Financial Statement Analysis: A Report on Kedison and Chocco PLC

This report provides a comprehensive financial analysis of Kedison PLC and Chocco PLC. It includes the preparation of financial statements for Kedison PLC, such as the profit and loss statement and balance sheet, along with detailed working notes. The report also presents a ratio analysis for Chocco PLC for the years 2020 and 2019, calculating key ratios like ROCE, ROE, EPS, net profit margin, asset turnover, stock holding days, debtors collection period, current ratio, gearing ratio, and inventory turnover. Furthermore, it offers insightful comments on the financial performance and position of Chocco PLC, evaluating various aspects such as profitability, efficiency, and liquidity based on the calculated ratios. This document helps in understanding the financial health and performance of both companies through detailed analysis and calculations.

FUNDAMENTALS

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
QUESTION 1 ..................................................................................................................................1
(a) Financial statement of Kedison PLC.....................................................................................1
(b) Reasons for balancing the statement of financial position....................................................3
QUESTION 2 ..................................................................................................................................4
(a)Calculate the following ratios for Chocco plc for 2020 and 2019, showing the formulas and
workings:.....................................................................................................................................4
(b) Comments on the financial performances and position of the Chocco Plc.........................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Fundamentals of accounting are basically a procedure of data entry along with
summarizing, recording, analysing and reporting the data which are related to the financial
transactions of business organizations (Lev, 2019). The current project is about the preparation
of financial statements within the business. According to this, all the important calculations have
been made in respect to the firm's data that are given in order to interpret the final results. The
statements will interpret the financial position and the profitability of the business. Apart from
this, the report has also describe the ratio analysis of the firm data that are given for two
particular years. The ratio analysis of the company provides data with comparing different sets
of financial data. This comparison will give a detailed understanding of the financial position of
the establishment.
MAIN BODY
QUESTION 1
(a) Financial statement of Kedison PLC
Profit and loss statement for the financial year ended 31st December 2020
Particulars Amount
Sales 826650
Less: Cost of sales 578650
Gross Profit 248000
(-) Administrative expenses 30000
(-) Interest paid (W.N. 1) 4000
(-) Directors remuneration 5000
(-) Distribution cost 28000
(-) Sales commission (W.N. 2) 3000
(-) Corporate tax 68000
Net Profit 110000
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(-) Preference dividend paid (W.N. 3) 30000
Earnings available to equity shareholders 80000
(-) Ordinary dividend paid 20000
Retained Earnings 60000
Statement of financial position as on 31st December 2020
Particulars Amount Amount
ASSETS
Fixed Assets
Plant and equipment 632730
Current Assets
Stock (W.N. 4) 329620
Debtors (W.N. 5) 171105
Cash and bank 12900
Total assets 1146355
LIABILITIES
Long term liabilities
4% Debentures 100000
Current Liabilities (W.N. 6)
Creditors 171355
Outstanding commission 3000
Outstanding Interest 2000
Tax payable 68000
Shareholders equity 802000
2

Ordinary shares 310000
10% preference shares 300000
Profit for the period (W.N. 7) 110000
Retained earnings (W.N. 8) 82000
Total Liabilities 1146355
Working Notes:-
1. Interest expense for the year 2020 on 4% Debentures are 100000 * 4% i.e. 4000.
From the expense of 4000, amount of 2000 has been paid and the remaining balance of 2000 is
outstanding for the firm. Interest expenses in profit and loss statement is 4000 and the
outstanding balance in the balance sheet is 2000.
2. Sales commission which is to be paid to the sales person in the month of January has to
be evidenced as the expense within the current month because it belongs to the sales that
has been made in recent year.
3. The payments of dividends pertaining to the shareholders must be paid after the complete
analysis of the firm as they are not the expense of the firm. This will never recorded in
the P&L account in order to calculate the profits of the organization for the period.
4. The closing stock of the Kedison PLC had been reduced by the amount of 980 as the
goods are delivered to the consumers on 31st December 2020 for which the adjustment is
not made by the firm.
5. The balance of the debtors account has been enhanced by 980 as the consumers have
remaining to pay the amount of the goods. Thus, the amount of dues has been settled at
later stage after the closure of the books of company accounts.
6. The outstanding interest, tax and the sales person commission has been recorded in the
current liabilities of the firm. The expenses that are belong to the current year but not
paid yet has been settled at later stage.
7. The net profit of the amount of 110000 has been recorded in the balance sheet by adding
it in the shareholder's equity segment.
8. The balance of the retained earnings of previous year has been used in the payment of the
recent year's dividend which is 30000 to the preference shareholders and 20000 to the
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equity shareholders in the organization. In such order, the total amount of 50000 has
been reduced from the last year's balance of 132000. So, the final amount of retained
earnings that has been recorded in the current balance sheet are 82000.
(b) Reasons for balancing the statement of financial position
The balance sheet is the document which involves all the necessary informations
regarding the organization and has been considered as crucial in order to understand the overall
condition of the firm. The top half of the document consists of assets which describes the ways
in which the values has been utilised in the business. The bottom half of the document includes
the liabilities + equity which shows the way in which the value was acquired or the sources of
funding (Trainor, Phillips and Cangialosi, 2018). Both the accounts are need to be balanced
because the total value of the business assets will all have been funded with the help of liabilities
and equity. In case if both the accounts are not balanced, it has been clearly understood that
some part has been missed to include while preparing balance sheet statement. Another reason is
that the company utilises double entry book keeping system of accounting in which states that
each time single transaction occurs, it will be recorded in at least two places. With the help of
recording the transactions into both the accounts at the same time enables the firm to matches
the balance sheet from both sides (McCarron and Burstein, 2017). The balance sheet is the
crucial information about the firm and has been help various stakeholders and users in order to
evaluate the exact position of the company in detailed manner.
QUESTION 2
(a)Calculate the following ratios for Chocco plc for 2020 and 2019, showing the formulas and
workings:
(1)
Particulars Formula 2020 2019
Earning Before Interest
and Tax 846 720
Total assets 9736 10087
Current liabilities 2511 3046
Capital employed Total assets - Current liabilities 7225 7041
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ROCE ratio EBIT / Capital employed 11.7% 10.2%
(2)
Particulars Formula 2020 2019
Net Income 431 366
Shareholders equity 3088 2912
ROE
Net income / average
shareholders equity 13.96% 12.57%
5
0.09 0.095 0.1 0.105 0.11 0.115 0.12
ROCE
2019
2020

(3)
Particulars Formula 2020 2019
Net income 431 366
Preferred dividend 0 0
Average common
shares outstanding 600 600
Earning per share
(Net income - Preferred dividend) /
Average common shares outstanding 0.72 0.61
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(4)
Particulars Formula 2020 2019
Net profit 431 366
Revenue 6738 6441
Net profit margin Net profit / sales * 100 6.40% 5.68%
7
0.54 0.56 0.58 0.6 0.62 0.64 0.66 0.68 0.7 0.72
Earning Per Share
2019
2020

(5)
Particulars Formula 2020 2019
Revenue 6738 6441
Total Assets 9736 10087
Asset turnover
Net sales / Average total
assets 0.69 0.64
(6)
Particulars Formula 2020 2019
Inventory 708 659
Cost of sales 3235 3096
Stock Holding days (Inventory / COGS)*365 80 78
8

(7)
Particulars Formula 2020 2019
Debtors 1249 1287
sales 6738 6441
Debtors collection Period (Debtors / sales)*365 68 73
9
76.5 77 77.5 78 78.5 79 79.5 80 80.5
Stock Holding Days
2019
2020

(8)
Particulars Formula 2020 2019
Current assets 2303 2355
Current liabilities 2511 3046
Current Ratio
Current assets / Current
liabilities 0.92 0.77
10
65 66 67 68 69 70 71 72 73
Debtors Collection Period
2019
2020

(9)
Particulars Formula 2020 2019
Total debt 4137 4129
Share holders equity 3088 2912
Gearing ratio formula
Long-term debt /
shareholders equity 1.3 1.4
11
0.65 0.7 0.75 0.8 0.85 0.9 0.95
Current Ratio
2019
2020

(10)
Particulars Formula 2020 2019
Net sales 6738 6441
Inventory 708 659
Inventory turnover ratio COGS / average stock 9.52 9.77
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1.24 1.26 1.28 1.3 1.32 1.34 1.36 1.38 1.4
Gearing Ratio
2019
2020
9.35 9.4 9.45 9.5 9.55 9.6 9.65 9.7 9.75 9.8
Inventory Turnover Ratio
2021
2020

(b) Comments on the financial performances and position of the Chocco Plc.
The financial statements are helpful in measuring the company's performances of current
year with comparing it with previous years (Ratcliffe, 2018). From the above balance sheet
certain ratios have been identified which are highly efficient and helpful enough to provide
detailed information about the company actions. The details are extremely accommodating to
evaluate company revenue, expenses, ability to meet its short and long term financial obligations
along with profitability and debt load. ROCE is a financial ratio that shows the company
performances that they are doing good job of generating profits from its capital. From the above
calculation it has been stated that the Chocco Plc. is doing good in year 2020 comparative to
2019. ROE shows management's ability to generate income from the available equity (Melander,
Sandström and von Schedvin, 2017). Thus, as per calculation ROE of 2020 which is 13.9% is
considered to be good and improving than previous year i.e. 2019 in which the ROE was 12.5%.
In context of earning per share which indicates the money generated by the firm of its stock has
been evaluated that the earning per share price has been increases in year 2020 from 0.61 to 0.72
which is a good sign for the firm.
In accordance to net profit margin which is also beneficial and considerable in year 2020
i.e. 6.39% which was 5.68% in previous year i.e. in 2019. This information is significant to
indicate company's overall financial health. As per asset turnover ratio it has been assessed that
higher the asset turn over ratio, the more efficient the company is generating revenue from its
assets (Kamar, 2017). From above calculation, the asset turnover ratio of year 2020 is 0.69 from
year 2019 which is 0.64. In terms of stock holding days, it has been examined that in year 2020,
stock has been hold by the Chocco firm for about 80 days which is not a good sign for the
company. In year 2019, it was 78 days. In discourse of debtors collection period, it has been
considered that reducing period of time is an indicator of increasing efficiency of the firm which
has been identified in the above calculation that the debtors collection days in 2020 are 68 days
which was previously as 73 days in 2019 which is good sign for the Chocco firm. In accounting
to the current ratio, it measures company's abilities to pay short term obligations those are due
within one year. From above computation it has been figure out that current ratio of 2020 is
0.917 while it was 0.773 in 2019. Although good current ratio is between 1.2 to 2, and the above
analysis shows that the current ratios for both the years are below 1 which means the company
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does not have enough liquid assets to cover its short term liabilities which is not adequate for the
firm.
Gearing ratio is an indicator of financial risks that are associated with the organization.
High gearing ratio illustrates high proportion of debt to equity while a low gearing ratio shows
low proportion of debt to equity (Nuryani and Sunarsi, 2020). As per the above calculation, the
gearing ratio of year 2020 is 1.3 while in year 2019 it was 1.4, which shows that it is not good
for the firm in any case although it has been improved from year 2019. The ideal gearing ratio is
0.5:1 under which both the figures are not being fit in efficient manner. At last the inventory
turnover ratio measures the number of times inventory is sold or utilised in a time period. It has
been calculated to know that business has a excessive stock in comparison to the sales level.
According to explained procedure, it has been undertaken that the company is unable to manage
their stock in appropriate manner as the ratio has been enhanced from year 2019 in which the
figure was 9.77 which has been converted this year i.e. 2020 as 9.52, which is not good for the
firm.
Thus, from complete demonstration it has been denoted that apart from all other elements
the company lack behind in their stock management (Albizu and et.al., 2017). In order to make
the inventory management effectively, the managers of the firm have to strategize their actions
in a way which are able to provide efficient stock management within the Chocco Plc.
CONCLUSION
From the above it has been concluded that with the preparation of the complete project
the concepts of profit and loss statement, balance sheet and ratio analysis has been cleared in
most efficient manner. This study consists of profit and loss statement due to which the revenue,
costs and expenses that are incurred within the operations are described with the help of
preparing the P&L account. Apart from this the balance sheet also had been prepared which
shows the company financial condition along with identification of various ratios which supplies
liquidity, profitability, solvency, efficiency and operating costs of the firm with proper
utilization of funds.
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REFERENCES
Books and Journals
Albizu, I., and et.al., 2017. Forecast ratio and security analysis of rating forecasting methods in
an overhead line. IET Generation, Transmission & Distribution, 11(6). pp.1598-1604.
Kamar, K., 2017. Analysis of the effect of return on equity (ROE) and debt to equity ratio
(DER) on stock price on cement industry listed in Indonesia stock exchange (IDX) in
the year of 2011-2015. IOSR Journal of Business and Management, 19(05). pp.66-76.
Lev, B., 2019. Ending the accounting-for-intangibles status quo. European Accounting
Review, 28(4). pp.713-736.
McCarron, K.B. and Burstein, A.N., 2017. The importance of mathematics as a prerequisite to
introductory financial accounting. Community College Journal of Research and
Practice, 41(9). pp.543-550.
Melander, O., Sandström, M. and von Schedvin, E., 2017. The effect of cash flow on
investment: an empirical test of the balance sheet theory. Empirical Economics, 53(2).
pp.695-716.
Nuryani, Y. and Sunarsi, D., 2020. The Effect of Current Ratio and Debt to Equity Ratio on
Deviding Growth. JASa (Jurnal Akuntansi, Audit dan Sistem Informasi
Akuntansi), 4(2). pp.304-312.
Ratcliffe, J., 2018. Profit and loss vs balance sheet thinking: what is the best way to protect your
assets?. Journal of Aesthetic Nursing, 7(2). pp.114-115.
Trainor, J.E., Phillips, C.R. and Cangialosi, M., 2018. An Analysis of the FASB's New Going-
Concern Standard and Its Relation to Liquidation Basis Accounting
Requirements. Review of business, 38(1).
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