Introduction to Accounting: Financial Analysis of Grenco Plc

This report provides a comprehensive financial analysis of Grenco Plc, a UK-based retail company. It begins with an introduction to accounting principles and the purpose of financial statements, including the income statement, balance sheet, and cash flow statement, detailing their interrelationships. The report includes a calculation of Grenco Plc's profit and loss through the preparation of an income statement, followed by comments on the company's financial aspects, such as liquidity ratios, net profit, fixed assets, and capital. The analysis uses data from the provided balance sheet to assess the company's financial health and performance, concluding with an overview of the company's financial standing and management effectiveness. This document is available on Desklib, where students can access a variety of solved assignments and past papers.

Introduction to
accounting

Executive Summary
This report covers different aspects of the accounting process that is a principle function
of any business enterprise. Accounting is a process that helps a business in identifying as well as
analysing quantitative financial activities. This concept facilitates in revealing profit or loss for a
give specified period along with the value and nature of the assets as well as liabilities of the
firm. In this report, there is a detailed description of different kinds of financial statements and
preparation of income statement in order to evaluate the profit or loss for the company.

Table of Contents
Executive Summary.........................................................................................................................2
INTRODUCTION...........................................................................................................................4
MAIN BODY...................................................................................................................................4
Explanation of financial statements.............................................................................................4
Calculation of Profit or loss and Income Statement....................................................................7
Comments on financial aspects of company................................................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10
APPENDIX....................................................................................................................................11

INTRODUCTION
The process of accounting is concerned with the recording of the financial transactions
that are pertaining to a business. Accounting involves summarising, examining as well as
reporting such transactions to the oversight regulators, agencies as well as tax collection entities.
Within this report, Grenco Plc is an organisation that is taken into consideration for
demonstrating different aspects of this report. This portfolio includes the explanation of different
types of financial statements and along with it, the information provided by them will also going
to be discussed (Brukhanskyi and Spilnyk, 2019). There will also be a description on the process
that how these financial statements are linked with each other. Moreover, there will be
calculation of profit and loss of the given company through preparing income statement.
Furthermore, this report also includes comments on the financial aspects of the organisation.
MAIN BODY
Grenco Plc is a UK-based organisation in retail industry that deals in grocery and general
goods with its headquarters in Manchester. The company was founded in the year 1998 and is
having a large number of market share within the country. Grenco Plc has also expanded as well
as diversified its market in various fields such as furniture, books, toys, clothing, software,
electronics, petrol, financial services, internet service and telecoms. There is also a financial
investment group Durwent and Co. Financial Services Ltd in respect to the given company. This
financial investment group wants to buy the shares and along with it, also want to invest within
Grenco Plc. The different aspects in relation to the existing report are given as follows:
Explanation of financial statements
Financial statements are those statements in which various business operations are
recorded in order to analyse the financial performance of the company. This is considered as an
outcome of the process of financial reporting. The main purpose of financial statements is to
represent the financial position of the business as well as express the changes within the
performance from the past years (Kwilinski, 2019). When the financial statements of the
company get prepared then only the the financial reports of an accounting year of an organisation
can be made. Grenco Plc made financial statements because it help the company in analysing its
financial position of the business and gives information regarding the revenues, expenses,

profitability of the company in order to meet the long-term as well as short-term financial
obligations. There are three main types of financial statements that are explained as below:
Income Statement: This kind of financial statement provide assistance to the managers
of the company in showing the income generated as well as expenditure incurred within the
business. It depicts whether an organisation is earning profits or incurring losses for a given
specific period. The purpose of financial statements within a company is to represent the
financial performance over a period of an accounting year. Likewise, it also records the business
transactions that have been done in the period along with evaluating the costs that have been
faced by the respective organisation in order to enhance the sales as well as profitability of the
company (Lai, Leoni and Stacchezzini, 2019). Through declining the costs and the wages within
the accounting year, managers of the company are provided assistance in determining the net
profit of the company. In context to Grenco Plc, the company ascertains the profit or loss by
taking all the revenues and then subtracting all of the expenditures from both operating as well as
n on-operating activities. This statement shoes the revenues, costs, selling and administrative
expenses, gross profit and other expenses along with the income, net profit, taxes paid within the
organisation in a coherent as well as logical manner.
Balance Sheet: This financial statement is considered as the most significant financial
statement of the company as it facilitates it in giving comprehensive understanding of financial
records to the clients in respect to the monetary information. Such kind of financial statement
shows the assets as well as liabilities of the company which are committed to pay in the future
time period. Additionally, financial statement of Balance Sheet is perceived as a monetary record
which is fundamentally the key concern of the organisation. It helps in providing a snapshot of
the finances of the organisation through summarising all the assets and liabilities of the company
along with the shareholders equity. In context of Grenco Plc, the balance sheet of the company
discovers the total assets and the process of their financing either through the bets or equities
(Lugovskу and Kuter, 2019). Balance sheet is divided into two columns in which the left side
column outlines all the assets of the organisation while the right side column outlines the
liabilities and shareholder;'s equity of the company. This kind of financial statement can be said
as a statement of net worth or a financial position statement. It is based on the financial equation
in which the total assets of the company are balanced with the total liabilities of the company
along with the shareholder's fund.

Cash Flow Statement: Within this kind of financial statement, transactions that are
related to the cash inflows as well as cash outflows are recorded. Cash Flow Statement helps in
making an analysis of cash position of the company. It also facilitates in analysing how well a
business is managing its cash and cash equivalents in order to pay the debt obligations as well as
operating expenses. The cash flow statement of Grenco Plc facilitates the company in following
the cash transactions that are done by it in the three main sections (Mamuti, Hysa and Caputo,
2021). These three main sections of the cash flow statement are described as under:
 Operating Activities: This is the first section of the cash flow statement in which all the
operating expenses as well as operating incomes of the business are included. The cash
flows from this type of activity starts from the net profit or the net income and after that it
adjusts all the operating expenses and incomes.
 Investing Activities: This is the second section after making adjustments regarding the
operating activities. Within this section, the cash invest on assets of company, loss or
gain concerned with investments are recorded. Positive cash flow from this kind of
activity is considered as a good indicator as investors would prefer those organisations
which are creating cash flows from its operating activities not from financing and
investing activities.
 Financing Activities: It is the last section of cash flow statement in which the
organisation ascertains the process of how the company can raise the cash for its
operational growth and success. When cash flows from such kind of activity is indicating
positive value then it is considered as there are more cash inflows in comparison to cash
outflows of the company. When it indicated negative value then it is considered that the
organisation is still paying off its debts as well as obligations within its business.
Interrelationship between Financial Statements
Income Statement is not prepared on the basis of cash which means principles of
accounting like revenue identifying, accruals and matching can generate income statement very
distinct from Cash Flow Statement of the organisation (Pasewark, 2020). In context to Grenco
Plc, if the respective company prepared its Income Statement purely on the basis of cash, then it
would have no Balance Sheet other than the Equity of Shareholder as well as Cash. It is the
generation of the Balance Sheet through the accounting principles that results in the increase in
Cash Flow Statement.

Calculation of Profit or loss and Income Statement
As explained above, Income Statement of the company helps in ascertaining the net profit
of the business and its financial position in terms of profitability. Grenco Plc prepares Income
Statement because it helps the managers of the company in deciding where they can earn profits
by raising revenues, reducing costs or both (Petkov, 2020). The Income Statement of Grenco Plc
is given as under:
Grenco Plc
Income Statement
For the Year ended 31st March, 20XX
Particulars Amount (£m) Amount (£m)
Sales 395000
Cost of Goods sold 323800
Gross Profit 71200
Operating expenses
Wages 35000
Rent 5500
Telephone expenses 1220
Van Running Costs 200
Motor expenses 180
Lighting an heating expenses 4000
General expenses 6000
Total Operating expenses 52100
Operating Income 19100
Non-Operating Income 0
Net Income 19100

Comment:
From the above calculation of the profit and loss account, it can be analysed that the
Grenco Plc has earned a Net Profit of £19100 that indicates that after generating the income of
£395000, the respective company is able to to create a nominate amount of the profit margins
(Scott, 2019). The organisation has also incurred a significant amount of the cost within the
entire process of the organisation, that is, from the manufacturing of goods to deliver it to the end
user of the goods. The Gross Profits of the organisation are at the best but there are also
operating expenditures that have occurred within the business.
Comments on financial aspects of company
In order to analyse the Balance Sheet (given in Appendix), there is calculation of the
financial ratios that is given as below:
Liquidity ratio: This type of ratio helps in describing the paying capacity of the company in
order to pay short-term obligations (Stratopoulos and Calderon, 2020). This helps in studying
two main aspects and these are current assets as well as current liabilities.
Current ratio = Current assets / Current liabilities
In the Year 2015 = 14500 / 5000
= 2.9:1
In the Year 2016 = 13300 / 5200
= 2.56:1
Quick ratio = Liquid assets / Current liabilities
In the Year 2015 = 9400 / 5000
= 1.88:1
In the Year 2016 = 5400 / 5200
= 1.04:1
Analysis:
From the above calculation of liquidity ratios, it can be analysed that the assets of
Grenco Plc have decreased in the year 2016 in comparison to 2015. Ideal Current ratio and liquid
ratio are 2:1 and 1:1. In above case, in year 2015, liquid ratio of company is 1.88:1 that means
company can pay around twice of its current liabilities and Current ratio of 2.9:1 that means
company has paying capacity of around thrice than its current obligations. Creditors of company
got increased and debtors got reduced.

Net Profit:
From given Balance Sheet, it can be seen that Net Profit of the company got increased by
19.38% over previous year. In 2015, Net Profit of company was 16000 that was extended to
19100 in 2016.
Fixed Assets:
Management of company has managed its assets in an effective way and has acquired
more assets in 2016. Long-term assets of Grenco Plc got extended by 11.76% which is a
significant increase in organisational assets.
Capital:
Shareholder's wealth also got increased because of enhanced profitability within the
business organisation (Suratno, 2020). Increment in wealth positively impacted the managers of
company that have voluntarily pursued them in spending more within the organisation. In the
year 2016, the wealth of Grenco Plc got increased.
Drawings:
The managers of the respective company made a crucial amount of the drawings each
year. It has increased by twice of the drawings amount of the previous year.
CONCLUSION
From above explanation of the report, it has been concluded that the process of
accounting has helped the company in managing the financial transactions of the organisation.
Accounting has played a crucial role within a business as it facilitates the managers of the
company in tracking income as well as expenditures and many more. Within this existing report,
the three main financial statements have been explained along with their interrelationships.
Moreover, there has been a calculation of profit or loss through Income Statement in order to
know financial Net profits of the company. Furthermore, comments on financial aspects of
business have also been given within this report.

REFERENCES
Books and Journals
Brukhanskyi, R. F. and Spilnyk, I. V., 2019. Crypto assets in the system of accounting and
reporting. The Problems of Economy, 2, pp.145-156.
Kwilinski, A., 2019. Implementation of blockchain technology in accounting sphere. Academy
of Accounting and Financial Studies Journal, 23, pp.1-6.
Lai, A., Leoni, G. and Stacchezzini, R., 2019. Accounting and governance in diverse settings–an
introduction. Accounting History, 24(3), pp.325-337.
Lugovskу, D. and Kuter, M., 2019, May. Accounting policies, accounting estimates and its role
in the preparation of fair financial statements in digital economy. In International
Conference on Integrated Science (pp. 165-176). Springer, Cham.
Mamuti, A., Hysa, E. and Caputo, F., 2021. Harmonization process of albanian national
accounting standards and international accounting. In Contemporary Issues in Public
Sector Accounting and Auditing. Emerald Publishing Limited.
Pasewark, W. R., 2020. Introduction: A proposed agenda for accounting education research.
Issues in Accounting Education, 35(4), pp.3-7.
Petkov, R., 2020. Artificial intelligence (AI) and the accounting function—A revisit and a new
perspective for developing framework. Journal of Emerging Technologies in
Accounting, 17(1), pp.99-105.
Scott, P., 2019. Introduction to Financial Accounting. Oxford University Press, USA.
Stratopoulos, T. C. and Calderon, J., 2020. Introduction to blockchain for accounting students.
Available at SSRN 3395619.
Suratno, S., 2020. Analysis of learning difficulties about “Introduction to Accounting and
Finance of worksheet material learning” A Case study of student at Financial Expertise
Class Program-SMK Negeri 1 Banjarmasin.

APPENDIX