Financial Accounting: Profit & Loss, Balance Sheet, Ratio Analysis

This assignment solution covers accounting fundamentals, focusing on the preparation and analysis of financial statements. It includes a profit and loss statement and a statement of financial position (balance sheet) for Kedison Plc, detailing the calculation of revenue, cost of sales, gross profit, operating profit, and net profit, alongside assets, liabilities, and equity. The solution also addresses the importance of balancing the balance sheet using the double-entry accounting principle. Furthermore, the assignment includes ratio analysis for Chocco Plc, calculating and interpreting key financial ratios such as Return on Capital Employed (ROCE), Return on Equity (ROE), Earnings Per Share (EPS), Gross Profit Margin, Asset Turnover Ratio, Stock Holding Period, Debtors Collection Period, Current Ratio, Gearing Ratio, and Interest Coverage Ratio, providing insights into the company's profitability, efficiency, and liquidity. Desklib provides a platform to access more solved assignments and study resources for students.

Accounting fundamental
assessment 1

Table of Contents
QUESTION 1...................................................................................................................................3
QUESTION 2 ..................................................................................................................................6
References .......................................................................................................................................9

QUESTION 1
A). For Kedison Plc the statement of profit and loss statement and financial position is prepared
for the ended year 31st December 2019
Profit and loss statement
It is also known as income statement which reflects the financial description of the business
presenting the revenue and expenses of specific period. The business worth is revealed by
comprising all the financial activities. The profit and loss for the given period is determined and
helps in gaining the understanding of financial health business. The financial performance is
reported through the financial statements (Ahmed, A.S and et.al., 2019).
PARTICULARS AMOUNT
Revenue (amount of goods or service sold for period) 827630
Cost of sales 578650
Gross profit 248980
Distribution cost 31000
Administration cost 85000
Other income 0
Operating profit 135980
Income from investment 0
Finance cost 2000
Profit before tax 130980
Taxation 68000

Net profit 62980
Financial position statement
The statement of the financial position is also called as balance sheet reporting assets, Liabilities
and equity of the organisation on the given date. The accounting information of the company is
recorded in the financial position at the end of the accounting period. The financial position
statement is used for financial analysis by making comparison of current assets and current
liabilities. It comprises the equation of balance sheet ASETS= liabilities + capital (Ardalan, K.,
2019).
ASSETS 1147335
LIABILITIES AND
STAKEHOLDERS
EQUITY 1147335
Non current assets Current liabilities 174355
Property, plant 632730 Non current liabilities 100000
Intangible assets 0
Total non current assets 632730 Liabilities. 274355
Current assets Share capital 310000
Stock 330600 Share premium 300000
Trade receivable 171105 Other reserves 0
Cash 12900 Retained earnings 132000

Profit before tax 130980
Total of current assets 514605 EQUITY/CAPITAL 872980
Working notes:
 Ordinary Shares - £1 ES – 310,000
Add: 10% £1 PS – 300,000 = 610,000
 N/c Assets: Plant & Machinery – 632,730
 Retained Profit: Operating margin profit – 132,000
Add: Profit regulations – 18,000
Add: CY profit - 112,980 = 244,980
 In the ledger account unpaid commission of £3000 is founded which was not recorded
and to show the accurate picture it is stated in annual reports. In regards to this the
business has passed the related journal entry.
Commission A/c Dr. 3000
To Outstanding Commission A/c. 3000
Therefore, the transactions is represented in the income report which apply deferral revenue for
the compensation budget and remained financial statement performance is expressed throughout
the present liabilities by the committeem (Brunelli, S. and Di Carlo, E., 2020).
The items that were shipped to customers of amounting £ 980 is been stated in the transaction
which is to be paid in future and in ledger account the entry is not been recorded to reveal the
accurate representation. For such the journal entry is passed by the company to show the
transaction in financial statement.
Accrued debtor sales a/c Dr. 980
To sales Debtor 980
In the revenue statement the funds are expressed by incorporating accumulated sales of debtor
collectors to the sales of borrower account. In the same accounting records the accumulated
debtor sales is represented throu8ghiut the current assets.
B). Why does the statement of financial position balance?
The balance sheet of the company is defined as the summary of all corporate assets and
liabilities which display the left over amount after the sale of all assets and all debts are paid off.

The balance sheet is also recognised as the statement of financial position which reveals the
picture of assets and liabilities or can be said as net worth (Guralnik, B. and Sohbati, R., 2019).
The accounting principle of double entry helps in balancing of the balance sheet which is
considered as major reason. In the two different accounts the accounting system records the
transactions and hence to ensure the consistency it also acts as check. The assets is the first
category in the balance sheet classified on three major categories such as current assets which is
expected to converted into cash within the year by representing all the values of the assets and
used for paying the current expenses and funding ongoing operations. The long term investments
are the non current assets of the company and last the fixed assets such as plant & equipment,
intangible assets like trademark. In the balance sheet the liabilities is classifies ad curren6t
liabilities which is short term liability are due within one year comprising of accounts payable ,
accrued expenses. Non current liabilities is also shown in balance sheet under the head of
liabilities which defines to long-term obligations and repayment is not within a year. In the
shareholder equity the company helps retained earnings for reinvestment and to pay the debts.
The retained earnings is not paid to the shareholder in form of dividend (Lee, C.M. and Watts,
E.M., 2021). The company net worth is represented by the shareholder equity and helps in
determining the financial status. In conducting fundamental analysis or computation of financial
ratios the balance sheet is used in other important financial statement of income and cash flow
statement. The balancing of the financial statement helps in understanding the company health
by correctly following double entry accounting process. The balancing of the balance helps the
stakeholders in understanding the liquidity position and performance of the company. The
company growth is determined by comparing the balance sheet of over the years. The ability of
the company is analysed to get the understanding of the project expansion and unexpected
expenses which requires the balancing of balance sheet. The statement of the financial position is
balanced to determine the risk and return and used to secure business loans,. The balancing of the
balance sheet helps in guiding the effective management decisions. The outsiders uses the
balance sheet to know the financial status to investors, stakeholders and lenders.
QUESTION 2
RATIO FORMULA 2020 2019
CALCULATI RESUL CALCULATI RESUL

ON T ON T
Return on
capital
employed
Operating profit / capital
employed * 100
805 / 7225 *
100 11.14%
699/ 7041 *
100 9.92%
Return on
equity
Net profit / total
shareholder's equity * 100
431 / 3088 *
100 13.95%
366 / 2912 *
100 12.56%
Earnings per
share
Net profit / number of
shares 431 / 17.8 1.03 366 / 17.8 0.72
Gross profit
margin
Gross profit / revenues *
100
3503 / 6738 *
100 33.39%
6441 / 501.3 *
100 38.26%
Asset turnover
ratio Net sales / total assets 6738 / 9736 0.69 6441 / 10087 0.64
Stock holding
period
Inventory / cost of sales *
365
708 / 3235 *
365 79.88
659 / 3096 *
365 77.69
Debtor
collection
period Debtor / sales * 365
1249 / 6738 *
365 67.65
1287 / 6441 *
365 72.93
Current ratio
Current assets / current
liabilities 2303 / 2511 0.9 2355 / 3046 0.77
Gearing ratio Debts / equities 1249 / 3088 0.44 1287 / 2912 0.44
Interest cover
ratio Operating profit / interest 805 / 226 3.56 699 / 181 3.86
Analysis of Ratio
ROCE – This means return on capital employees that used by Chocco Plc to analysis the
company's profitability and capital efficiency. In the year 2019 ROCE was 9.92% and in 2020 it
is 11.14% which is greater than earlier. This shows organization gained the high range of profits
as compare to past year.

ROE – This is a measure tool which used by Chocco Plc to analyse the shareholder's
equity that can help to increase business performance. From the calculate it can be interpreted
that ROE of 2019 was 12.56% and in 2020 it is 13.95% that shows higher participation of equity
shareholders in the organization (Merkt, H., 2021).
EPS – This ratio exactly states earning or net income of organization that is split up on a
per share basis. The EPS of 2019 was .72 where as 2020's EPS is 1.03 that is good for the
Chocco Plc as it helps to retain higher funds.
Gross Profit Margin – This ratio states net income generated as a percentage of
revenues receives that increase productivity. In the year 2019 GP ratio was 38.26 % and in 2020
it is 33.395 that is less that past year. The reason behind reducing pro0fit margin is increases in
expenses and debts of Chocco Plc while operating the business.
Assets Turn over ratio – This ration is used to know the organization's efficiency which
arises by analysing assets and it produce the revenues. From the ratio calculation it has analysed
that Chocco Plc get possession of high range of assets than past year. In 2019 assets turn over
ratio was 0.64 and in 2020 it is 0.69 that is good for organization as assets value increased.
Stock Holding period – This can be explained as amount of time and investment that is
held by an investors or the period between the purchase and sale of security. The stock holding
period of 2019 was 77.68 days and 2020 79.88 that states in current year 0organization holds
more stock (Poscher, R., 2021).
Debtors Collection period – This means a field period of time in which amount will be
revived that is accrued while buying something. The debtors collection period of 2019 was 72.93
days. On the other side, DCP of 2020 is 67.65 days that is good as organization would received
the amount in less days than past year.
Current Ratio – This states as a popular metric that used across industry for assessing
company's short term liquidity. The Current ratio of 2019 was 0.77 and CR of 2020 is 0.91
which is greater. As compare to past year, Chocco Plc has higher capacity to maintain liquidity
in their workplace. The ideal CR for organisation is 2:1 that can help to manage all expenses and
develop business performance (Snell, R.L and et.al., 2019).
Gearing Ratio – This is a general classification stating a financial ratio, used to compare
some form of Owner's equity to funds borrowed by the company. In the year 2019 and 2021,
gearing ratio is 0.44 that can helps to know organization have limited fund to pay off their debts.

Interest coverage ratio – This means debts and profitability ratio that states how a
company can pay interest on its outstanding debts. In relation to Chocco Plc, interest coverage
ratio was 3.86 and in 2020 is 3.56 which is less. This is beneficial for organization as it has to
pay less interest on their outstanding debts (Wirth, C and et.al., 2021).

References
Ahmed, A.S and et.al., 2019. An empirical analysis of the effects of the Dodd-Frank Act on
determinants of credit ratings. Available at SSRN 2991922.
Ardalan, K., 2019. Equity home bias: a review essay. Journal of Economic Surveys, 33(3),
pp.949-967.
Brunelli, S. and Di Carlo, E., 2020. Accountability, ethics and sustainability of
organizations. Accounting, Finance, Sustainability, Governance and Fraud: Theory and
Application, 4, pp.82-123.
Guralnik, B. and Sohbati, R., 2019. Fundamentals of luminescence photo-and
thermochronometry. In Advances In Physics And Applications Of Optically And
Thermally Stimulated Luminescence (pp. 399-437).
Lee, C.M. and Watts, E.M., 2021. Tick size tolls: Can a trading slowdown improve earnings
news discovery?. The Accounting Review, 96(3), pp.373-401.
Merkt, H., 2021, July. The Dynamic Relationship between German Corporate Law and Financial
Market Law. In Legal Theory and Interpretation in a Dynamic Society (pp. 131-148).
Nomos Verlagsgesellschaft mbH & Co. KG.
Poscher, R., 2021, July. The Normative Construction of Legislative Intent. In Legal Theory and
Interpretation in a Dynamic Society (pp. 11-46). Nomos Verlagsgesellschaft mbH & Co.
KG.
Snell, R.L and et.al., 2019. Fundamentals of Radio Astronomy: Astrophysics. CRC Press.
Wirth, C and et.al., 2021. Fundamentals of finance: Financial institutions and markets, personal
finance, financial management. Massey University Press.