research. 49(6). pp.726-752.
Li, Z., 2019, July. Research on accounting teaching reform under the background of informatization. In
Proceedings of the 2019 International Conference on Artificial Intelligence and Computer
Science (pp. 768-772).
Flower, J. and Ebbers, G., 2018. Global financial reporting. Macmillan International Higher Education.
Shchepot'ev, A.V., 2018. Choosing accounting procedures and elements of accounting policy of the
organization to obtain the forecast values of financial reporting indicators.
Hajikermani, S., Moeinadin, M. and Heirany, F., 2018. Fair Value in Financial Reporting and
Improvement of Accounting Information Value Relevance. Empirical Research in Accounting.
7(4). pp.53-72.
Michalczyk, L., 2018. Beneish's detection model as a tool for detection of accounting manipulation in
the conditions of the Polish bilateral act. International Journal of New Economics, Public
Administration and Law, (2 (2)).
Acosta-González, E., Fernández-Rodríguez, F. and Ganga, H., 2019. Predicting corporate financial
failure using macroeconomic variables and accounting data. Computational Economics, 53(1).
pp.227-257.