Financial Statement Analysis and Ratio Comparison Report

This report presents a detailed analysis of financial statements, encompassing the preparation of an adjusted trial balance, a statement of comprehensive income, and a balance sheet for Weather and Sons. It also includes working notes that elaborate on specific calculations, such as prepaid expenses, depreciation, and accruals. Furthermore, the report extends to financial ratio analysis, specifically focusing on comparing the performance of Ryanair and EasyJet. The analysis involves creating ratio tables for the years 2013, 2014, and 2015, providing insights into the financial health and operational efficiency of the selected companies. The report aims to provide a thorough understanding of financial statement preparation and the application of financial ratios in performance evaluation.

Accounting
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TABLE OF CONTENTS
INTRODUCTION................................................................................................................................3
TASK 1.................................................................................................................................................3
Question1.........................................................................................................................................3
a) Preparing adjusted trial balance...................................................................................................3
b) Preparation of the statement of comprehensive income.............................................................6
c.) Preparation of balance sheet.......................................................................................................7
TASK 2...............................................................................................................................................10
Question 2......................................................................................................................................10
Produce the 2013, 2014 and 2015 ratio tables for the Ryanair and Easy Jet and the comparison of
performance of the selected companies.........................................................................................10
CONCLUSION..................................................................................................................................12
REFERENCES...................................................................................................................................13
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INTRODUCTION
Accounting is the systematic and comprehensive recording of financial transaction related to
a business. It is a process of analysing, summarizing and reporting of transaction. It is regard as a
“Language of the business” which assists the companies to convey right and accurate financial
information to external parties in order to enhance brand image in front on the stakeholders
(Zimmerman and Yahya-Zadeh, 2011). All business and economical decision making are based on
financial statement which is the outcome of accounting information system. Without keeping a
proper account, the objective will not be achieved in the right manner. Accounting is a basic need of
a business organization to find out where the business stands in the market in terms of financial
aspect (Accounting- Need And Importance, 2016). It delivers a great essence of providing the basis
for planning and budgeting at the time of dealing and measuring economic activities and
communicating financial information to the users for decision making process.
TASK 1
Accounting can be categorized into different areas like financial, management, auditing,
taxation accounting etc. This division is based on several functions and related powers to these
various streams. Profession of accounting include private and public accounting categorize (Kaplan
and Atkinson, 2015). Private accounting is employed by an organization in order to keep record of
daily transactions. On the other hand, public accountants appoint by the government itself with the
aim of auditing. These types of accountants know with the name of external auditors and they are
protecting the interest of the shareholders. Public accountants need to follow all regulations and
rules of government in right way. For presenting the financial information of a business, a company
use different kinds of methods and format. The basic and common methods are income statements
and balance sheet (Horngren, Sundem, Schatzberg and Burgstahler, 2013). Along with this, trail
balance also used by the firms in order to deliver financial information to the shareholders.
Question1
a) Preparing adjusted trial balance
Trial balance is a list of closing balance of ledger accounts on a particular date. It can be
considered as a first stage of preparation of financial statements. Generally, it prepares at the end of
accounting period which assist in drafting of financial statement (What is a trial balance?, 2016).
With the help of this, it is easy for the organizations to ensure that every debit entry recorded
against a corresponding credit entry in the accounts book. During this process, a double entry
concept of accounting follows. It is important to resolve the differences in trial balance because
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after preparing financial statement, rectification of differences or errors cannot be easy tasks. Trail
balance ensures that the account balances are accurately taken from accounting ledgers. An adjusted
trial balance as at June 30, 2016 for Weather and Sons is as follows:
Table 1 Adjusted trial balance
Weather and sons
Adjusted trial balance as at June 30, 2016
Accounts Debit in £ Credit in £
Retained earnings 88000
Sales 636000
Share capital 100000
Share premium 200000
Inventory 50000
Purchases 230000
Trade payables 86000
Trade receivables 205000
Bank 83900
Motor expenses 12987
Maintenance 12000
Salaries and wages 106000
Admin expenses 33220
Telephone 5687
Heat and light 14300
Prepaid expenses (W.N.1) 13000
Equipment at cost 318000
Provision for Depreciation (W.N.2) 51000
Motor vehicles 45000
Rent 60000
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Advertising 19118
Bad debts 3788
PBD 2000
Long term loan 90000
Interest on loan 9000
Depreciation (W.N.3) 58950
Accrual (W.N.4) 4300
provision for tax 18300
Loan interest accrued 12950
Total £ 1284250 £ 1284250
Working notes (W.N.)
W.N.1 Prepaid expenses
Description Amount in Pounds (£)
Prepaid rent 8000
Prepaid heat and light expenses 5000
Total £13000
W.N.2 Provision for depreciation
Description Amount in Pounds (£)
Provision for depreciation on Equipments 45000
Provision for depreciation on Motor vehicle 6000
Total £51000
W.N.3 Depreciation
Description Amount in Pounds (£)
Equipment 318000
- Depreciation@15% (47700)
Equipment value after 15% depreciation £270300
Motor vehicle 45000
-Depreciation@25% (11250)
Motor vehicle value after 25% depreciation £33750
Total £58950
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W.N. 4 Accruals
The amount of £4300 of the accruals of telephone expenses includes in the adjusted trial balance.
b) Preparation of the statement of comprehensive income
An income statement refers to the financial statements of a company which shows revenue
and expenses of an organization at a particular time period (DRURY, 2013). It shows how the
revenues from the sales of services and products before expense are taking out and shift it into the
net income. Firm can take effective financial decision from income statement. With the help of this,
it can be easily identified that how a business has been performed during a particular period.
Income statement can be divided into three parts: total revenue, total expenses and net income.
Single and multiple steps are the two methods of income statement preparation (Types of income
statements, 2016).
Comprehensive income for an organization is the combination of net income/net loss and
other comprehensive incomes (i.e. unrealized gains/losses on available for sale investments,
hedge/derivative financial instruments, postretirement benefit plans and Foreign currency
translation adjustments) amounts which occurred at the particular time such as month, year, quarter
etc. Generally, comprehensive income consists of all of the gains, revenues, expenses and losses
that caused by change in equity of shareholders during period of accounting (What is
comprehensive income?, 2016). For the given case study, the statement of comprehensive income of
is an as follows:
Table 2 Statement of comprehensive income
Weather and sons
Income statement as at June 30, 2016
Particulars Amount in £ Particulars Amount in £
To opening stock 87000 By sales 636000
To purchases 230000 By closing inventory 50000
To prepaid expenses 13000
To Gross profit 356000
Total 686000 686000
To motor expenses 12987 By Gross profit 356000
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To maintenance 12000
To salaries and wages 106000
To admin expenses 33220
To telephone (W.N.1) 9987
To rent 60000
To advertising 19118
To bad debts 3788
To PBD 2000
To interest 9000
To accrued interest 12950
To depreciation 58950
To provision for taxation 18300
To net profit 1488
Total 356000 356000
c.) Preparation of balance sheet
Balance sheet is a financial statement which summarizes an organization liability, assets and
shareholders’ equity at a particular time. Its three balance sheet segments gives idea to the investors
about what company owns and owes as well as amount invested by shareholders (What are balance
sheets and why are they important?, 2016). Formula for preparing balance sheet is as follows:
Assets = Liabilities + Shareholders' Equity
In accounts, balance sheet consider as a one of the major financial statements which is used
by the accountants and owner of company. It is also refer as the statement of financial position. In
terms of balance sheet, assets are objects which the venture owns (Gow, Ormazabal and Taylor,
2010). These can be said as resources of the firm that have been acquired via transactions and their
value can be measured and express in currency. Assets also includes costs which has been already
paid in advance that still not out of the date such as prepaid ads, insurance, legal fees, rent,
telephone bills etc. On the other hand, same like assets, liabilities can be divided into current and
noncurrent liabilities. Current liabilities represent payment obligations of a firm which needed to be
pay within 12 months of the date on the balance sheet. Noncurrent liabilities are those amounts that
can be paid more than one year. Apart from this, if a person is a sole proprietor of his business then
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it is called owner’s equity (Liabilities, 2016). But if venture comes under corporation category then
it is known as stakeholder’s equity. Equity is a combination of paid in capital and retained earnings.
With the help of balance sheet, a bank can easily know that whether an organization is qualified or
not for additional loans and credits. Along with this, it assists present and potential investors to
better understand where their investment will go and what they can expect to receive in the future in
terms of dividends (Kieso, Weygandt and Warfield, 2010).
Table 3 balance sheet
Weather and sons
Balance sheet as at June 30, 2016
Assets Notes Amount in £
Noncurrent assets 1 256050
Current assets
Inventory 50000
Trade receivables 2 203000
Bank 3 96900
Miscellaneous provision 30000
Total assets 585950
Equity
Share capital 100000
Reserves:
Retained earnings 88000
Share premium 200000
Total equity
Liabilities
Non-current liabilities
Long term loan 5 111950
Current liability
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Trade payables 86000
Total equity and liability 585950
Notes to accounts
Table 4 Notes to accounts for balance sheet
Particulars Amount in Pounds (£)
1. Noncurrent assets
Equipment 3180000
- Provision for depreciation (45000)
- Depreciation (44700)
Equipment value after depreciation 228300
Motor vehicle 45000
- Provision for depreciation (6000)
- Depreciation (11250)
Motor vehicle value after depreciation 27750
Total current assets 256050
2. Trade receivables
Balance 205000
- Provision for bad debts (2000)
Total balance 203000
3. Bank amount
Balance 83900
+ Prepaid rent 8000
+ Prepaid heat and light 5000
Total balance 96900
4. Share capital
Ordinary shares 100000
+ Net profit 1488
Total balance 101488
5. Long teen loan
Long term loan 90000
+ Interest 9000
+ Accrued interest 12950
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Total balance 111950
TASK 2
Financial ratios are useful indicators of performance of an organization. It represents the
financial situations. With the help of this, it can be easy to analyse trends and then compare the
business financial to the other organizations business financial performance (Laidre, 2016). There
are five types of financial ratios such as liquidity, asset turnover, financial leverage, profitability and
dividend policy ratio. Several kinds of financial ratios are used by financial analysts in order to
determine the strengths and weaknesses of a company and compare it with the other firms. Along
with this, it helps in judging internal performance and productivity of the business in oppose of the
external environment (Hail, Leuz and Wysocki, 2010). Financial ratio assists in evaluation of a
business from the different angles by considering various aspects. Many of the public enterprises
are required to follow GAAP principles of their nations to assess financial performance.
Question 2
Produce the 2013, 2014 and 2015 ratio tables for the Ryanair and Easy Jet and the comparison of
performance of the selected companies
Table 5 Comparison of performance of Easy Jet and Ryanair
Easy jet Ryan Air
Particulars Years
2013 2014 2015 2013 2014 2015
Profitability Ratios
Return on equity 20.89% 21.48% 24.79% 17.31% 15.94% 23.68%
Net profit 9.35% 9.94% 11.69% 11.66% 10.38% 15.33%
Liquidity Ratios
Current ratio 1.05 0.89 0.72 1.97 1.51 1.72
Quick ratio 0.99 0.79 0.66 1.88 1.45 1.45
Efficiency Ratios
Receivables turnover 40.17 60.36 80.79 90.78 88.21 95.67
Fixed asset turnover 1.82 1.88 1.73 0.99 1.01 1.07
Profitability ratios: It is a classification of financial metrics that is used to evaluate ability of
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business to generate high amount of earning as compare to its expenses. It is methods which assist
in evaluate strong position of the business in the present market in the form of profitability. The
main aim of owner of every venture is generating high earning to maximize the wealth of the
shareholders (Larcker and Rusticus, 2010). The various financial ratios of the profitability helps in
determine the financial efficiency of the business.
Return on equity: It measures the profitability of a business in the respect value of
shareholder equity. It knows as net assets which calculate from subtract liabilities to assets. It
defines the return on the investments done by the shareholders.
Formula: ROE= (Net income/Shareholder Equity) x100
From the above comparison table, the figures of return on equity shows increase trend of
Easy Jet and Ryanair. By comparing the financial performance of both of the companies by
considering their Return on Equity, it has found that Ryanair has high percentage of ROE between
the periods of 2013 to 2015 as compare to Easy Jet (Choi and Meek, 2011).
Net profit: This is also known with the name of net profit margin ratio and it is used to
measure the profitability of the business.
Formula:
Net profit margin: Net profit/Net sales
From the comparison table, it has been clearly identified that net profit margin of Easy Jet
has increased with the time. On the other hand, Ryanair net profit margin has nit grew with that
exponential speed. In 2013, it was 11.66% and 2014; it was decreased and reached at 10.38%. In
2015, it was again increase i.e. 15.33% (Bebbington, Unerman and O'Dwyer, 2014). From this, it
has clearly shown that Ryanair has generated high amount of net profit margin as compare to Easy
Jet.
Liquidity ratios: It assists in judge efficiency of the business by using various ratios such as
current ratio, financial leverage, quick ratio, equity ratios, debt etc.
Current ratio: It is a kind of liquidity ration that is used to measure the capabilities of a
business to pay off its short term liabilities by its current assets. To avoid the risk of liquidity trap
situation, it is essential to measure liquidity (Denison, 2010).
Formula: Current ratio= Current assets/ Current liabilities
From the comparison table, it has determined that current ration of Easy Jet has decreased
with the time and in the opposite, current ration of Ryanair is also decreasing but it is higher as
compare to Easy Jet. It clearly defines that Easy Jet is under the liquidity trap situation where its
current liabilities are more than its current assets values. Due to this, company has not able to pay
off its short term debt in frequent manner (Garrison, Noreen, Brewer and McGowan, 2010).
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Quick ratio: It is common and most important method to measure financial performance of
a company. Under this, total amount of cash + marketable securities+ accounts receivables to the
amount of current liabilities compares.
Formula: Quick ratio= Cash and cash equivalents+ Marketable securities+ Accounts
receivables Current liabilities
From the comparison table of two organization, it has been explored that quick ratio of Easy
Jet and Ryanair decreases. This reflects the shortage of the company to pay off its short term
liabilities (Lennox, Francis and Wang, 2011).
Efficiency ratios: The aim of this method to analyse the future efficiency of a business in
various aspects. It includes various ratios such as trade receivables, fixed asset turnover, inventory
turnover and asset turnover.
Receivables turnover: The receivable turnover of the Easy jet company reflects that there is
a strong capability of the firm to control over recovery of the payments from the debtors. This trend
increases every year by 20%. But in the case Ryanair, this trend has increased or decreased with the
time.
Fixed asset turnover: The following trend of the Easy Jet has decreased and in the opposite,
Ryanair trend has increased with the time (Zimmerman and Yahya-Zadeh, 2011).
CONCLUSION
From the above study it has been concluded that the accounting has played an important role
in every organization. It has used to keep the records of all kind of transactions in right format.
There have various methods and techniques have available by which a performance of a company
can be evaluated by considering many aspects.
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