Introduction to Accounting: Components of Financial Statements, Income Statement Preparation, and Financial Analysis of Grenco Plc

This report provides an introduction to accounting and discusses the three components of financial statements, income statement preparation, and financial analysis of Grenco Plc. It includes the computation of profitability and liquidity ratios of the company and provides recommendations for improving its financial health. The report concludes that investing in Grenco Plc is profitable for investors.

Introduction to Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
Three components of financial statement....................................................................................3
Preparation of Income Statement and Comment on it.................................................................4
Comment on Financial aspects of Grenco Plc.............................................................................6
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................1

INTRODUCTION
Accounting is a system of recording, summarizing, analysing, verifying and reporting
business and financial transaction via following the principles, concepts and procedure of
accounting (Puri, Singh and Chakrabarti, 2022). This report is based on Grenco Plc, a grocery
and general merchandising retailer of UK. The report will discuss the three component of
financial statement with describing what information they provide or lined with each other.
Further, the report will prepare income statement of Grenco plc in order to identify the profit and
loss earn or incur by company. Lastly, the report will comment on the financial aspects of
company so that Durwent & Co financial service can make decision regarding investment in
Grenco plc.
Three components of financial statement
The three most significance components of financial statement along with the information
they provided and link they have with another component are as follows:
Balance sheet: This is a part of financial statement of company which state the financial
position of business at a particular point of time. That’s why it is also known as statement of
financial position. This report basically shows the list of fixed assets, current assets, current
liabilities, non-current liabilities and equities. There are generally two sides of balance sheet that
is assets side and other one is equity and liability side which must be balance at the end of year.
In simple term, the balance sheet provides the information regarding how the money is made
available in company and how the company employs the money (Kulkarni, 2020). This is linked
to income statement because the profit earned by company is recorded in retained earning section
of equity side of balance sheet. Not only that, balance sheet is also linked with cash flow
statement because in order to prepare cash flow statement, the company need to use the
information provided on balance sheet of company.
Income statement: This is another most crucial part of financial statement which provide
the profitability position or information to the users of financial statement. The income statement
basically provides the financial performance of the business over the period of time along with
the list of revenue or expenses. The income statement is basically linked with both balance sheet
as well as cash flow statement. It is because revenue comprises of all cash inflows from
manufacturing of goods and expenses comprises of cash outflows incurred during the

manufacturing of goods and rendering of services (Huang and Yan, 2020). The linkage between
income statement and balance sheet is such that balance sheet is basically completed via
including the net profit or loss which is computed from income statement. The income statement
report basically provides the information regarding the profit resulting from excess of revenues
over expenses and losses resulting from excess of expenses over revenue. As per International
Financial Reporting Framework (IFRS), other comprehensive income is also cover in statement
of comprehensive income. This forms part of statement of change in equity.
Cash flow statement: This is a statement shows movement of cash within the organization
such as cash inflow into the business and cash outflow from the business. The main purpose
behind the preparation of cash flow statement within the organization is such that it is
supplement of income statement or balance sheet. The cash flow statement basically states the
closing cash balance within the organization which they can use it in the situation of emergency.
The cash flow statement of company such as Grenco plc provides the information regarding the
cash come in and cash goes out from the three most important activities such as operating
activity, investing activity and financing activity. All these three areas are most significant
activities of an organization with the help of which stakeholders can understand the sources of
cash and utilization of cash within the organization (Anggraini, 2022). The cash flow statement
is also linked with balance sheet and income statement because it uses the information provided
by both this statement. For example, cash flow statement uses the net profit information from
income statement which is basically a base of calculating net cash flow from operating activities.
While on the other hand, they also use the information related to assets and liabilities from
balance sheet to identify cash flow from investing and financing activities.
Preparation of Income Statement and Comment on it
Income Statement
For the year ended 2016
Particulars Details Amounts (£m)
Sales Revenue 395000
Less Cost of Sales -323800
Gross Profit 71200
Less Operating expenses:

Wages 35000
Rent 5500
Telephone expenses 1220
Van running costs 200
Motor expenses 180
Lightening and heating expenses 4000
General expenses 6000
Total 52100
Net Profit 19100
Comment on income statement of Grenco plc using the financial ratio
Gross Profit Margin Calculation
Particulars Formula 2016
Gross Profit 71200
Sales revenue 395000
Gross Profit Margin Gross Profit/ Sales revenue *
100
18% (approx.)
[71200 / 395000] * 100
Comment: After preparing income statement and calculating gross profit margin of
Grenco plc, it is identified that the GP margin of company in the year 2016 is 18%. This means
that 18% of the total sales i.e., 71200 is gross margin of and the remaining of 82% of total sales
are covered in cost of sales. Basically, the gross profit of Grenco plc is positive in the year 2016
because the cost of sales is lower than the sales revenue. But, the gross profit margin is quite
lower which they have to be improved in order to enhance the overall profitability of
organization (Easton and et.al., 2018). In order to do so, it is recommended the management of
Grenco plc that they should adopt the strategies of reducing cost of sales and increasing sales
revenue. For example, unique promotion or marketing of products on social media sites and
discount offer to customer along with training to employees to increase their efficiency.
Net Profit Margin Calculation
Particulars Formula 2016

Net Profit 19100
Sales revenue 395000
Net Profit Margin Net Profit / Sales revenue * 100 5% (approx.)
[19100 / 395000] * 100
Comment: Net profit margin is a ratio which state the ability of the organization to earn
net income from the sale of products and services. After analysing the P&L and ratio of Grenco
Plc of the year 2016, it is identified that the NP is 19100 and NP margin is 5%. This means that
the NP of the Grenco plc in the year 2016 is higher than the NP of company in the year 2015. It
is because NP of 2016 is 19100 and NP of 2015 is 16000. But despite of higher net profit, it is
not correct to state that profitability position of Grenco plc in the year 2016 is better as previous
year sales revenue is not given and it is impossible to compute 2015 NP margin. However,
analysing the current year NP margin of company, it is identified that ability of Grenco plc to
earn net profit from sale of £1 is 5% (Kadim, Sunardi and Husain, 2020). Further, to improve the
net profit margin of business, it is advisable to the management of Grenco Plc that they should
decrease their operating expenses via adopting proper strategy or steps.
Comment on Financial aspects of Grenco Plc
In order to comment on the financial position of business, the financial ratios need to be
computed using the information provided on balance sheet of Grenco plc (Vicente-Ramos and
et.al., 2020).
Calculation of financial ratios based on balance sheet are as follows:
Profitability Ratio:
Particulars Formula 2015 2016
Net Income 16000 19100
Total assets 37500 12500
Capital employed Total assets – Total
current liabilities
32500
(37500 – 5000)
7300
(12500 – 5200)
Shareholders’ equity 25000 29400
Return on capital Net income / capital 49% 262%

employed employed * 100 (16000/ 32500 * 100) (19100 / 7300 * 100)
Return on equity Net income /
Shareholder’s equity *
100
64%
(16000 / 25000 * 100)
65%
(19100/ 29400 * 100)
Return on total assets Net income / total
assets * 100
43%
(16000 / 37500 * 100)
153%
(19100/ 12500 * 100)
Liquidity Ratio:
Particulars Formula 2015 2016
Current assets 14500 13300
Current liabilities 5000 5200
Stock 5100 7900
Quick assets Current assets - stock 9400 5400
Current ratio Current assets /
Current liabilities
2.9
(14500 / 5000)
2.6
(13300 / 5200)
Quick ratio Quick assets / Quick
liabilities
1.9
(9400 / 5000)
1.0
(5400 / 5200)
The comment on various financial aspects of Grenco plc using financial ratios are as
follows:
Profitability ratio:
This is one of the most significant metrics of financial ratio which state the ability of the
company to generate net income from the use of capital employed, shareholder’s equity and total
assets. This ratio includes return on capital employed, return on assets and return on equity. On
the basis of above calculation, it is analysed that return on capital employed of Grenco plc in the
year 2016 is 262% which is quite higher than the previous year of 49%. Further, it is also
analysed that the return on equity of company in the year 2016 is 65% while in the year 2015 it
was 64%. The return on assets of Grenco plc is also higher in the current year i.e., 153% as
compared to previous year i.e., 43% (Borisovna, 2020). On the basis of analysis, it can be said

that the overall profitability position of the company in the current year is better and increasing
than previous year. It might be because of the better internal management of the company with
the help of which they can generate capital from profitable source and investment them in
profitable assets.
The ROCE of company increases because they have sales their outdated assets and cash
is quickly generated from current assets. The return on equity has increased in the current year
because of the higher net income and shareholder’s equity of business. Lastly, the ROA has
increased in the current year because of higher income and lower total assets. Thus, it can be said
that the profitability position and financial health of Grenco plc is better in current year as
compared to previous year (Suhadak and et.al., 2018). So, investing in Grenco plc by the
Durwent & Co financial service ltd. is profitable to investors.
Liquidity Ratio:
This is another most significant metrics of financial ratio which state the ability of the
company to pay off its current obligation with the use of cash balance and cash generated from
current and quick assets. After analysing the above ratio calculations, it is identified that current
ratio and quick ratio of Grenco plc in the year 2015 was 2.9 and 1.9 respectively. While on the
other hand, the same ratio of company in the current year i.e., 2016 is 2.6 and 1.0 respectively.
This means that the overall liquidity position of the company in the current year was poor than
previous year and they have to adopt the proper strategy to improve it. For example, it is
advisable to Grenco plc that they have to provide discount facilities to its customers for their
early payment (Husain and Sunardi, 2020). The impact of which the company able to receive its
dues from debtors on time and use the same for the payment to creditors. Along with this, the
company also need to adopt proper inventory management strategy such as EOQ, JIT etc. in
order to enhance the current and quick ratio of company.
CONCLUSION
After summing up the above information, it is concluded that the overall financial health of
the Grenco plc is good. It is concluded from the report that the profitability position and liquidity
position of company in the current year is best as compared to standards except liquidity position
of Grenco plc in current year is poor than previous year. But as investors are more concerned

about the returns on equity and profit making capability of company. Thus, the report has
advised investor Durwent & Co financial service ltd. to invest in the shares of Grenco plc
because it is profitable for them. The report has also computed various liquidity, profitability
ratio along with income statement. Lastly, the report has also discussed the three component of
financial statement and the information they provide.

REFERENCES
Books and journals
Puri, N., Singh, H. and Chakrabarti, A., 2022. APPLICATION OF PRINCIPAL COMPONENT
ANALYSIS TO FACILITATE FINANCIAL STATEMENT ANALYSIS: AN
AUTOMOBILE INDUSTRY CASE. Academy of Accounting and Financial Studies
Journal. 26(1).
Kulkarni, M. S., 2020. Competition in monopoly: teaching-learning process of financial
statement analysis to information technology management students. International
Journal of Information and Communication Technology Education (IJICTE). 16(3).
pp.70-91.
Huang, Y. and Yan, C., 2020. Global accounting standards, financial statement comparability,
and the cost of capital. International Review of Economics & Finance. 69. pp.301-318.
Anggraini, N. T., 2022. Analysis of Financial Statements Based on Financial Ratio and Vertical-
Horizontal Method in PT Unilever, Tbk, 2016-2017 Period. Journal of Social
Science. 3(1). pp.171-176.
Borisovna, I. T., 2020. Balance sheet analysis while instructing on financial statements in
English. Балканско научно обозрение. 4(1 (7)). pp.80-82.
Easton, P. D. et.al., 2018. Financial statement analysis & valuation. Boston, MA: Cambridge
Business Publishers.
Kadim, A., Sunardi, N. and Husain, T., 2020. The modeling firm's value based on financial
ratios, intellectual capital and dividend policy. Accounting. 6(5). pp.859-870.
Husain, T. and Sunardi, N., 2020. Firm's Value Prediction Based on Profitability Ratios and
Dividend Policy. Finance & Economics Review. 2(2). pp.13-26.
Suhadak, S. and et.al., 2018. Stock return and financial performance as moderation variable in
influence of good corporate governance towards corporate value. Asian Journal of
Accounting Research.
Vicente-Ramos, W. and et.al., 2020. The effect of good corporate governance on banking
profitability. Management Science Letters. 10(9). pp.2045-2052.
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