Preparation of P&L and Balance Sheet with Ratio Analysis

This report covers the concept of preparation of financial statements along with ratio analysis. It includes the reason for balancing financial position statements, ROCE, ROE, EPS, net profit margin, asset turnover ratio, current ratio, gearing ratio, inventory turnover ratio, and financial performance of Chocco plc.

FUNDAMENTALS

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
A) Preparation of P&L and Balance Sheet..................................................................................3
B) Reason of balancing of financial position statements.............................................................5
Question 2........................................................................................................................................5
A: Ratio analysis..........................................................................................................................5
B: Financial performance.............................................................................................................6
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................10

INTRODUCTION
Financial statements are the reflation of the company's financial performance. These are
the base that will enable the company and the concerned stakeholders to determine its financial
position and performance. Likewise, with the analysis of ratio the financial health of the
company will be determined. This report cover the concept of preparation of financial statements
along with ratio analysis.
MAIN BODY
A) Preparation of P&L and Balance Sheet
Profit and loss account:
Particular Amount
Sales 826,650
Less: Cost of sales (578,650)
Gross profit 248000
- Sales commission (3000)
- Director remuneration (5000)
- Administrative expense (30000)
- Distribution cost (28000)
EBIT 152000
- interest (4000)
EBT 148000
- Tax (68000)
EBT 110000
- Preference dividend (30000)
Earnings available to equity shareholders 80000
- Ordinary dividend (20000)
Retained earning 60000

Balance sheet:
Particulars Amount Amount
ASSETS
Fixed assets
Plant & equipment 632730
Current assets
Stock 329620
Cash and Bank 12900
Debtors 171105
Total assets 1146355
LIABILITIES
Long term liabilities
4% Debentures 100000
Current liabilities
Outstanding interest 2000
Creditors 171355
Tax payable 68000
Outstanding commission 3000
Shareholders’ equity 802000
Ordinary shares 310000
10% preference shares 300000
Retained earnings 82000
Profit for the period 110000

Total liabilities 1146355
Notes:
 Interest expenses:
Interest on debentures: 100000*4%
= 4000
 As commission on sales are to be made on January so it will be recorded in the current
month as expenses.
 The closing stock is reduced by 980 because it is being delivered to customers on 31st
December, 2020.
 Likewise, balance of debtors are increased by 980 because customers are not making
payment instantly.
B) Reason of balancing of financial position statements
The balance sheet shows the details regarding the company's assets and liabilities. Along
with details of equity also presents in balance sheet. As this follows the concept of double entry
book keeping where every transactions has double i.e. debit and credit effect which itself
nullified and gives equal balance at assets and liability. Also the balance sheet follows the
equation of Assets= liability +capital which again lead to balancing of balance sheet. It is also to
be noted that the balance of both the sides indicate that the accounting transactions are properly
recorded.
Question 2
A: Ratio analysis
Ratio 2020 2019
ROCE: Earnings before
interest and Tax/Capital
employed
= 805/7225
= 0.11
= 699/7041
= 0.099

Return on equity: Net Income/
Shareholder's equity
= 431/3088*100
= 13.95%
= 366/2912*100
= 12.56%
Earning per share: Net
income- preferred dividend/
weighted average number of
shares outstanding
= 431/600
= 0.72
= 366/600
= 0.61
Net profit margin: Net
income/Revenue*100
= 431/6738*100
= 6.39%
= 366/6441*100
= 5.68%
Asset Turnover: Net sales/
Average total assets
= 6738/9736
= 0.69
= 6441/10087
= 0.63
Stock holding days: Inventory/
cost of sales *365
= 708/3235*365
= 79.88 days
= 659/3096*365
= 77.69 days
Debtor collection period:
Trade debtors/ sales
revenue*365
= 1249/6738*365
= 67 days
= 1287/6441*365
= 72.93 days
Current ratio: Current
assets/current liabilities
= 2303/2511
= 0.91
= 2355/3046
= 0.77
Gearing ratio: Total
debts/shareholders equity
= 4137/3088
= 1.33
= 4129/2912
= 1.41
Inventory turnover ratio: Cost
of goods sold/average
inventory
= 6738/708
= 9.52
= 6441/659
= 9.77

Capital employed: Total assets-Current liabilities
2020:
= 9736-2511
= 7225
2019:
= 10087-3046
= 7041
B: Financial performance
ROCE:
It is a major ratio that shows that how much of operating income will be generated with
the employing of capital (Soewignyo and Soewignyo, 2018). It shows the company's efficiency
with the use of its assets.
While making comparison of ROCE of 2019 and 2020, it is analysed that the ratio is in
increasing trends because it raises from 0.099 to 0.11. This means that it shows positive aspect
with regard to Chocco plc that it is generating good operating profit with the employing and
utilizing its assets. This also indicates a rise in its sales.
ROE:
This ratio is an indicator of the net income which is being earned by the company on per
investment (Barbier, 2020). This ratio shows that how much profit is earned by company with
the money invested by the shareholders.
In case of Chocco plc the ROE is 12.56% in 2019 which rise to 13.95% in 2020. Yet it
has not reached the ideal ROE percentage of 15-20% but with a increasing trends. Thus, it can be
right to said that the company is earning good income with respect to investment. This would
because of efficient operation of its business activities and efficiently using the assets.

Earning per share:
It refers to earning which is being earned on per share. It shows how much money can be
make by company for each share of stock (Nugraha and et.al., 2020). This ratio is an indicator of
corporate value.
With respect to Chocco EPS is raising from 0.61 to 0.72 from 2019 to 2020. This means
that it is in increasing trend. As the ratio shows an increasing trend which means that the earning
that will be available to shareholders will be high. This will lead to increase in the percentage of
investment. Also as the ideal ratio lies from 1 to 99% and in case of Chocco it is increasing
which again shows an positive sign with respect to company.
Net profit margin:
This ratio is an indicator of the net income that is being generated by company over its
revenue. From this ratio investor can make analysis that whether the company is generating
adequate proportion of profit or not after making adjustment with respect to its cost (Nariswari
and Nugraha, 2020).
In respect to Chocco its percentage is raising from 5.68 to 6.39from 2019 to 2020. This
means that the company is generating high percentage of profit from its revenue. As this is in
upwards trends which means that the company is in profitable state and is well enough to make
up and mitigate its cost along with generating profit.
Asset turnover ratio:
This ratio measure the value of company sales or revenue with the value of assets. This
means that it shows how efficiently company is using its assets in order to generate revenue
(Patin, Rahman and Mustafa, 2020).
While analysing the above table it is found that the ratio is in increasing trends. As the
ratio was 0.63 in 2019 which raise to 0.69 in 2020. This increase in ratio clearly shows that the
Chocco plc is efficiently utilizing its assets with regard to generation of revenue. This will again
indicates and mark that the company's profit will also be raised and shows positive financial
health.
Stock holding days:

Inventory holding days shows the number of days and time that the company can hold its
inventory. It always needs to be in declining state because a higher days shows the company's
inefficiency with regard to stock conversion.
As the above table and analysis of Chocco plc the ratio shows a increasing trend because
it was 77 days in 2019 which raised to 79 days in 2020. As it shows the increasing trend which
means that the company is not well efficient with respect to its inventory conversion to sales. It
may also because of the excess purchase of inventory.
Debtor collection period:
It shows the number of days that is being taken by company with regard to make
collection of its dues from its debtors (So and et.al., 2019).
In case of Chocco plc, its ratio shows the declining phase which means that the
company's operation are good enough that it make collection in less days. As it was 72 days in
2019 which reduces to 67 days in 2020. This clearly means that the company is well efficient and
following all adequate measure that enable it to make collection at early stage and on time.
Current ratio:
This is a ratio which shows the liquidity condition of company. This means how much
liquid the company would be in respect to make payment of its short term debts (Sagala, 2019).
From the above analysis of Chocco plc it is found that the Current ratio is 0.77 in 2019
which raised to 0.91 in 2020. Although it is in upward trend but still it is far behind the ideal
ratio which is 2:1. This means that the company is not well equipped to make payment of its
short term liabilities.
Gearing ratio:
This ratio shows the amount of debt which a company have with respect to its equity
(Singh, 2019).
In case of Chocco plc the ratio shows declining trend because it was 1.41 in 2019 which
decline to 1.33 in 2020. This declining trends shows that the company is raising the percentage
of debt to its equity. As the amount of debt should always need to be half of equity but in case of
Chocco plc there is a greater proportion of debt in comparison of its equity.

Inventory turnover ratio:
This ratio shows how quickly company sells its inventory. A low ratio shows low
capacity of sale of inventory and lead to overstocking while a higher ratio shows the more
capability of company with regard to sales and low inventory. However, the low ratio is
desirable because inadequate presence of stock will lead to business loss. In case of Chocco plc
this ratio declines from 9.77 to 9.52 from 2019 to 2020. This means that the company is not
efficient to sell out its assets quickly.
Thus, from the above interaction of the ratio it would be right to said that the Chocco
plc's financial performance is appropriate with respect to its stakeholders. This is because as
majority of ratio including ROCE, ROE, NP, Asset turnover and various other are showing
positive results which directly indicate good financial performance. However, some ratios
including stock holding, gearing are showing negative results which will further be improved by
taking appropriate steps including efficient operation and using of assets. But, in overall
company is showing good financial health and performance.
CONCLUSION
From the above report it is concluded that the ratio analysis enable the investor to take the
right decision about the company because it directly indicate its financial health. Likewise, with
the preparation of P&L company can determine its profit and loss situation.

REFERENCES
Books and journals
Barbier, P.J.A., 2020. Financial return on equity (FROE): A new extended DuPont
approach. Academy of Accounting and Financial Studies Journal. 24(2). pp.1-8.
Nariswari, T.N. and Nugraha, N.M., 2020. Profit Growth: Impact of Net Profit Margin, Gross
Profit Margin and Total Assests Turnover. International Journal of Finance & Banking
Studies (2147-4486). 9(4). pp.87-96.
Nugraha, and et.al., 2020. Does Earning Per Share (EPS) Affected By Debt To Asset Ratio
(DAR) And Debt To Equity Ratio (DER)?. PalArch's Journal of Archaeology of
Egypt/Egyptology. 17(10). pp.1199-1209.
Patin, J.C., Rahman, M. and Mustafa, M., 2020. Impact of total asset turnover ratios on equity
returns: dynamic panel data analyses. Journal of Accounting, Business and Management
(JABM). 27(1). pp.19-29.
Sagala, D.A.P.H., 2019, October. Effect of Current Ratio, Debt To Equity Ratio, Net Profit
Margin, and Total Asset Turnover on Earning Per Share. In International Conference on
Global Education (pp. 1507-1521).
Singh, H., 2019. Cost Effective Design of Variable Steering Ratio with Power
Assist. International Research Journals of Engineering and Technology (IRJET). 6(9).
pp.1077-1080.
So, and et.al., 2019. Debtor level collection operations using Bayesian dynamic
programming. Journal of the Operational Research Society. 70(8). pp.1332-1348.

Soewignyo, F. and Soewignyo, T.I., 2018. Audit Committee, Value Creation Efficiency and
Capital Employed Efficiency. Management. 6(1). pp.20-29.