Introduction to Accounting: Explanation of Financial Statements and Analysis of Grenco Plc

This report explains the process of accounting and the functions of a business. It covers financial statements such as balance sheet, cash flow statement, and statement of profit and loss. The report analyzes the financial health of Grenco Plc, a UK-based retail company. It includes liquidity ratios, net profit, fixed assets, capital, and drawings.

Introduction to
Accounting
Component

EXECUTIVE SUMMARY-
The upcoming report covers process of accounting and functions of a business.
Accounting helps in analysing and identification of the data which is in monetary terms. With the
help of accounting profit and loss of a firm can be calculated for a specific period of time. This
report contains the detailed explanation with regard to the financial statements in order to get the
net earnings of a business.

Table of Contents
EXECUTIVE SUMMARY- ...........................................................................................................2
INTRODUCTION ..........................................................................................................................5
TASK...............................................................................................................................................5
1. Explain balance sheet, cash flow statement and statement of Profit and Loss. Also explain
the relationship between three.....................................................................................................5
CONCLUSION ...............................................................................................................................9
REFERENCES..............................................................................................................................11
APPENDIX....................................................................................................................................12

INTRODUCTION
The first and leading step in accounting is associated with the identification of business
transactions that are financial and monetary in nature (Bhardwaj and Gupta.,2018). After
identifying such kind of transactions, these are then recorded in the books of accounts.
Accounting process also includes analysing, examining and summarising of the financial reports
to get a vision of the business entity. In this report, the Grenco Plc. is taken into consideration to
understand the financials of the business entity. This report also depicts the different financial
statements like Balance Sheet, cash flow statement, and profit and loss accounts. In addition to
this it also comment on the financial health of a company.
TASK
Grenco Plc. is a UK based company that is concerned with retail business of grocery
goods and general products. It is headquartered in Manchester. This company was set up in the
year 1998 and has huge market share. The company has variegated its grocery retail business and
now it merchandises in petrol, electric items, telecom, internet services, books, furniture and
financial services. Grenco Plc. is expanded over the years and this is the reason that an
investment firm - Durwent & Company Financial Services wish to invest in this firm.
1. Explain balance sheet, cash flow statement and statement of Profit and Loss. Also explain the
relationship between three.
Financial statements are the end data of a company that gives the impression of business
activities and financial performance of a firm at a point in time. Financial statements helps the
business in forming the conclusion on the financial health of a firm through financial statement
analysis. These records the assets, liabilities, equity, income and expenses and they are straight
away connected with the financial position of an organisation (Woollacott., 2022). These
statements are prepared to fulfil the requirements of the users of accounting information so that
they can opt for best investment decisions. It is the mix of three major reports that contains the
cash flow statements, the income statements, and the balance sheet.

Income Statement- An income statement is also known as profit and loss account. The
purpose of this financial statement is to present a outline of company's revenues, expenses, gains,
losses and getting net income or loss that a company has obtained during a particular period.
This can be monthly, quarterly, semi-annually, or annually (Shaidullin and et.al., 2019) . The
main items that are delineated in the profit and loss statement are revenues, expenses, gains and
losses, and income. This statement is reliable for making important financial decisions. It
involves the close analysation of revenue and expenses as these are the important factors for any
organisation to control the cost and increase the revenue. It does not only provide the financial
information but it also highlights the efficiency and performance of the company's management
compared to the industry peers. In Grenco Plc.'s case the manager evaluates the profit by
subtracting costs of goods sold from the revenue generated by the company during a financial
year. This statement also includes taxes paid, income, and net profit earned by the organisation.
Balance Sheet- It is the most important financial statement that reflects the true position
of an organisation's assets , liabilities, equity capital, total debts during a financial year. It helps
the interested parties to understand whether the activities performed by an organization are
profitable in nature or not. The balance sheet reflects all the transactions since the company
started and thus it results with the overall performance of an organisation which is helpful for
both the users i.e. internal and external. The one side of this statement contains liabilities that
includes current and non-current liabilities and shareholders fund. Its another side of assets
consists of current and non-current assets (Yeter, Garbatov, and Guedes Soares., 2020). In the
situation of Grenco Plc. it will help in evaluation of assets and liabilities accompanying the
organisation that are obtained from the various sources. It is based on the fundamental equation
that implies company's assets are equal to its liabilities plus its shareholders equity.
Cash Flow statement- It is an important tool that helps in determining how much cash
has entered and left the business during a given point of time. It examines the position of a cash
in an organisation. It also finds out whether the company is in a sound financial position to meet
its day to expenses for the operational purpose or not and also helps in predicting the future cash
flows (Gabric and Bosnjak., 2018). The cash flow statement of Grenco Plc helps the company
to keep track of the cash inflows and outflows by segregating into three kind of activities. These
segments are defined as-

 Operating Activities- This is the first head of the cash flow statement and primary
activity of a business, which includes manufacturing, distributing, selling and marketing
etc. (Yüksel and Kavak., 2019). It includes all the day to day expenses and income that a
corporate has incurred. It helps in estimating the profitability of a business and also gives
the major cash flow in a firm.
 Investing Activities- This is another head in the cash flow statement. These activities
involves cash transactions that are associated with purchasing and sale of investments.
This includes the inflows from interest on loan, investments, trading of shares,
debentures, bonds and outflows from payments made on purchase of long-term and
intangible assets, advances and loans given to the other parties (Alabass., 2019).
 Financing Activities- This is an activity that involves the rise in the capital of a
company. This deals in the financial activities of a firm such as that are confined with the
trading of company's shares, repaying investors, adding or changing loans, or getting
more stock whenever necessary. and all these activities modify the capital and
borrowings of the firm.
The relationship between these three financial statements is that they are dependent on each
other. The net income calculated from the income statement have links with the balance sheet
and cash flow statements. In balance sheet it is recorded into retained earnings and in the cash
flow statements it feeds into the cash flow from operations activities statements. Depreciation
and other capitalized expenses on the profit and loss accounts are added to the net income to
evaluate cash flow from the operational activities. Last but not the least, current assets and
current liabilities on the balance sheet are directly concerned with the revenues and expenses on
the profit and loss account.
2. Compute P & L Account and also comment on it.
From the above description, Profit and Loss Account provides knowledge about the
income and expenses of the business that helps in evaluation of the company's net return. It
provides the base for the future forecast and growth analysis.

Interpretation: It can be interpreted from the above profit and loss account that the company has
earned net profit of £19100 after the revenue generation of £395000. This states that the
company has earned the minimal amount of profit. Company has incurred a good amount of cost
in process of manufacturing of goods till the final product. The organisation has resulted in the
great amount of gross profit but the amount of operating expenses is also very huge.
3. Analyse the Balance Sheet of previous year and comment on the financial statement.
For analysation of the given balance sheet, few ratios needs to be calculated. They are as
follows-
Liquidity Ratio- This is the financial metric which is used to determine the ability of a
business entity to pay off its current liabilities without raising the capital from external sources.
This tool also determines if a company can make use of its current or liquid assets in order to

cover its liabilities (Gorjizadehbaee and Khan Mohammadi., 2021). The three main tools under
this financial metric are- current ratio, quick ratio and cash ratio.
Interpretation- From the above calculated liquidity ratios it can be summarised that there is a
decrease in company's assets as compared from the previous year. The ideal ratio for the current
ratio and the liquid ratio is 2:1 and 1:1 respectively. In this case liquidity ratio of a business for
the year 2015 is 1.88 times which indicates that the company has a capacity of paying
approximately twice of its current outstanding. The current ratio is 2.9 times which states the
company can pay approximately 3 times than its current liabilities. It is also analysed that the
creditors of company have increased and debtors have decreased.
Net Profit: It is analysed from the balance sheet that net profit of a business has been
increased by 19.38% from the previous year which was 16000 in the year 2015. This increment
in net profit indicates that company was more efficient in converting its sales into profit as
compared to the previous year.
Fixed Assets: It can be seen that the long term assets of the company have been
increased in 2016 by 11.76% which states the asset growth and the company is growing, with
this it also reflects the well management and purchase of more assets.
Capital: There is an increase in the shareholders wealth, that means the company is
successful in bringing a positive impact to the owners and is attracting more stakeholders for
investment purpose. Not only this it also shows that a company earns a return on invested capital

which is greater than the weighted average cost of capital. The shareholders wealth in 2016 has
been increased.
Drawings: The drawings have increased by 13.05% in 2016, it signifies that the decrease
in the assets equivalent to the amount that is withdrawn. The drawings for the year 2016 is
double of the year 2015 which states that the company needed more help to achieve its stated
standard.
CONCLUSION
From the above report it can be culminated that the process of bookkeeping plays a
significant role in keeping an accurate account of all the records and keeping them organised on
the daily basis. Accuracy is the essential part of a bookkeeping process. Book-keeping is a
important procedure that assists the business managers to keep track of its daily expenses and
revenues and much more on a easy note. Furthermore, this report also depicts the concept of
financial statements, its types and relationship between its different kinds. This report also shows
the calculation of revenue and losses through the income statement to get a value of company's
net profits. It has also given the analysation on different monetary aspects of the business.

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APPENDIX