Introduction to Accounting and Finance - Interpretation of Relaxation's Financial Statements

This article provides an in-depth analysis of Relaxation's financial statements including the statement of profit or loss, statement of financial position, and statement of cash flows. It covers topics such as calculating ratios, understanding the impact of transactions on cash outflow, and evaluating a company's financial stability using interest cover ratios and gearing. The article also provides recommendations for the business to improve its financial position.

Introduction to
Accounting and
Finance

Contents
Q1: Features of Relaxation’s financial statements..........................................................................3
a) Considering the two statements answer the following:...........................................................3
b) Explain the distinct goals of the THREE major financial statements in a few sentences.......3
Q2: Interpreting Relaxation’s Statement of Profit or Loss (SPL)...................................................4
a) Identify the shift between 2019 and 2020 by calculating the percentage change in total
income..........................................................................................................................................4
b) Calculate the contribution of each source of revenue to total revenue....................................4
c) The gross profit margin ratio is calculated for each segment..................................................5
d) In the Statement of Profit or Loss, explain the major difference between cost of sales and
operating expenditures.................................................................................................................5
e) The operational profit margin ratio is calculated for each segment........................................5
f) Give ONE reason why the online store's operational profit margin is larger than the other
sectors of the firm........................................................................................................................6
Q3: Interpreting Relaxation’s Statement of Financial Position (SOFP)..........................................6
a) Explain why depreciation is paid and how it affects the property, plant, and equipment's
worth............................................................................................................................................6
b) Calculation of different ratios..................................................................................................6
c) Explain how interest cover ratios and gearing assist us evaluate a company's financial
stability........................................................................................................................................6
Q4: Interpreting Relaxation’s Statement of Cash Flows.................................................................7
Identify THREE transactions that resulted in this monetary outflow. You must explain why
each financial outflow occurred...................................................................................................7
Q5: Recommendation......................................................................................................................7
REFERENCES................................................................................................................................9

Q1: Features of Relaxation’s financial statements
a) Considering the two statements answer the following:
i. The first statement is related to the Statement of Profit and loss as it is
detailing about extra costs incurred in employment and maintenance of
website.
The second statement is related to the Statement of Financial position as it is
related to the rise in the obligations and liability of the business.
ii. The first statement will have an effect on the profits of the business and will
be recorded in the expenses of the business and at last reduce the revenue of
the business. The second statement will have an effect on the Liabilities of the
business and it will increase the liability of the business due to long term loans
from bank.
b) Explain the distinct goals of the THREE major financial statements in a few sentences.
i. Statement of Profit or Loss: The P&L statement uncovers the organization's
acknowledged benefits or misfortunes for the given timeframe by contrasting
complete incomes with absolute consumptions and expenses. It can show an
organization's capacity to increment benefit after some time by decreasing
expenses and costs or expanding deals.
ii. Statement of Financial Position: The objective of an company's statement of
financial status is to give precise data about its resources, liabilities, and value. It
helps with showing the monetary place of an organization starting at a given date.
Financial backers and different partners can involve the data in the proclamation
to lead monetary investigation and go with speculation decisions (Battiston, and
et.al., 2021). Financial backers can likewise contrast the year-end budget
summary with the year-end fiscal report from the earlier year to perceive the
amount of a change there is. This will furnish them with a superior
comprehension of the organization's exhibition. The fiscal report of the
organization may likewise be contrasted with the budget summaries of different
firms in a similar area to decide whether it is beating the opposition.

iii. Statement of Cash Flows: It provides information on cash inflows and outflows
from operating, investing, and financing operations, which helps analyse net
changes in cash and cash equivalents. The cash flow statement is a financial
statement that displays how well a firm's actions are doing, where the money is
approaching from, and how well it is being expended (McLaney, and Atrill,
2020). The statement is significant since it aids investors in determining if a
company's financial status is reliable.
Q2: Interpreting Relaxation’s Statement of Profit or Loss (SPL)
a) Identify the shift between 2019 and 2020 by calculating the percentage change in total income.
Particulars 2019 2020 Change Percentage
change
Revenue 5,550 9,000 3450 62.16 %
Cost of Sales (3,885) (6,125) 2240 57.65 %
Gross Profit 1,665 2,875 1210 72.67 %
Overheads (620) (1,006) 346 55.80 %
(534) (996) 462 86.51 %
Operating profit 511 873 362 70.84 %
Finance costs (51) (65) 14 27.45 %
Profit before Tax 460 808 348 75.65 %
Income tax expense (120) (202) 82 68.33 %
Profit for the period 340 606 266 78.23 %
b) Calculate the contribution of each source of revenue to total revenue
Total revenue contributed by
 The retail operations are 66.7%
 The online store is 18.3%
 The hotel contract is 15%
Working note:
Retail operations : (6,006/ 9000) * 100 = 66.7%
Online store : (1,644/ 9000) * 100 = 18.3%

Hotel contract : (1,350/ 9000) * 100 = 15%
c) The gross profit margin ratio is calculated for each segment
Gross profit Margin for different segments:
Gross Profit Margin = Gross profit / Revenue * 100
 The retail operations:
Gross Profit margin = 1,800 / 6,006 * 100 = 29.97%
 The online store:
Gross Profit Margin = 494 / 1,644 * 100 = 30.04%
 The hotel contract:
Gross Profit Margin = 581 / 1,350 * 100 = 43.03%
d) In the Statement of Profit or Loss, explain the major difference between cost of sales and
operating expenditures.
Businesses incur discrete expenditures such as operating expenses and cost of goods sold.
The term "cost of goods sold" alludes to costs straightforwardly related to the making of an item,
for example, materials used to fabricate it and transportation expenses to get things from a
wholesaler to a retailer (Linnenluecke, Marrone, and Singh, 2020). Rent, utilities, office supplies,
and legal charges are examples of operating expenses that are not directly related to the
production of goods or services.
e) The operational profit margin ratio is calculated for each segment
Operating profit Margin for different segments:
Operating Profit Margin = Operating profit / Revenue * 100
 The retail operations:
Operating Profit margin = 544 / 6,006 * 100 = 9.05%
 The online store:
Operating Profit Margin = 206 / 1,644 * 100 = 12.53%
 The hotel contract:
Operating Profit Margin = 123 / 1,350 * 100 = 9.11%

f) Give ONE reason why the online store's operational profit margin is larger than the other
sectors of the firm.
The operating profit margin of the business from its online store segment was larger than
other segments due to the fact that there have less of operating expenses that the business faced
in this segment. The revenue and costs from this segment were less and because of this, the
segment was able to convert its revenue into operating profits by deducting these lesser costs.
Q3: Interpreting Relaxation’s Statement of Financial Position (SOFP)
a) Explain why depreciation is paid and how it affects the property, plant, and equipment's
worth.
Depreciation brings down the worth of property, plant, and gear on the pay articulation as
the resource's worth deteriorates after some time inferable from mileage and the finish of its
valuable life (Aldamen, Duncan, Kelly, and McNamara, 2020). The deterioration use is utilized
to bring down the worth of the net equilibrium and is recorded as a cost on the pay explanation
b) Calculation of different ratios
Capital gearing ratio: this ratio gives insight about the capital structure of the business.
Capital gearing ratio = Equity shares capital / Long term debts
2019 = 1,440 / 606 = 2.37
2020 = 1,593 / 618 = 2.57
Interest cover ratio: The interest coverage ratio is a debt-to-profitability ratio that decides how
promptly an enterprise can pay interest on its obligation (Ozdil, and Hoque, 2019).
Interest Cover ratio = Earnings before interest and tax / Interest expense
2019 = 511 / 51 = 10.01
2020 = 873 / 65 = 13.43
c) Explain how interest cover ratios and gearing assist us evaluate a company's financial stability.
The capital gearing ratio tells us about the capital structure of the business. the business of
Relaxation can be seen to have capital gearing ratio near to 2.40 which means that the business is
using more of equity than debts. The business currently has less risk – taking power but the
business is working fine as they are able to provide dividend to the shareholders at a good rate.
The interest coverage ratio of the business can be seen 10 times and 13 times in the year
2019 and 2020 respectively. This is good position for the business as it can be said that the

business can meet their short-term interest obligations 10 times and 13 times respectively. The
earnings of the business are good.
Q4: Interpreting Relaxation’s Statement of Cash Flows
Identify THREE transactions that resulted in this monetary outflow. You must explain why each
financial outflow occurred.
The company faced a major cash outflow in the year 2020. This was majorly due to three
particular transactions which were, Purchase of Property, Plant & Equipment, Repayment of
long-term borrowings, Dividend paid. The company has made a huge investment of £ 75,000
for the purchase of assets. The company has also repaid the loan term obligation that the
company was facing, they paid an amount of £ 63,000 for this repayment of loan. The company
has also paid £ 453000 for the dividend to different shareholders in the year which is showing a
major outflow of cash from the business even though the business is recording huge profit. All
these transactions have occurred due to the fact that business has earned enough profits in the
year 2020.
The purchase of property, Plant & Equipment has happened as the business has invested in
the equipment to produce the products and label them with the hotel’s logo and name. There has
been repayment of long – term borrowings as the business already had enough borrowings and to
get more the bank needed them to repay the old obligations first. The dividend has been paid as
the business wass able to earn enough profits in the year 2020.
Q5: Recommendation
The new online shop and hotel deal can be said to have a good impact on the overall
business of the company. The online shop helped the business to reduce the risk related to the
COVID-19 pandemic and the hotel deal helped the business to sell its normal products at a
higher price due to the hotel name tag on it. These new segments have overall increased the costs
for the business but the benefit that the business is able to derive from them is good and they are
worth it. The business should focus on reducing the receivables collection period and enhancing
the payables period as currently the business has inefficiency in same. This might pose a threat
on the current situation of the business and liquidity of the company. The business should try to
get more loan for its capital as the business should try taking more risks in the business and come
up with more advanced and better products which would guarantee their success in long run.

REFERENCES
Books and Journals
Battiston, S., and et.al., 2021. Accounting for finance is key for climate mitigation
pathways. Science, 28.
McLaney, E. and Atrill, P., 2020. Accounting and Finance. Pearson Education, Limited.
Linnenluecke, M.K., Marrone, M. and Singh, A.K., 2020. Sixty years of Accounting & Finance:
a bibliometric analysis of major research themes and contributions. Accounting &
Finance, 60(4), pp.3217-3251.
Aldamen, H., Duncan, K., Kelly, S. and McNamara, R., 2020. Corporate governance and family
firm performance during the Global Financial Crisis. Accounting & Finance, 60(2),
pp.1673-1701.
Ozdil, E. and Hoque, Z., 2019. Accounting as an Engine for the Re‐Creation of Strategy at a
University. Accounting & Finance, 59(3), pp.1741-1762.