Business statements allow the firm to determine

April 8, 2019 Business

Business Accounting – Task: 1
Use financial accounting techniques to explain; record and interpret financial data and financial statements.

INTRODUCTION:
Financial statements are often defined as a collection of records showing the financial performance, position and cash flows of the particular organization. Financial statements allow the firm to determine whether they are in a position to generate cash, pay back debts and whether they can attain profitability. These statements include trading and profit and loss account, balance sheet and cash flow statements. CITATION acc171 l 1033 (accounting tools , 2017)Trading and profit & loss account:
Trading and profit & loss account is also known as income statement. It shows the firms operations and activities including revenues, expenses, losses and profits of a particular period. The trading account helps the firm in deriving gross profit or loss and on the other hand, profit & loss accounts helps in deriving net profit or loss of the firm. It also helps the firm to compare the obtained results with the expected ones so as to determine where they stand. The required informations to prepare trading and profit & loss account is always derived from the trial balance.

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Trial balance:
PARTICULARS DEBIT AMOUNT CREDIT AMOUNT
Opening stock
Purchases
Wages
Salary
interest
Sales
Bad debts
Closing stock 30,000
25,000
5000
10,000 600
70,000
500
40,000
Format of trading and profit & loss account:
TRADING AND P/L ACCOUNT FOR THE YEAR ENDING 31ST MARCH 2017
PARTICULARS AMOUNT PARTICULARS AMOUNT
Opening stock
Purchases
Wages
Gross profit c/d
Salary
Bad debts
Net profit transferred
30,000
25,000
5000
50,000
110,000
10,000
500
40,100
50,600 Sales
Closing stock
Gross profit b/d
interest 70,000
40,000
110,000
50,000
600
50,600
Balance sheet:
Balance sheet is also known as position statement as it shows the total assets and liabilities of the firm of a particular date. The information shown in the balance sheet considered to be true only for that particular point of time. Another important aspect is that, both the sides, i.e. assets and liabilities must equal to eachother. The asset side of the balance sheet contains fixed assets like land and building, furniture, machinery etc. and current assets like stock, debtors, and cash in hand and at bank. The liability side of balance sheet contains current liabilities such as bank over drafts, amounts due to creditors on the purchase of goods for resale etc. and long-term liabilities such as bank loans and loan from other business. CITATION Fra051 l 1033 (wood, 2005)Format of a balance sheet:
BALANCE SHEET AS ON 31ST MARCH 2017
LIABILITIES AMOUNT ASSETS AMOUNT
Current liabilities:
Creditor
Capital
Add: net profit
Less: drawings
9100
20,000
8000
28000
7000
21000

30,100 Fixed assets:
Fixtures and fittings
Current assets:
Stock
Debtors
Cash at Bank
Cash in hand
5000
3000
6800
15100
200
30,100
Cash flow statements:
A cash flow statement shows the state of cash in the organization. It gives information about the inflow and outflow of cash. The cash flow statement is divided into three heads namely, cashflow from operating activities, cash flow from financial activities and finally cash flow from investing activities.

All these statements are used by both internal and external parties to the business including shareholders, customers, banks, etc. for various purposes such as interpretation, comparison, or to find the profitability and liquidity of the business. CITATION Fra051 l 1033 (wood, 2005)Illustration-1:
From the following trial balance prepare trading and profit and loss a/c of XYZ Private Ltd, for the year ended on 31st march 2016, and a balance sheet as on that date.

TRIAL BALANCE AS ON 31ST MARCH 2017
PARTICULARS DEBIT AMOUNT CREDIT AMOUNT
Plant and machinery
Opening stock
Purchases
Building
Wages
Sundry debtors
Salary
Furniture
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Bad debts
Drawings
Bills receivable
Insurance
Cash at Bank
Sales
Bank loan
Interest received
Sundry creditors
Capital
100,000
60,000
160,000
170,000
32,000
100,000
24,000
36,000
5000
1800
10,000
50,000
4400
20,000

795,500 480,000
119,700
2000
40,000
171,500
795,500
*Closing stock valued at 90,000
TRADIING AND P/L ACCOUNT FOR THE YEAR ENDING ON 31ST MARCH 2017
PARTICULARS AMOUNT PARTICULARS AMOUNT
Opening stock
Purchases
Wages
Gross profit c/d
Salaries
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Bad debts
Insurance
Net profit transferred
60,000
160,000
32000
318,000
570,000
24,000
5000
1,800
4,400
284,800

320,000 Sales
Closing stock
Gross profit b/d
Interest received 480,000
90,000
570,000
318,000
2000
320,000

BALANCE SHEET AS ON 31ST MARCH 2017
LIABILITIES AMOUNT ASSETS AMOUNT
Sundry creditors
Bank loan
Capital
Add: net profit
Less: drawings
40,000
119,700
171,500
284,800

456,300
10,000

566,000 Furniture
Plant and machinery
Building
Sundry debtors
Bills receivable
Cash at bank
Closing stock 36,000
100,000
170,000
100,000
50,000
20,000
90,000
566,000
Interpretation of financial statements:
Interpretation of financial statements helps the firm to identify the meaning of the derived financial data including trading and p/l account and balance sheet. This process helps them to make further decisions regarding future earnings, ability to pay back interest, profitability, liquidity, debt maturities and so on. It thereby helps in finding out the strengths or weaknesses of the firm and helps in the process of comparison. Interpretation can be carried out using various methods or techniques namely, comparative financial statements, common size financial statements, ratio analysis, fund flow statement, and cash flow statement. CITATION Shi18 l 1033 (N)Ratio analysis:
Ratio analysis is one among the techniques used to interpret financial statements. It basically shows the relationship between two variables derived from the financial data. It is most commonly used technique for interpreting data. Ratio analysis are of various types namely, liquidity ratios, solvency ratios, activity ratios, and profitability ratios. CITATION Fra051 l 1033 (wood, 2005)Current ratio:
Current ratio = current assets / current liabilities
Current assets = 260,000
Current liabilities = 159,700
Current ratio = 260,000 / 159,700 = 1.62:1
Interpretation: the ratio derived i.e. 1.62:1 can be said as satisfactory since the ideal current ratio is 2:1 and the ratio obtained is nearest to it. The current ratio shows that the working capital of the organization is satisfactory.

Inventory turnover ratio:
Inventory turnover ratio = cost of goods sold / average stock
Cost of goods sold = opening stock + purchases + direct expenses –closing stock
= 60,000 + 160,000 + 32000 (wages) – 90,000
= 162,000
Average stock = opening stock + closing stock / 2
= 60,000 + 90,000 / 2 = 75,000
Inventory turnover ratio = 162,000 / 75,000 = 2.16
Interpretation: the ratio derived i.e. 2.16 can be said as satisfactory. The ratio shows that the firm is in a position to manage their inventory. It indicates that the firm’s stock is sold out within a short period of time.

Working capital turnover ratio:
Working capital turnover ratio = net sales / working capital
Net sales = total sales – sales return
= 480,000
Working capital = current assets – current liabilities
= 260,000 – 159,700 = 100,300
Working capital turnover ratio = 480,000 / 100,300 = 4.78
Interpretation: the ratio derived i.e. 4.78 can be said as satisfactory and the firm is carrying out a better utilization of working capital. It also indicates that volume of sales generated is better.
Gross profit ratio:
Gross profit ratio = gross profit / net sales *100
Gross profit = 318,000
Net sales = total sales – sales return = 480,000
Gross profit ratio = 318,000 / 480,000 *100 = 66.25%
Interpretation: the ratio generated by the firm is not bad and it can be satisfactory to an extent. It indicates that the firm is having better control over purchase management.

Bibliography
BIBLIOGRAPHY accounting tools . (2017, july 30). Retrieved may 10, 2018, from accountingtools.com: https://www.accountingtools.com/articles/2017/5/10/financial-statements
N, S. (n.d.). economics discussion. Retrieved may 10, 2018, from economicsdiscussion.net: http://www.economicsdiscussion.net/accounting/analysis-and-interpretation-of-financial-statements/22029
wood, F. (2005). Frank wood’s business accounting 10th edition . In f. wood, business accounting 10th edition (p. 793). harlow : pearson education ltd.

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