Interpretation of Financial Ratios of ASOS Plc and Preparation of Income Statement and Balance Sheet for Ovid Venture

AC4052QA FINANCIAL
ACCOUNTING

Table of Contents
SECTION A.....................................................................................................................................3
INTRODUCTION...........................................................................................................................3
Interpretation of Ratios................................................................................................................3
CONCLUSION................................................................................................................................5
SECTION B.....................................................................................................................................6
Question 1....................................................................................................................................6
Preparation of Income statement of Ovid Venture......................................................................6
Preparation of balance sheet of Ovid Venture.............................................................................6
Question 2....................................................................................................................................7
1....................................................................................................................................................7
2....................................................................................................................................................8
REFERENCES................................................................................................................................9

SECTION A
INTRODUCTION
Ratio analysis is a tool with the help of which users of financial statement can analyse the
financial performance of company for their decision-making purpose. ASOS plc is a UK based
online retail company which offer fashion related products to its customers. The report will cover
the interpretation of ratios via evaluating the profitability, efficiency, liquidity and financial
structure of ASOS organization.
Interpretation of Ratios
Evaluating financial performance and position of ASOS Plc using financial ratios are as follows:
Profitability ratios: The profitability ratio state the ability of the company to generate
returns from the business operation and capital. In order to evaluate the profitability position of
ASOS plc, the return on capital employed is used. After analysing the result of return on capital
employed of ASOS organization for the four year, it is identified that profitability performance
of company is getting worst current year as compared to previous year. It is because in the year
2018 the ROCE of company is 22.72%, 2019 it is 6.99%, 2020 it is 12.52% and in the year 2021
it is 9.39%. The reason behind the drastic decrement in the ROCE of ASOS company is a
decrease in the earnings before interest and tax, increase in equity or an increase in non-current
liabilities. Ultimately, the result indicates that the ability of ASOS organization to generate profit
from its invested capital is poor in current year as compared to previous year. In order to improve
the same, the company need to adopt appropriate and suitable strategies. Here, the company
basically need to increase the sales and reduce the cost of sales. To reduce the cost of sales, it is
recommended to the company that they should provide training and development to its
employees (Gouda, El-Hoshy and Hassan, 2018). The impact of which the wastage of resources
will get decrease and ultimately cost of production will decrease.
Thus, in this way, ASOS company can enhance its overall profitability position of the
business in the market and gain competitive advantage.
Efficiency ratios: An efficiency ratio of the company indicates the ability of the
company to appropriately use assets in the business operation in order to generate income. The
three most significant efficiency ratio used to identify efficiency performance of ASOS is stock

turnover percentage, debtor collection period and creditors payment period. The stock turnover
of company in the current year i.e., 2021 is 4.85% which is lower than the previous year of
6.13%. Not only that, in the year 2019 and 2019, the stock turnover percentage is higher than
current year. This means that the capacity of the company to sell its goods and products quickly
and easily is poor in current year. Further, the debtor’s collection period of ASOS plc in the year
2021 is higher than all the previous three years. This means that company takes more time to
collect its dues from the debtors because of its poor credit policy (Linares-Mustarós, Coenders
and Vives-Mestres, 2018). The creditors' payment period of ASOS organization in the year 2021
i.e., 36.81 is lower than the previous year of 39.5 days. This means the company pay its dues to
its supplier on time in order to improve the credit worthiness of the business.
After analysing the overall efficiency ratio result, it can be interpretable that the credit
policy of ASOS organization is poor along with its selling strategy. In order to improve the same,
it is advisable to ASOS plc that they should promote its products and services over the social
media platform. Not only that, the company’s management also need to decide the discount
policy on sales. It means the company should offer discount to its customers if they purchase the
products on cash rather than credit (Risal and Aqsa, 2020). Also, discount will be offer to
customer on the early payment of dues. Further, it is also advisable to the management of ASOS
that they should prepare A/R aging report in order to determine the current payment status of
each debtors of the organization. Also, being proactive in generating invoices and sending them
to customers is most important part of the internal management of the company.
Liquidity ratios: The liquidity ratio is also one of the significant metrics of financial
ratio which indicate the capability of the company to pay off its current obligation with the use of
cash balance and cash generated from other current assets. The current ratio and quick ratio is
computed and used for identifying the liquidity performance of the company. After analysing the
result of ratio calculations, it is identified that current ratio of ASOS plc in the year 2021 is 1.56
which is higher than all the previous three years. On the other hand, quick ratio of the company
also higher in current year i.e., 0.75 as compared to all the previous three years. This means the
liquidity position of ASOS company is getting better year by year. This might be because of the
good credit worthiness of the business in the market and in the eye of supplier. The company has
the capability to pay its supplier on time from the cash they kept aside or cash collection from