University Finance: Income Statement Preparation, Analysis and Report

This report focuses on the preparation and analysis of an income statement, covering key aspects such as cost classification (fixed, variable, and semi-variable costs) and the calculation and interpretation of important financial ratios. The analysis includes a detailed examination of gross profit ratio, net profit ratio, current ratio, and liquidity ratios, providing insights into the company's financial performance and stability. The report also addresses long-term debt and offers recommendations to senior management based on the financial data. The report assesses the company's efficiency in managing direct costs, profitability, working capital management, and liquidity compared to industry averages. It provides a comprehensive view of the company's financial health and offers actionable advice for improvement, including working capital management and liquidity. The report is a valuable resource for students studying financial accounting.

Running head: PREPARATION OF INCOME STATEMENT AND ANALYSIS
Preparation on Income Statement and Analysis
Name of the Student:
Name of the University:
Author’s Note:

1PREPARATION OF INCOME STATEMENT AND ANALYSIS
Table of Contents
Answer to Question 8:................................................................................................................2
Answer to question 9:.................................................................................................................4
Answer to question 10................................................................................................................4
Sub part a:..............................................................................................................................4
Sub part b:..............................................................................................................................5
Answer to question 11:...............................................................................................................7
Sub part a:..............................................................................................................................7
Sub part b:..............................................................................................................................7
Sub part c:..............................................................................................................................8
Bibliography:..............................................................................................................................9

2PREPARATION OF INCOME STATEMENT AND ANALYSIS
Answer to Question 8:

3PREPARATION OF INCOME STATEMENT AND ANALYSIS

4PREPARATION OF INCOME STATEMENT AND ANALYSIS
Answer to question 9:
Answer to question 10
Sub part a:

5PREPARATION OF INCOME STATEMENT AND ANALYSIS
Sub part b:
Fixed Costs:
Behaviour wise costs can be classified into three categories, fixed costs, Variable
costs and semi-variable costs. Fixed costs are those expenses which do not depend on the
volume of output. It remains same irrespective of the output1. Fixed costs are also known as
period costs, because it depends on a certain time or period. With the increase in the volume
of output the total fixed costs remain same but the per unit variable cost decreases. In short
run firms tries to recover the variable costs only and in longer period time every firm wants to
recover variable cost as well the amount of the fixed cost thereby making profit2. Some good
example of fixed costs can be given as, Salary of Security, Office Staff Salary, Rent of
Godown, Insurance Expenses. All these expenses depends on time period not on the volume
of output.
Variable Costs:
Variable costs are those costs which varies proportionately with the increase or
decrease in the volume of output. Variable costs have a direct relationship with the volume.
As the volume increases with the same rate, and as the volume decreases the total variable
costs also decreases. With the changes in the volume of output the total variable costs
changes but per unit variable cost remains same. Some examples of variable costs are raw
1 Christ, Katherine L., and Roger L. Burritt. "Material flow cost accounting: a review and agenda for future
research." Journal of Cleaner Production 108 (2015): 1378-1389.
2 Shepherd, Ronald William. Theory of cost and production functions. Princeton University Press, 2015.

6PREPARATION OF INCOME STATEMENT AND ANALYSIS
materials, direct labour, direct consumables3. All these costs vary proportionately with the
variation in the volume of output.
Semi Variable Costs:
Semi Variable costs are the mixture of fixed and variable costs. Expenses, a part of
which remain same with the changes in output but the remaining part increases or decreases
with the increase or decrease in the volume of output, is known as semi variable costs. If it
can again be classified and segregated into two parts, fixed and variable, then ultimately it
will go back to the two components of total costs, variable and fixed4. Some examples of
semi variable costs are, depreciation of assets, facilities related expenses, overtime salaries
and wages. All those expenses remains fixed to a certain extent after which it also start to
increase or decrease.
3 Shepherd, Ronald William. Theory of cost and production functions. Princeton University Press, 2015.
4 Klychova, G. S., et al. "Management aspects of production cost accounting in horse breeding." Asian Social
Science11.11 (2015): 308.

7PREPARATION OF INCOME STATEMENT AND ANALYSIS
Answer to question 11:
Sub part a:
Sub part b:
From the above table, it can be observed that the company is having a gross profit
ratio of 50% which is satisfactory, it implies that the company is efficient in managing their
direct costs and boost the total revenue. They are almost earning 50% of their total revenue as
the gross profit. On the other hand, their net profit ratio is also satisfactory. They are almost
earning one third of their sales revenue as their net profit. They are having a 33.33% of net
profit. They are having a poor current ratio of 1:0.75. It implies they are having worse kind of
liquidity. They are not even able to meet all the current obligations through their current
assts. The ideal current ratio should have been 2:1. Their liquid ratio is also poor 1:0.65. it
should have been 1:1. Their long term debts are almost 29% of their equity which is
considerably good for them.

8PREPARATION OF INCOME STATEMENT AND ANALYSIS
Sub part c:
Report to the Senior Management of Lee & Co:
As it can be observed that the industry is having an average of 60% gross profit
margin the companies 50% gross profit margins is not satisfactory, the company should
check all their direct costs and take such measures to reduce the direct costs. In terms of the
net profit the company is performing well, while the industry average is 30% the company is
earning a 33.33% of net profit. The company should concentrate on their working capital
management as the company is having a very poor current ration much below the industry
average. The company’s liquidity is also in serious situation, while the industry average is
1:1; the company is having a liquid ration of only 1:0.75. In terms of gearing ration the
company is at par with the industry average, which means they are having almost same
capital structure.

9PREPARATION OF INCOME STATEMENT AND ANALYSIS
Bibliography:
Christ, Katherine L., and Roger L. Burritt. "Material flow cost accounting: a review and
agenda for future research." Journal of Cleaner Production 108 (2015): 1378-1389.
Froeb, Luke M., Brian T. McCann, and Michael R. Ward. Managerial economics. Cengage
learning, 2015.
Hill, Stephen. Managerial economics: the analysis of business decisions. Macmillan
International Higher Education, 2016.
Khan, Salman H., et al. "Cost-sensitive learning of deep feature representations from
imbalanced data." IEEE transactions on neural networks and learning systems 29.8 (2018):
3573-3587.
Klychova, G. S., et al. "Management aspects of production cost accounting in horse
breeding." Asian Social Science11.11 (2015): 308.
Pintea, Camelia-M., and Petrică C. Pop. "An improved hybrid algorithm for capacitated
fixed-charge transportation problem." Logic Journal of the IGPL 23.3 (2015): 369-378.
Shepherd, Ronald William. Theory of cost and production functions. Princeton University
Press, 2015.
Shepherd, Ronald William. Theory of cost and production functions. Princeton University
Press, 2015.
Sun, Lei, et al. "Transportation cost allocation on a fixed route." Computers & Industrial
Engineering 83 (2015): 61-73.