Task 2 Financial Statement Analysis

SOLE TRADER ACCOUNTING

TRADING PROFIT AND LOSS ACCOUNT

BALANCE SHEET
RATIO ANALYSIS
Selected Ratios for Marshall Company
    2017 2018 2019
Liquidity Current Ratio 1.56 1.7 1.84
Ratios Acid Test Ratio 1.1 1.22 1.34
         
Leverage Debt Ratio 0.56 0.55 0.72
Ratios Debt to Equity Ratio 0.94 1.05 1.16
         
Gross Margin Ratio 0.23 0.32 0.41
Return on Asset Ratio 0.52 0.59 0.71
Profitability Return on Equity 1.1 1.25 1.4
         
Inventory turnover ratio 2.25 2.6 2.95
Asset turnover ratio 0.89 1.95 2.01
Receivables Turnover Ratio 0.25 0.16 0.07
56 62 54
Asset Usage Days Sales outstanding Ratio days days days

INTERPRETATIONS
In order to gain valuable insights into an organization's overall performance, ratio analysis can
help you comprehend raw data. You may obtain a sense of a company's profitability, growth,
liquidity, leverage, margins, and other metrics by looking at its budget reports.
There are five basic financial ratios, for example:
Ratios of Liquid to Solids
A company's ability to pay its debts and liabilities is indicated by its liquidity ratios. Major
liquidity ratios include:
Operating Cash Flow Margin (OCFM) = Sales Revenue / Cash from Operating Activities. It reveals
the quality of an organization's profits and demonstrates how efficiently it generates revenue.
Total Liabilities = (Cash and Cash Equivalents) / Cash Ratio
When you know how much money an organisation has compared to its resources, you can
make better decisions.
C. Quick Ratio = (Current Assets – Inventory)/Current Debt
In a few of seconds, This ratio, often known as the "Acid-Test" ratio, measures an organization's
marketable securities, receivables, and cash in relation to its debts and other financial
obligations. Having an idea of the organization's ability to meet its current obligations is a
valuable asset
d. The current ratio is the difference between the current assets and the current liabilities.
So, you'll have a better idea of how effectively the group can achieve its financial promises in
the following year In addition, it's important to keep an eye on your leverage ratios. Solvency
ratios, often known as leverage, provide insight into a company's ability to pay down its long-
term obligations
Leverage ratios that are critical include:
a. Total Debt to Assets Ratio
It refers to a company's entire responsibility to its resources.
c. Interest Coverage Ratio = Profits Before Interest and Taxes / Interest Expenditure
An organization's ability to pay interest on its debts can be gauged by the interest inclusion
ratio.
d. Equity to Debt Ratio Ratios are calculated by dividing total liabilities by total equity.
A general commitment to an organization's financial backer is taken into consideration.
Ratios of Performance
It reveals the market performance of a company, as the name implies.
Return on Equity (ROE) is calculated as follows:
Profit from net resources, as investors value all out resources minus obligation, is also included
in this figure.
Net Income / Total Avg. Assets = b. Return on assets
It measures an organization's ability to generate revenue from its resources. Having a greater
ratio indicates that a company is more efficient at generating revenue from its resources. A low
resource turnover ratio, on the other hand, indicates that a corporation is not effectively
employing its resources to generate new business.
All out deals or income divided by average resources is known as asset turnover. The ratio of a
company's total resource sales to its total resource purchases might fluctuate dramatically over
the course of a year.
Revenue minus Cost of Goods Sold = Revenue/Revenue = Gross Profit Margin
If you want to discover how closely net sales and profits are linked, you can use a company's
net overall revenue proportion.
Operating profit margin = operating profit/revenue.
It refers to the whole revenue of the organization before interest and assessment payments.
The net profit margin is equal to net profit divided by revenue
It displays the net profit margin of a business. A company that generates a large amount of net
revenue is a good indicator of profitability.
PARTNERSHIP ACCOUNTS

INCOME STATEMENT
Tristar Company
Income Statement
For the year ended 30 April 2011
$  
Revenue (sales) 209500.00
Less returns outward 4750.00
Net Sales 204750.00
Cost of sales 97400.00
Gross profit 107350.00
Less expenses  
Salaries and wages 42100.00
Heat and light 3890.00
General expenses 16750.00
Discount received 5300.00
Marketing expenses 12050.00
Rent 7500.00
Total Operating Expenses 87590.00
   
Operating Profit 19760.00
Less: Interest on capital 1,600
Interest on drawings 2,500
Net profit before tax 4,410
Less: Income tax 1,763
Net profit 2,647

APPROPRIATION ACCOUNT
Appropriation account
For the year ended 30 April 2011
Profit available for 2647.0
  Net profit for the year
appropriation 0
1600.0
John 1,386 Less: Interest on capital 0
2500.0
David 693 Interest on drawings 0
Sue 347    
        
3547.0
  3547.00   0

BALANCE SHEET
Statement of financial position
As at 30 April 2011
Assets   Equity and liabilities  
Non-current assets   Equity  
Property, plant and
140,000
equipment John 40,000
Motor vehicles 45,000 David 35,000
Fixtures and fittings 15,000 Sue 30,000
105,00
      0
       
    Less: drawings  
    John 10,000
    David 10,000
      20,000
    Total Equity 85,000
    Retained earnings 2,647
192,64
    Total equity 7
Current assets      
Inventory 28,100 Non-current liabilities  
100,00
Trade receivables 209,500 Interest-bearing loans 0
Less: Provision for doubtful
debts 4,750 Current liabilities  
  204,750 Trade payables 21,500
121,50
Bank 999 Total liabilities 0
       
314,74
Total assets 314,749 Total equity and liabilities 9

RATIO ANALYSIS
Selected Ratios for Tristar Company
     2017 2018 2019
Liquidity Current Ratio 1.78 1.7 1.9
Ratios Acid Test Ratio 1.32 1.22 1.12
         
Leverage Debt Ratio 0.54 0.55 0.56
Ratios Debt to Equity Ratio 0.87 1.05 1.23
         
Gross Margin Ratio 0.69 0.55 1.95
Return on Asset Ratio 0.52 0.59 0.66
Profitability Return on Equity 1.1 1.25 1.4
         
Inventory turnover ratio 4.5 4.2 3.9
Asset turnover ratio 2.23 2.65 3.07
Receivables Turnover Ratio 6.5 5.8 5.1
60 64 51
Asset Usage Days Sales outstanding Ratio days days days

INTERPRETATIONS
The appropriation account of an Tristar Company details the manner in which its resources are
dispersed among its various departments, shareholders, and partners. An appropriation
account is a type of account that is used by businesses to indicate how the profits of the
business are allocated and kept. In the case of partnerships, it demonstrates how the profits are
divided up between the partners. The major objective of the appropriation account that is used
by a partnership is to demonstrate how the profits are divided up between the various
members. In the case of a limited liability company (LLC), the appropriation account will begin
with profits that have not yet been taxed. Next, retained profits will be calculated by deducting
both corporation taxes and dividends.
When governments construct their budgets, appropriation accounts play an important role in
the process. The appropriation credits are then distributed to the appropriate agencies after
being subtracted from the projected revenues from taxes and trade. Credits that have been
allocated to appropriation accounts but have not been used can be reallocated to other
agencies or put to use for other objectives.

SOLE TRADERSHIP:
INCOME STATEMENT:

Sales                                                              95 800

Purchases                                                           48 340

Returns outwards                                                   560

Gross profit                                                       47 900

Wages of motor vehicle driver                                       270

Motor vehicle running expenses                                     1 1680

Depreciation of motor vehicle                                       3 950

Depreciation of premises                                             11 310

Rent and insurance                                                 35 000

Light and heat                                                       130

General and marketing expenses                                     6 200

Discount received                                                   5 300

Provision for doubtful debts                                         560

Net profit                                ,                         2 850

BALANCE SHEET:
Assets                                                               $

Stock (Inventory)                                                 12 600

Motor vehicles                                                     14 450

Less: Provision for depreciation of motor  11 500

vehicle                  

                                                                             2 950

Premises                                                           56 960

Less: Provision for depreciation of 35 000                                                                        

premises                        

Debtors (Trade Receivables)                             7   700

    

Bank                                                               4 950

Total 86 060
Liabilities                                                           $

8% Bank loan repayable 30 June 2021            20

    000
        

Creditors (Trade Payables)                                60

     000
 

Capital                                                            6 060
                                     86 060

(c) Gross profit percentage

Gross profit                                                       47 900

Gross profit percentage                                           100

Sales                                                              95 800

(d) Total amount of sales returns

Returns outwards                                                   560

Total amount of sales returns                                     560

(g) Journal
entries

Debit                                Credit
             
01-Apr-18 Stock (Inventory)                        30000
          
30 000

Capital                                                       30 000

18-May-18 Purchases                                    48

     340
     

Creditors (Trade Payables)                                   48 340

 20-May-18 Returns outwards                      560
           

Stock (Inventory)                                           560

01-Oct-18 Motor vehicles                            18500

         

Capital                                                     18500

INTERPRETATION:
The act of reserving a sum of money for use in a certain endeavour is known as appropriation.
In the world of accounting, this term refers to a breakdown of how a company's profits are
distributed; in the world of government finance, this term refers to an account that displays the
money that have been credited to a government department. Appropriating funds is the
process through which an organisation or government allots monetary resources to meet the
operational requirements of its business.
The majority of partnerships and limited liability firms are the entities that are responsible for
preparing appropriation accounts in general accounting (LLCs). They are an extension of the
profit and loss statement that demonstrate how a company's profits are distributed to its
shareholders or used to grow the reserves that are shown on the balance sheet. A corporation
may set aside funds, either temporarily or permanently, in order to meet its financial
obligations, which may include the payment of staff wages, the conduct of research and
development, and the distribution of dividends.

REFERENCES