Accounting Fundamentals: Financial Statements Analysis and Ratios Calculation

This article provides an in-depth analysis of financial statements and ratios calculation for Kedison PLC and Chocco plc. It includes the profit and loss account, balance sheet, and the calculation of various ratios such as ROCE, ROE, net profit margin, asset turnover, current ratio, and more. The article also explains the importance of balance sheet balance and the double entry system. The subject is Accounting Fundamentals and the course code is not mentioned. The article is relevant for students pursuing accounting courses in any college or university.

FUNDAMENTALS

TABLE OF CONTENTS
TABLE OF CONTENTS..............................................................................................................2
QUESTION 1...................................................................................................................................3
Profit and loss account for the year ended 31st December 2020 for Kedison PLC....................3
Balance sheet as at 31st December 2020 for Kedison PLC........................................................4
Describing the reason for financial Position balance..................................................................5
QUESTION 2...................................................................................................................................5
a) Calculation of ratios................................................................................................................5
b) Explaining the financial position of Chocco plc.....................................................................8
REFERENCES..............................................................................................................................11

QUESTION 1
Profit and loss account for the year ended 31st December 2020 for Kedison PLC
Particulars Amount £m
Sales 826650
Less COGS 578650
Gross profit 248000
Indirect Expenses
Less Administrative expenses 30000
Less Interest paid 4000
Less Directors remuneration 5000
Less Salesmen commission 3000
Less Distribution costs 28000
Less Corporation tax 68000
Net profit 110000
From the evaluation of above prepared income statement for the year it can be articulated
that organization has earned the net profitability of 110000. For this purpose, company has
incurred the expenses like administration, interest, director’s remuneration, salesman
commission, distribution cost, etc. in order to achieve the higher profitability. It becomes
essential for company to get information regarding net profitability in turn dividend can be paid
accordingly. The firm has given emphasis on generating higher profits by pending required level
of expenses. Profit and loss statement prepared for the year indicates that company is possessing
good level of liquidity for meeting its expenses for achieving success (Easton and et.al., 2018).
Balance sheet as at 31st December 2020 for Kedison PLC
Amount £m

Assets
Fixed Assets
Plant and equipment 632730
Current Assets
Closing stock 329620
Debtors 171105
Cash and bank 12900
Total Assets 1146355
Liabilities
Corporation tax 68000
Sales commission 3000
Interest paid 2000
Trade creditors 171355
4% Debentures long term debt 100000
Equities
£1 ordinary shares 310000
Preference shares 300000
Retained profit 192000
Total liabilities 1146355
The above illustrated table has been formulated for assessing financial position of
organization. The balance sheet comprises equities, assets and liabilities which helps in getting

full picture of financial position (Zakerean, 2021). On the basis of above formulated financial
statement it can be identified that in order to pay current liabilities' organization has cash &
equivalents assets that can provide assistance. The firm has good level of equity which includes
ordinary, preference shares & retained profits. By analysing financial health of company it can
be articulated that fir requires long term debt for meeting its operational practices in effective
manner. From this it can be interpreted that Kedison PLC is having good financial health &
profitability. It is important for the company to create financial position in effectual manner for
the better processing and identifying available resources in order to make strategic decision.
Describing the reason for financial Position balance
Balance sheet comprises the assets, liabilities and equities of company for the specified period.
The financial position is made by utilizing the double entry system which articulates that
accounting transaction are recording at least two different account (Why Does a Balance Sheet
Need to Balance? 2020). These are prepared according to the double entry system to make sure
that firm is having appropriate recording by including all aspects of transaction to present the full
picture. double entry system makes sure that all transaction is recorded as debit and credit in
financial statement so that proper balance can be recorded in formulation of balance sheet.
It is prepared by following the equation of assets equals to liabilities plus equities. The
assets comprise cash, equivalents, account receivables, prepared expenses, inventory, marketable
securities, land, property, trademark, etc. Liabilities involves accounts payable, accrued
expenses, long term lease, etc. And equity part involves the retained earnings, etc. from the
evaluation it can be identified that companies formulates the balance sheet by giving emphasis
on proper assessment of liquidity position (Haralayya, 2021). The equation & double entry
system is the main reason for which the balance sheet balances.
QUESTION 2
a) Calculation of ratios
ROCE
Particulars Formula 2020 2019
Operating profit 805 699
(Total asset-Total Current (9,736- (10,087-

liabilities)
2,511)
= 7,225
3,046)
=7,041
Return on capital employed
Operating profit
/ (Total asset-
Total Current
liabilities)*100 11.14 9.92
ROE
Particulars Formula 2020 2019
Net profit 431 366
Shareholders’ equity 3088 2912
Return on equity
Net profit /
Shareholders’
equity*100 13 12
Earnings per share
Particulars Formula 2020 2019
Dividend per share 0.85 0.8
Market price 5.12 4
Earnings per share
Dividend per
share/ Market
price 0.166 0.201
Net profit margin
Particulars Formula 2020 2019
Net profit 431 366
Revenue 6738 6441
NPM Net profit/ 6.39 5.68

Revenue*100
Asset turnover
Particulars Formula 2020 2019
Revenue 6738 6441
Total assets 9736 10087
Asset turnover Revenue/
Total assets 0.69 0.63
Stock holding days
Particulars Formula 2020 2019
Average Inventory 708 659
COGS 3235 3096
Stock holding days
Average
Inventory/
COGS *365 79.88 77.69
Debtors collection period
Particulars Formula 2020 2019
Trade receivables 1249 1287
Sales 6738 6441
Debtors collection period
Trade
receivables/
Sales*365 67.65 72.93
Current ratio
Particulars Formula 2020 2019

Current assets 2303 2355
Current
liabilities 2511 3046
Current ratio Current assets / Current
liabilities 0.92 0.77
Gearing ratio
Particulars Formula 2020 2019
Total Debt 6648 7175
Total equity 3088 2912
Gearing ratio
Total Debt/ Total equity 2.15 2.46
Inventory cover Ratio
Particulars Formula 2020 2019
COGS 3235 3096
Average
inventory 708 659
Inventory
turnover ratio
COGS/ Average inventory 4.5
5.44
b) Explaining the financial position of Chocco plc
 ROCE is associated with assessing that how much operating profit is generated by
company from capital invested. From the evaluation of return on capital employed it can
be identified that in the year 2019 & 2020 the obtained outcome is 9.92 and 11.14
respectively. On the basis of this it can be interpreted that ROCE of Chocco plc is in
inclining trend. This is an indication of positive sign which is reflecting the financial
position. It is showing that firm can get higher return of capital to accomplish objective
of higher profitability.

 Return on equity of Chocco plc in the year 2019 and 2020 is 12 & 13% that is showing
upward sloping trend. It can be interpreted that company financial positions as compared
to previous has improved but less than ideal ratio which is 15%. There is requirement of
modification in order to improve financial performance effectively. The increasing ratio
is showing that firm is paying attention on improving its monetary performance.
 Earnings per share is concerned with determining how much profit company can make
from its each share (Prasoona and Reddy, 2021). The company's outcome regarding this
is 0.201 & 0.166 respectively that is showing decreasing pattern. In addition to this, it can
be stated that Chocco plc should put some more efforts to increase EPS in turn
shareholders can be attracted for longer duration.
 Net profit margin refers to the ability of Chocco plc for generating profitability from its
sales. The outcome obtained for the year 2019 and 2020 is 5.68 and 6.39% respectively
that is showing upward going movement which is favourable and reflecting growth of
company. Chocco plc has earned higher profitability as compared to previous that is less
than ideal margin. This is presenting higher efficiency of specified firm to generate
profit.
 Assets turnover ratio shows that how well firm uses its assets to generate revenue. From
the assessment it can be recognised that the ratio is 0.63 & 0.69 for the year 2019 and
2020 respectively. The specific ratio is in upward movement that is favourable sign for
company's growth. Financial health of company is good as compared to previous and
higher than industrial standard. Organization can make more efforts to increase
efficiency of firm to get higher revenue.
 Stock holding days of Chocco Plc for the two specified duration is 77.69 and 79.88
respectively. On the basis of computation, the outcome derived presents that the days of
holding inventory is increasing as compared to earlier period. This is basically showing
that company's replacing inventory is become ineffective due to inappropriate sales
conversion rate. This is sign of adverse performance of firm which required modification
to improve financial performance.
 Debtors collection period shows how effectively company receives the payment from the
customers who have purchased goods on credit. From 2019 to 2020 it has lessened as
reached 67.65 from 72.93 days. The attained result is favourable as its shows how

effectively firm collects funds to maintain liquidity. This positive indication regarding
the performance can help the firm to satisfy its stakeholders by reflecting efficiency of
maintaining liquidity for continuous operation.
 Current ratio is used to assess the ability of enterprise to meet its short term liabilities
with help of cash & equivalent assets (Benrqya and Jabbouri, 2021). Chocco Plc
performance in 2019 & 2020 is 0.77 and 0.92 times which is lower as compared to
benchmarking set. The ideal ratio lies in 1.2 to 1.5 times that reflects that negative
performance and require improvement which can be done by selling outdated assets, etc.
 Gearing ratio is associated with assessing how much risk is concerned with company by
evaluating debt & equity ratio. The derived outcome is 2.15 and 2.46 for current and
previous year which is presenting that associated risk has lessened. This is positive sign
of declined risk and help in getting smooth functioning.
 Inventory cover ratio derived for the two mentioned year is 5.44 & 4.5 respectively. The
ideal ratio is between 5-10 which is greater than obtained outcome of current year 2020.
This is showing that Chocco Plc financial health is not effective.

REFERENCES
Books and Journals
Benrqya, Y. and Jabbouri, I., 2021. Performance evaluation of European grocery retailers: a
financial statement analysis. International Journal of Logistics Economics and
Globalisation. 9(1). pp.24-39.
Easton, P. D and et.al., 2018. Financial statement analysis & valuation. Boston, MA:
Cambridge Business Publishers.
Haralayya, B., 2021. Ratio Analysis at NSSK, Bidar. Iconic Research And Engineering
Journals, 4(12), pp.170-182.
Prasoona, J. and Reddy, R.G., 2021. Analysis of financial statements. Biotica Research Today.
3(5). pp.373-375.
Zakerean, M., 2021. The Relationship between Corporate Reputation, CEO Narcissism, and
Financial Statement Comparability. Iranian Journal of Accounting, Auditing and Finance.
Online
Why Does a Balance Sheet Need to Balance? 2020. [Online]. Available through:
<https://www.brixx.com/why-does-a-balance-sheet-need-to-balance/>