AC4052QA Financial Accounting Report: Ratio Analysis and Ovid Venture

This report provides a comprehensive financial analysis, beginning with an interpretation of financial ratios for ASOS plc, a UK-based online retailer, evaluating its profitability, efficiency, liquidity, and financial structure. The analysis reveals areas needing improvement, such as stock turnover and debtor collection days, and suggests strategies for enhancement. The report then presents the preparation of financial statements for Ovid Venture, including an income statement and balance sheet for the year ended December 31, 2021. Finally, it details the impact of various adjustments on the profit and loss account and balance sheet, along with the cash flow implications of depreciation, disposal of non-current assets, and changes in inventory.

AC4052QA FINANCIAL
ACCOUNTING

Table of Contents
SECTION A.....................................................................................................................................3
INTRODUCTION...........................................................................................................................3
Interpretation of Ratios................................................................................................................3
CONCLUSION................................................................................................................................5
SECTION B.....................................................................................................................................6
Question 1....................................................................................................................................6
Preparation of Income statement of Ovid Venture......................................................................6
Preparation of balance sheet of Ovid Venture.............................................................................6
Question 2....................................................................................................................................7
1....................................................................................................................................................7
2....................................................................................................................................................8
REFERENCES................................................................................................................................9

SECTION A
INTRODUCTION
Ratio analysis is a tool with the help of which users of financial statement can analyse the
financial performance of company for their decision-making purpose. ASOS plc is a UK based
online retail company which offer fashion related products to its customers. The report will cover
the interpretation of ratios via evaluating the profitability, efficiency, liquidity and financial
structure of ASOS organization.
Interpretation of Ratios
Evaluating financial performance and position of ASOS Plc using financial ratios are as follows:
Profitability ratios: The profitability ratio state the ability of the company to generate
returns from the business operation and capital. In order to evaluate the profitability position of
ASOS plc, the return on capital employed is used. After analysing the result of return on capital
employed of ASOS organization for the four year, it is identified that profitability performance
of company is getting worst current year as compared to previous year. It is because in the year
2018 the ROCE of company is 22.72%, 2019 it is 6.99%, 2020 it is 12.52% and in the year 2021
it is 9.39%. The reason behind the drastic decrement in the ROCE of ASOS company is a
decrease in the earnings before interest and tax, increase in equity or an increase in non-current
liabilities. Ultimately, the result indicates that the ability of ASOS organization to generate profit
from its invested capital is poor in current year as compared to previous year. In order to improve
the same, the company need to adopt appropriate and suitable strategies. Here, the company
basically need to increase the sales and reduce the cost of sales. To reduce the cost of sales, it is
recommended to the company that they should provide training and development to its
employees (Gouda, El-Hoshy and Hassan, 2018). The impact of which the wastage of resources
will get decrease and ultimately cost of production will decrease.
Thus, in this way, ASOS company can enhance its overall profitability position of the
business in the market and gain competitive advantage.
Efficiency ratios: An efficiency ratio of the company indicates the ability of the
company to appropriately use assets in the business operation in order to generate income. The
three most significant efficiency ratio used to identify efficiency performance of ASOS is stock

turnover percentage, debtor collection period and creditors payment period. The stock turnover
of company in the current year i.e., 2021 is 4.85% which is lower than the previous year of
6.13%. Not only that, in the year 2019 and 2019, the stock turnover percentage is higher than
current year. This means that the capacity of the company to sell its goods and products quickly
and easily is poor in current year. Further, the debtor’s collection period of ASOS plc in the year
2021 is higher than all the previous three years. This means that company takes more time to
collect its dues from the debtors because of its poor credit policy (Linares-Mustarós, Coenders
and Vives-Mestres, 2018). The creditors' payment period of ASOS organization in the year 2021
i.e., 36.81 is lower than the previous year of 39.5 days. This means the company pay its dues to
its supplier on time in order to improve the credit worthiness of the business.
After analysing the overall efficiency ratio result, it can be interpretable that the credit
policy of ASOS organization is poor along with its selling strategy. In order to improve the same,
it is advisable to ASOS plc that they should promote its products and services over the social
media platform. Not only that, the company’s management also need to decide the discount
policy on sales. It means the company should offer discount to its customers if they purchase the
products on cash rather than credit (Risal and Aqsa, 2020). Also, discount will be offer to
customer on the early payment of dues. Further, it is also advisable to the management of ASOS
that they should prepare A/R aging report in order to determine the current payment status of
each debtors of the organization. Also, being proactive in generating invoices and sending them
to customers is most important part of the internal management of the company.
Liquidity ratios: The liquidity ratio is also one of the significant metrics of financial
ratio which indicate the capability of the company to pay off its current obligation with the use of
cash balance and cash generated from other current assets. The current ratio and quick ratio is
computed and used for identifying the liquidity performance of the company. After analysing the
result of ratio calculations, it is identified that current ratio of ASOS plc in the year 2021 is 1.56
which is higher than all the previous three years. On the other hand, quick ratio of the company
also higher in current year i.e., 0.75 as compared to all the previous three years. This means the
liquidity position of ASOS company is getting better year by year. This might be because of the
good credit worthiness of the business in the market and in the eye of supplier. The company has
the capability to pay its supplier on time from the cash they kept aside or cash collection from

debtors or cash from sale of inventory. However, the current as well as quick ratio of the
company is lower than the ideal or standard ratio of 2:1 and 1:1 respectively. So, in order to
achieve the ideal ratio, the management of ASOS plc should adopt some steps.
It is advisable to company that they should offer an early payment discounts to its credit
customers in order to collect the cash earlier. This further used by company to pay off its
obligations on time (Mongwe and Malan, 2020). Along with this, the company can also sale its
outdated assets into the market in order to generate more cash within the organization. Besides
generating cash, the company also need to build strong relation with the supplier so that any
delay in payment will not affect the liquidity and credit worthiness of the organization.
Financial structure ratios: This is another financial ratio metrics which indicate the
gearing percentage of ASOS organization is higher in current year as compared to previous years
(Coufal, 2020). This indicates better structural and financial position of the company in the
market. ASOS should maintain its financial structure in this way only without increasing
percentage too much. In this way, it can be said that the overall financial performance of ASOS
is good but the company should adopt strategy to improve its more.
CONCLUSION
After summing up the above information, it is concluded that the overall financial
performance and structure of ASOS plc is good in current year except some of the areas such as
stock turnover, return on capital employed, debtor’s collection days. The report has
recommended the various strategies with the application of which the company can enhance its
performance and position of business. Lastly, the report has also concluded the factors which
leads to decrease in ratios in the interpretation of ratio section of report.

SECTION B
Question 1
Preparation of Income statement of Ovid Venture
Income Statement
for the year ended 31st December 2021
Particulars Details Amount
Sales 280000
Less Cost of Sales:
Opening stock 14000
Add Purchases 160000
Less Closing stock 18000
Total 156000
Gross Profit 124000
Less Operating expenses
Wages and salaries 21000
Rents and rates 7500
Insurance less prepaid (1700 – 400) 1300
Electricity add outstanding (2800 +
250) 3050
Delivery 8500
Advertising 900
Audit and accountancy 500
Office expenses 700
Depreciation on fixture and fittings 20000
Depreciation on motor vehicle 2365
Total 65815
Net income before interest 58185
Less Bank interest 200
Net Income 57985

Preparation of balance sheet of Ovid Venture
Balance sheet
as at 31st December 2021
Particulars Cost
Accumulated
Depreciation Net Book Value
Fixed (Non-current) Assets
Fixtures and fittings 80000 60000 20000
Motor Vehicle 25000 3715 21285
Current assets
Debtors 41350 41350
Bank 1500 1500
Inventory 18000 18000
Prepaid insurance 400 400
Total Assets 102535
Current Liabilities
Creditors 8900
Outstanding electricity payable 250
Total Current liabilities 9150
Non-current liabilities
Long term bank loan 2200
Total Liabilities 11350
Net Assets 91185
Equity
Ordinary £1 shares (issued and fully paid) 20000

Retained Earnings
Opening profit and loss 13200
Add Net profit of year 57985
Total Equity 91185
Question 2
1.
The impact of following adjustment on Profit & loss account and balance sheet are as follows:
a. Prepaid expenses: Deducted from particular expense in P&L a/c and recorded under current
assets of BS.
b. Accrued expenses: Added back to particular expense in P&L a/c and recorded under current
liabilities of BS.
c. Prepaid income: Deducted from particular income in P&L a/c and recorded under current
liability of BS.
d. Accrued income: Added back to particular income in P&L a/c and recorded under current
assets of BS (Utami, Atmaja and Hirawati, 2021).
2.
a. Depreciation: It is added back to operating cash flow because it is a non-cash item.
b. Disposal of non-current assets: It is added back to investing activities of cash flow statement
because cash comes in due to sale.
c. An increase in inventory: It is deducted from operating cash flows because cash is used to
purchase inventory (Damani and et.al., 2021).

REFERENCES
Books and journals
Gouda, O. E., El-Hoshy, S. H. and Hassan, H. T., 2018. Proposed three ratios technique for the
interpretation of mineral oil transformers based dissolved gas analysis. IET Generation,
Transmission & Distribution. 12(11). pp.2650-2661.
Linares-Mustarós, S., Coenders, G. and Vives-Mestres, M., 2018. Financial performance and
distress profiles. From classification according to financial ratios to compositional
classification. Advances in Accounting. 40. pp.1-10.
Risal, M. and Aqsa, M., 2020, October. The Influence of Financial Ratios and Intellectual
Capital on Financial Difficulties in Construction Companies. In International
Conference on Community Development (ICCD 2020) (pp. 303-307). Atlantis Press.
Mongwe, W. T. and Malan, K. M., 2020, December. The efficacy of financial ratios for fraud
detection using self organising maps. In 2020 IEEE Symposium Series on
Computational Intelligence (SSCI) (pp. 1100-1106). IEEE.
Coufal, M., 2020. Significance of different financial ratios in predicting stock returns: NYSE-
cross-industry analysis.
Utami, D. W., Atmaja, H. E. and Hirawati, H., 2021. The Role of Financial Ratios on the
Financial Distress Prediction. KINERJA. 25(2). pp.287-307.
Damani, A. D. and et.al., 2021. An Empirical study of the Financial Ratios of the Indian
Information Technology Sector by applying Factor Analysis and substantiation of the
results using Cluster Analysis.