Wyvern Stationery Financial Statement Analysis: A Case Study

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TASK 4: Finance Element Case Study
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Table of Contents
1. Who are the people interested in reading these financial statements? Explain the purposes for
which they will use them.................................................................................................................3
2. What are the particular points that Peter Simpson will note from the profit and loss account?
Include a calculation of the net profit percentage for each year and give a brief comment............3
3. List the main changes that have occurred between the two balance sheet dates. Do you think
the business has expanded or declined? What is the evidence of your decision?...........................4
4. What are the particular points from the statements that Peter Simpson’s bank manager will
note? Peter’s business has an overdraft facility of £3000 and a bank loan of £2000......................5
Reference list...................................................................................................................................6
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1. Who are the people interested in reading these financial statements? Explain the
purposes for which they will use them.
Stakeholders (both internal and external) are interested in the reading of a company’s financial
statements (Stubbs and Higgins, 2018). In case of the business of Peter Simpson, the following
are the people who would be interested in reading Wyvern Stationery’s financial statements -
 Owners - Peter Simpson himself is interested in the financial statements of the business
since he would be able to know the profitability of the business along with gaining an
understanding of its growth potentiality.
 Investor - The investors are going to be interested in reading Wyvern Stationery’s
financial statements for knowing their solvency position and the safety of them to make
the investment
 Suppliers - Suppliers are interested in reading Wyvern Stationery’s financial statements,
as the reading will enable them in knowing that the goods that they are supplying to the
business on credit can be received within time or not based on assessing their ability to
clear its dues on time.
 Employees - Employees in the business will also read the business’s financial statement
since it would help them in understanding the stability of the business, the security of
them to work in it and make decisions on whether they would continue working in it or
not.
2. What are the particular points that Peter Simpson will note from the profit and loss
account? Include a calculation of the net profit percentage for each year and give a brief
comment.
According to Linsmeier (2016), the foremost benefit of the creation of a profit and loss account
in an organisational context is the evaluation of the net amount of profit or net amount of loss
that has been generated from the operations of the business. From the evaluation of the profit and
loss account of Wyvern Stationery, Peter Simpson can be noticing various aspects, a few
significant being the following -
 Increase of £20700 in the sales of the business
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 Increase of £16886 in the cost of sales of the business
 Increase of £3814 in its gross profit
 Increase of £1194 in its net profit
 Increase of £2620 in the overhead expenses of the business
While the increase in sales, gross profit and net profit are positive aspects that Peter Simpson
will note, the other two points are the negative aspects to be noted. However, what is most
important for the business is its net profit percentage, which have been calculated below -
Last year -
Net profit percentage = Net profit / Sales x 100 = 5410 / 27500 x 100 = 19.67%
Comment - It can be identified from the above calculation that the net profit percentage of
Wyvern Stationery was 19.67% during the last year, which shows that considerable profit had
been earned from the company.
This year -
Net profit percentage = Net profit / Sales x 100 = 6604 / 48200 x 100 = 13.70%
Comment - It can be identified from the above calculation that the net profit percentage of
Wyvern Stationery in this year has been 13.70%, which is quite lesser than that of the last year
and shows a decrease in its performance.
The probable reasons for which the net profit percentage of the company has decreased is the
excessive increase in the cost of sales of the business while massive increases in the overheads
paid by it, mainly interest paid and wages.
3. List the main changes that have occurred between the two balance sheet dates. Do you
think the business has expanded or declined? What is the evidence of your decision?
The balance sheet of a company is one of the most significant financial accounting tools that
businesses can be using to gaining an understanding of their financial conditions (Easton and
Sommers, 2018). From the comparison of the balance sheet of Wyvern Stationery for the last
year and this year, one can find out that major changes have occurred in the current assets and
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current liabilities in it. According to Greenwood et al. (2016), the assets, which can be converted
simply into cash is current asset while the financial obligations, which are needed to be paid back
in a span of year or two is current liabilities.
It is evident from the balance sheet of Wyvern Stationery that debtors, creditors and working
capital of the company have changed largely. While debtors and creditors have increased by
£1055 and £2120 respectively, the working capital in it has decreased by £1805. This shows that
the business is declining, as working capital has decreased, while both debtors and creditors have
increased.
Other changes that can be seen from the balance sheet is that the bank loan has decreased by
£200 but at the same time, the closing capital of the business has also decreased by £355. Thus,
all these evidences indicate that there has been a decline in the business’s financial condition.
4. What are the particular points from the statements that Peter Simpson’s bank manager
will note? Peter’s business has an overdraft facility of £3000 and a bank loan of £2000.
Financial statements are of great significance to an organisation’s bank manager as well
(Menicucci and Paolucci, 2016). The bank manager of Peter Simpson is one of the main people
interested in the financial statements of the company. The factors that are of most importance to
him include the net profit and gross profit from the profit and loss statement while the bank loan,
the current liabilities and the bank loan shown in the balance sheet.
The bank manager will note these aspects since they will help him or her in ensuring the
financial position of the business. The profitability of the business can be ensured from the profit
and loss account while the proper payment of interest can be noted from it as well. Since an
overdraft facility and bank loan is already provided to the business, analysing financial
statements will help the manager in deciding whether further loan should be provided to it or not,
overdraft facility should be increased or not and lastly whether the rate of interest should be
reduced or increased or not.
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Reference list
Easton, M. and Sommers, Z., 2018. Financial Statement Analysis & Valuation, 5e.
Greenwood, R., Hanson, S.G. and Stein, J.C., 2016. The Federal Reserve’s balance sheet as a
financial-stability tool.
Linsmeier, T.J., 2016. Revised model for presentation in statement (s) of financial performance:
Potential implications for measurement in the conceptual framework. Accounting
Horizons, 30(4), pp.485-498.
Menicucci, E. and Paolucci, G., 2016. The determinants of bank profitability: empirical evidence
from European banking sector. Journal of Financial Reporting and Accounting, 14(1), pp.86-
115.
Stubbs, W. and Higgins, C., 2018. Stakeholders’ perspectives on the role of regulatory reform in
integrated reporting. Journal of Business Ethics, 147(3), pp.489-508.
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