UGB105 Introduction to Financial Accounting Assignment Solution

This document presents a comprehensive solution to a financial accounting assignment. It begins with the creation of a trading account, profit and loss account, and a statement of financial position for a fabric shop proprietor, Bob Peterson, based on a provided trial balance. The solution then explores the key features of financial statements and their importance to users, followed by a detailed ratio analysis, including return on capital employed, gross profit margin, current ratio, and trade payable and receivable ratios. Furthermore, the assignment addresses bank account reconciliation over two months and the application of both the straight-line and reducing balance methods for depreciation calculations. Finally, it explains the meaning and significance of accounting concepts. The document offers a complete and well-structured approach to the assignment, offering a valuable resource for students studying financial accounting.

INTRODUCTION TO
FINANCIAL PROJECT
1

Table of Contents
MAIN BODY..................................................................................................................................3
Question 1a)....................................................................................................................................3
(a) Trading Account for the year ending 30th April 2019.......................................................3
(b) Profit and loss account for the year ending 30th April 2019.............................................3
(c) Financial position as on 30th April 2019...........................................................................3
Question 1b)....................................................................................................................................4
Six main features for users of financial statements and importance and benefits to users....4
Question 2a)....................................................................................................................................6
Ratio Analysis........................................................................................................................6
Question 2b)....................................................................................................................................9
(a) Bank account balancing at the end of each month............................................................9
(b) Accounts balances at the end of two month periods.........................................................9
(c) Trial balance as at 30 April 2018....................................................................................11
Question 2c)..................................................................................................................................11
(i) Straight Line method at 12.5%.......................................................................................11
(ii) Reducing Balance Method 15%.....................................................................................12
(iii) Meaning and significance of the accounting concepts..................................................13
REFERENCES..............................................................................................................................15
2

MAIN BODY
Question 1a)
(a) Trading Account for the year ending 30th April 2019
Particulars
Amount in
£ Amount in £
Sales 30000
Opening stock 4700
Purchases 15700
20400
Less: Clsoing stock 4400
Cost of goods sold 16000
Gross profit 14000
(b) Profit and loss account for the year ending 30th April 2019
Profit and Loss Account for the year ended 30 April 2019
Particulars
Amount in
£ Amount in £
Gross profit 14000
Less: expenses:
Shop wages 4420
Light and heat 260
Rent 4500
Insurance 120
9300
Net profit 4700
(c) Financial position as on 30th April 2019
Statement of Position as at 30 April 2019
Particulars
Amount in
£ Amount in £
Fixed Assets
Shop fittings 13000
Current Assets
Stock 4400
Debtors 120
Bank 610
Cash 100 5230
Total assets 18230
3

Capital
Opening capital 15000
Add: profit 4700
Less: Drawings 3500 16200
Current Liabilities
Creditors 2030
Total liabilities 18230
Question 1b)
Six main features for users of financial statements and importance and benefits to users
The financial statements are the statement which provides for the information relating to the
profitability of the company to the interested users. This is very much essential for the
companies to provide all the clear and correct information within the financial statements. This
is essential because of the fact that if the information will not provide for the proper information
to the users of the financial statements. The major feature of financial statement of the company
to the users of information is as follows-
 Proper information relating to profitability of company- this feature of the financial
statement of the company state that the financial statement suggests the profits or the loss
which the company is being earning from the daily business. This is major feature as this
is very essential for the management of the business and the goodwill of the business.
The major reason underlying this fact is that when the proper information will be
displayed relating to the investment of the company and how much the company is
earning the profits (Pelekh, Khocha and Holovchak, 2020). This information is helpful
for the investors to a great extent. The investors are the user of the financial information
and this will assist the investor in analysing the profitability of the company before
investing in the company. This is essential for the investor to assess the pat records that
how much the company has paid to the investors in earlier time and how they will pay in
the future.
 Reliability- this is another major feature of the financial statements being prepared by the
company. This is majorly because of the reason that if the financial statements will not
be good and relevant then the information being provided by the company must be
4

reliable and accurate. This is important because of the fact that when the company will
provide for reliable information then only the major user of the company that is
consumer will decide that whether they have to deal with the company or not
(Duvanskaya and Ol’ga, 2016). This is majorly because of the reason that if the
consumer will not get the actual and the correct values then the consumer will not have
faith over the company and its product.
 Understand ability- this s the major feature which need to be present in the financial
statements for the company to be successful. This understandability is essential as this
will assist the user of the information that is management and the employees to work in
more better and effective manner. This is majorly because of the reason that when the
company will have clear and correct and understandable information then this will assist
the management and the employees to make the effective decision for the better working
of the company. Thus, this will provide better and correct path to the employees and the
management to make sure that the companies working in proper and right direction.
 Comparability- this is another major important feature which is essential for the company
to take into consideration for the better working of the company. This is majorly because
of the reason that if there will not be any comparability in the financial statements then
this will not give the other companies facility of comparing the statement with that of the
other companies. This is very important for the user competitors and the management as
well. For the competitors it is necessary as the financial statements will assist the
company in framing of the policies and procedures in respect with the financial statement
of the company. In addition to this comparability will also assist the management in
taking the proper decision for the company and for the better working of the company.
 Timeliness- this is another major feature which is very essential to be present in the
financial statement as this will assist the company to prepare for the financial statement
on time. This is the most essential feature because the accounts and financial statements
are prepared within a particular timeframe only and for this it is essential for the
company to complete it on time (Lapiţkaia and Leahovcenco, 2020). Also, this is
essential for the user employee and this is majorly because of the reason that if the
financial statements are not prepared in time then the employees will not be able to work
in proper and effective manner. Thus, this might delay the working and operations of the
5

company. Thus, for this it is essential for the company to finish the financial statements
on time (Hajek and Henriques, 2017).
 Verifiability- this is referred to as keeping the proof of every record and every
transaction taking place within the company. This is essential for the company as this
will help the company in keeping the track and record of all the small and big transaction
and this will assist the company in any case of contingency. Thus, this feature is very
helpful for the company in keeping the record of all the transaction within the company.
This feature is very helpful for the users like government and the auditors of the
company. This is majorly because of the reason that when the government levies the
taxes and other charges over the company then they have to analyse all the transaction of
the company and for this they use the financial statements. In the similar manner the
auditor are hired for the analysis of the financial statements of the company and for this
they have to analyse the financial transaction are correct and accurate or not and for this
they require the proof of every transaction which this feature provides for.
The financial statements and the information being provided by them are both important and
beneficial for the company as this will assist the company in managing the business and the
decision relating to the business (Sorkun and Toraman, 2017). This is pertaining to the fact that
when the financial statements are prepared in proper and effective manner then this will help the
company in making a clear picture of the company and of the profitability of the company.
Thus, this will benefit the company in taking proper decision for the betterment and
development of the business in good and effective manner.
Question 2a)
Ratio Analysis
Return on Capital Employed
Particulars Formula Year 1 Year 2
Employed Capital
Total assets - current
liabilities 3810 4760
Net operating profit 460 350
Return on capital
employed
Net operating
profit/Employed Capital 12.07% 7.35%
6

It is the ratio which generally used to provide the information about the efficiency of
management of organization. Ration shows that company has earned the return of 7.35% in the
past 2 years which is downward movement from the earning of 12.07% in past. So management
has to make sure that management has to change the strategy to increase the return. Decreasing
return brings negative impact on the business performance.
Gross Profit Margin
Particulars Formula Year 1 Year 2
Cost of Sales 3020 4650
Sales 4940 6850
Gross profit 1920 2200
Gross profit margin ratio shows that gross profit which is earned by the company during the
year. Gross profit is calculated by meeting all the cost of sales. Gross profit of the company
derived is 32.12% which has decline from the last year. As last year the Gross profit was
38.87%. Reason behind the same is identified that there is good sort of the increase in the cost of
the company from the last year.
Current Ratio
Current assets 1770 2390
Current liability 560 840
Inventory 930 1150
Quick Assets 840 1240
Current ratio
Current assets / current
liabilities 3.16 2.85
Quick Ratio
(Current Assets -
Inventory) / Current
Liabilities 1.50 1.48
7

Liquidity is one of the important elements which need to be considering by the organization
before making any sort of the investment decision. It is also consider by different management
for taking variety of different strategic decision to enhance liquidity of company. The above
table and the data shows that liquidity position in the year 2 are 2.85 which was in the year 1
were 3.16. These shows that there is been downward movement. For the same reason the
company has the enough amount of the assets which can help them in meeting the short term
obligation and working capital requirement of business.
Trade Payable and Receivable Ratio
Particulars Formula Year 1 Year 2
Trade payables 560 840
Purchase 3320 4870
Creditors payment period Trade payables / purchase *365 62 63
Particulars Formula Year 1 Year 2
Trade receivables 820 1230
Sales 4940 6850
Debtors collection period Trade receivables / Sales *365 60.59 65.54
Looking at the trade payable day it has been identified that it is 45 days which has been
increased in last year as it was 41 days in that year. It means that this decision is taken to cash
operating cycle of the business in the long run.
Trade receivable days has been also increased very rapidly as it has been identified that it has
increased from 61 days to 65 days in the last year. This has been done as a part of the sales
promotional policy. This enables the company to enhance the sales revenue of the company.
Question 2b)
(a) Bank account balancing at the end of each month
Date Particulars Amount Date Particulars Amount
01-Mar To Capital 500
10-Mar
To Business
takings to date 290 01-Mar By Purchases 150
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27-Mar
To Business
takings to date 240 05-Mar By Rent 50
22-Mar By Advertising 25
26-Mar
By Gilberto
Wahabo
Drawings 100
31-Mar By bal c/d 705
1030 1030
April
01-Apr To bal b/d 705 02-Apr By Purchases 100
14-Apr To Loan L Lock 450 05-Apr By Rent 50
16-Mar
To Business
takings 330 23-Apr
By Gilberto
Wahabo
Drawings 75
26-Mar
To Business
takings 180 29-Apr
By advertisement
leaflets 30
30-Apr By bal c/d 1410
1665 1665
(b) Accounts balances at the end of two month periods
Sales
Date Particulars Amount Date Particulars Amount
10-Mar Sales 290
27-Mar Sales 240
16-Apr Sales 330
30-Apr By bal c/d 1040 26-Apr Sales 180
1040 1040
9

Rent
Date Particulars Amount Date Particulars Amount
05-Mar To Bank 50
05-Apr To Bank 50 30-Apr bal c/d 100
100 100
Advertisements
Date Particulars Amount Date Particulars Amount
22-Mar To Bank 25
29-Apr To Bank 30 30-Apr bal c/d 55
55 55
Loan L. lock
Date Particulars Amount Date Particulars Amount
14-Apr By Bank 450
30-Apr Bal c/d 450
450 450
Capital A/c
Date Particulars Amount Date Particulars Amount
01-Mar By bank 500
30-Apr By bal c/d 500
500 500
Drawings
Date Particulars Amount Date Particulars Amount
26-Mar To Drawings 100
23-Apr To Drawings 750 30-Apr By bal c/d 175
10

175 175
(c) Trial balance as at 30 April 2018
Trial Balance
Particulars Debit Credit
Bank 1410
Sales 1040
Purchases 250
Loan 450
Rent 100
Advertisements 55
Capital 500
Drawings 175
Total 1990 1990
Question 2c)
(i) Straight Line method at 12.5%
Particulars
Amount in
£
Cost of machine as on 1 January 2017 16000
Depreciation for each year
(16000*12.5%) 2000
Closing balance as at 31 December 2017 14000
Opening balance as on 1 January 2018 14000
Depreciation for each year 2000
(16000*12.5%)
Closing balance as at 31 December 2018 12000
Opening balance as on 1 January 2019 12000
Depreciation for each year 2000
(16000*12.5%)
Closing balance as at 31 December 2019 10000
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(ii) Reducing Balance Method 15%
Depreciation under reducing balance method
Particulars
Amount in
£
Cost of machine as on 1 January 2017 16000
Depreciation for each year
(16000*15%) 2400
Closing balance as at 31 December 2017 13600
Opening balance as on 1 January 2018 13600
Depreciation for each year 2040
(13600*15%)
Closing balance as at 31 December 2018 11560
Opening balance as on 1 January 2019 11560
Depreciation for each year 1734
(11560*15%)
Closing balance as at 31 December 2019 9826
Provision for depreciation on machinery account
Date Particulars Amount Date Particulars Amount
31.12.2017 Balance c/d 2000 31.12.2017
Depreciation
expense 2000
2000 2000
31.12.2018 Balance c/d 4000 31.12.2018 Balance b/f 2000
31.12.2018
Depreciation
expense 2000
4000 4000
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