Financial Accounting: Interpretation of Ratios, Income Statement, Balance Sheet, and Cash Flow Statement

This article covers financial accounting through interpretation of ratios, preparation of income statement and balance sheet, and statement of cash flows. It also explains accounting concepts and their application in financial statements. The subject is relevant to accounting courses in colleges and universities.

Accounting

Contents
INTRODUCTION...........................................................................................................................................3
SECTION A...................................................................................................................................................3
Introduction.............................................................................................................................................3
Interpretation of ratios............................................................................................................................3
Highlight limitations in the use of accounting ratios...............................................................................4
Conclusion...............................................................................................................................................5
SECTION B....................................................................................................................................................5
QUESTION 1.................................................................................................................................................5
Prepare Income statement for the year ended 31st December 2020.....................................................5
Prepare Balance Sheet as at 31st December 2020..................................................................................6
Identify FIVE accounting concepts that have been applied in the preparation of financial Statements
and explain their meaning.......................................................................................................................7
QUESTION 2.................................................................................................................................................8
Prepare Harma Limited’s statement of cash flows for the year ended 31st December 2021.................8
Write a short memo to Mrs Harma explaining the findings of your statement of cash flow...................9

INTRODUCTION
Financial accounting is essentially the recording and evaluation of activities. It is conducted
out to assess company sales and effectiveness. To standardize the procedure, government
regulators have outlined several fundamental values. Companies in the United States use GAAP
principles. All money transfers centre on five necessary elements: assets, liabilities, revenue,
expenditures, and ownership (Zhang and Zhang, 2017). In addition, each business deal comprises
two equal halves. For instance, when money is taken from a bank and recorded in the income
statement using the dual procedure. These report categories into two sections in fist section
analysis the financial performance of ASOS plc in three years by financial ration with
limitations. In second section prepare financial statements and explain their meetings.
SECTION A
Introduction
ASOS plc is a Leading digital retailer of clothing and cosmetics. The firm was started in London
in 2000, with a primary focus on young people. The website sells over 850 brands or its own
fashion accessories, and delivers to all 196 nations through distribution center in the United
Kingdom, the United States, and Europe.
Interpretation of ratios
There are analyzing the different financial ratios in order to know actual financial performance
and identify the changes in compare of last year. There are analyzing from 2018 to 2021 such as:
Profitability ratios: Profit offers a "return" on capital for shareholders, as well as a critical supply
of money (i.e. retained earnings) to support the firm's continued prospects. Profitable is used to
assess company's financial success. In this category consist of different types of ratios that help
to investors to analysis profitability of ASOS in different year. From the return on shareholder
funds analysis that
Return on shareholder fund: It is mainly used to compare different originations in different sector
and between 15 to 20% consider as good ratio. In the year 2018 was 23.25 which was good but it
was declining in 2019 reach on 7.3 which is not good for investors after that in the year of 2020

The preceding research shows that the company is operating well. It made a 41.45 percent gross
profit and a 20.24 percent operational profit. This is higher than ASOS plc, which earned these
earnings at a rate of roughly 38 and 18 percent, respectively. However, ASOS plc's return on
capital employed is significantly greater than plc. It is around 5% higher. In terms of revenues,
the corporation is likewise performing poorly. Despite this, the firm's position isn't all that poor.
According to its current ratio, it can repay one and a half times its liabilities with its current
assets. However, its quick ratio is much lower than the needed ratio of 1: 1. This indicates that
the firm is not sufficiently liquidated.
Furthermore, the firm's valuation is low in comparison to ASOS plc. This company is doing
better. The firm's debt-to-equity ratio is fairly favourable. They have an 84 percent debt-to-equity
ratio. This demonstrates that the company is willing to take on additional risk. Earnings
generated by the company are sufficient to cover its obligations, and this at a rate of 5 times. This
demonstrates the firm's competitiveness. ASOS Plc only has a rating of 3. Both companies have
nearly identical dividend coverage ratios. They also demonstrate the business's effective profit
making. It can pay dividends twice, which is a good indicator. Earnings per share of the
company are low in comparison to earnings per share of the company. It only pays 15p for a
share of stock. The firm's price-earnings ratio is significantly lower than that of S plc.
Highlight limitations in the use of accounting ratios
The following are some of the limitations:
• The preceding measures are supported by data from yearly financial statements, which are
subject to estimate and modification of inadequacies.
• Such key numbers must only be evaluated after evaluating market situation, fluctuations in the
price of a product and stocks, and etc, in order for the Accounting ratios to be relevant in
anticipating the firm's situation (Nnadi and Soobaroyen, 2015).
• The qualitatively component of ASOS plc is not considered while computing leading people. It
is solely quantitative in nature.
• One user's perspective is not necessarily the same as another's. As a result, there may be
situations whenever provides an update in this study is advantageous to all concerned parties.

Lenders, for instance, desire the firm to have a large voltage quota, but shareholders might like a
smaller present quota so that they may spend capital in development operations.
• The influence of fluctuations in ASOS plc Company’s stock or rate of inflation has been
neglected throughout study, reducing the competence of such ratios (Al-Sartawi, Alrawahi and
Sanad, 2016).
Conclusion
As per the above report it has been concluded that Ratio analysis examines paragraph
information from a business’s operations to elicit information about profitability, liquidity,
operational efficiency, and solvency. Ratio analysis may show how a firm has changed over the
years, as well as compare one business to the next in the similar industry sector.
SECTION B
QUESTION 1
Prepare Income statement for the year ended 31st December 2020
£ £
Sales 285000
Cost of sales:
Purchases 160000
Opening stock 18000
Less: Closing stock -14000
Cost of sales: 164000 -164000
Gross profit 121000
Expenses
Audit and accountancy 500
Advertising 900

Directors remuneration 8500
Electricity
(2800+250) 3050
Insurance
(1700-400) 1300
Fixtures and fittings
(80000*0.25) 20000
Motor vehicle
(25000*0.10) 2500
Office expenses 5700
Rent and rates 7500
Wages and salaries 21000
Total expenses 70950 70950
PBIT/profit before interest and tax 50050
Bank interest -200
Net profit 49850
Prepare Balance Sheet as at 31st December 2020.
Cost £ Accumulated depreciation £ Carrying amount £
Non current assets:
Fixtures and fittings 80000 (16000+8000)=24000 24000
Motor vehicle 25000 (25000-1350*10%)=2365
(25000-2365) 22635
Total 28635
Current asset:
Bank 1500
Prepayment for insurance 300
Debtors 41350

Total 43150 43510
Current liabilities:
Creditors 8900
£1 share (issued and fully
paid) 25000
33900 -33900
Net Current Assets 9610
Long term liabilities:
Long term bank loan 7400 -7400
2210
Financed by:
Capital 13200
Net profit 20300
33500
Identify FIVE accounting concepts that have been applied in the preparation of financial
Statements and explain their meaning
Accounting ideas and norms, as employed in accounting, are the rules and standards that
all auditors follow while documenting market movements and preparing financial accounts.
Some of the key accounting principles that will be covered are accruals, matching, prudence,
going concern, and coherence.
Money measurement principle - Accounting often only works with elements that can be stated
in money units. Currency has the benefit of being a good unifying factor for expressing the vast
range of resources possessed by a corporation.
Historic cost concept - Investments are reflected on the balance sheet at their historical cost
accounting value (that is, acquisition cost). Accounting has embraced these methods of assessing
asset worth over methods that rely on some type of present price.

The going concern notion states that a company will keep operating for the near future. In other
respects, there is no plan or necessity to transfer the company's assets. Whenever a company is in
financial distress and needs to pay its debts, this type of transaction may occur (Cleary and
Quinn, 2016).
The notion of a business entity: For accrual basis, the company and its owner(s) are recognized
as independent and separate entities. As a result, owners are recognized as creditors towards their
own businesses for their invested capital.
The notion of dual aspects: Every operation has two sides, both of which affect the balance
sheet. Therefore, the cash purchase of a car results in a rise in one asset and a drop in the other
(cash). The payback of a loan reduces the obligation (debt) and increases the asset (cash/bank).
QUESTION 2
Prepare Harma Limited’s statement of cash flows for the year ended 31st December 2021.
Net Cash flow from operating
activities: £'000
Net operating profit 6
Adjustment for depreciation (10-8) 2
8
Increase inventory 17
Increase trade receivables
-
12
Decrease trade payables 4
9 9
Net cash flow from operating activities -1
Cash flow from investing activities
Loan paid -

10
-10
Cash flow from financing activities
Net Cash inflow from financing activities 0
Net cash outflow during the year -11
Cash at the start of the year 2
Cash at the end of the year 0
Write a short memo to Mrs Harma explaining the findings of your statement of cash flow
A cash flow statement determines internal and outgoing transfer of funds in a corporation,
serving as a link between the income statements sheet. A cash flow statement shows the increase
in cash each period as well as the start and finish cash holdings. From the operating activities it is
analyzing that generates cash flow -1 and from the investment activities generating cash flow -
10. Thus from the overall analysis it is saying that total net cash flow is -11. From the analysis it
is saying that in the starting of the year cash was 2 and at the end of cash was 0.

REFERENCES
Books and Journal
Zhang, I .X. and Zhang, Y., 2017. Accounting discretion and purchase price allocation after
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