Financial Accounting and Reporting - Assignment Example

FINANCIAL ACCOUNTING AND REPORTING By of the of the School Task 2 J. Lewisham Income Statement For the year ending 31st May 2012 Sales 80,900 Less: Sales returns 2400 Net sales 78,500 Less cost of goods sold Purchases 37,900 Add: Opening inventories 8200 Cost of goods available for sale 46100 Less closing inventories 6400 Less: Drawings (J.L) 600 Cost of goods sold 39,100 Gross profit 39,400 Add other income revenue Discount received 700 Total profit 40,100 Less operating expenses Depreciation expense 8400 Insurance 2900 Heating and lighting 1500 Wages 12200 Rates 3700 Bad debt w/f 800 Loan interest 800 Motor expense 1400 31700 Net profit 8400 Workings 1) Purchases=A/P+ discount received-opening creditors+ closing creditors =37000+700-4800+500= $37,900 2) Drawings= Balance + J>L drawings =19000+600= $19,600 3) Sales calculation Cash sales 28,000 Add: A/R @ June 1 52,000 Less: A/R opening bal 12600 Add: closing debtors 10000 Add A/R @ May 31 800 Bad debts w/o 800 Add credit not issued 2400 Less dishonored cheque 500 Total sales 80,900 J. Lewisham Balance sheet As at 31st May 2012 Non-current assets Equipment 40,200 Less accumulated depreciation 8400 31,800 Current assets Cash in hand (700) Cash at the bank 5200 Accounts receivable 10000 Inventory 6400 Total Current assets 20,900 Total assets 52,700 Less liabilities Current liabilities Accounts payable 5000 Rates owing 500 Loan interest owing 200 Total current liabilities 5700 Long-term liabilities Loan from bank 10,000 Total liabilities 15,700 Net Assets 37,000 Financed by Capital 48200 Less drawings 19600 Add net profit 8400 Total equity 37,000 Workings 1) Equipment = Beginning bal = new purchases =25200+15000= $40200 2) Calculation of capital Statement of affairs As at June 1, 2011 Cash in hand (June 1) 600 Cash at the bank (June 1) 16,000 Inventory 8200 Accounts receivable 12600 Prepaid rent 400 Equipment 25200 Less liabilities Accounts payable 4800 Loan from bank 10,000 Capital (June 1) 48,200 Calculation of ratios Gross Profit margin = gross profit / total sales =39,400 / 80,900 * 100% = 48.7% Gross profit margin indication the proportion of the total sales revenue that remains after deducting cost of sales or cost of goods sold. A gross profit margin of 48.7% indicates the company is realizing a gross profit of $48.8 for every $100 of sales revenue. The company is very profitable. Net Profit margin = net profit / total sales =8,400 / 80,900 * 100% = 10.4% This ratio indicates the profitability of the company. It shows the proportion of gross profit that remains after meeting operating expenses. A net profit margin of 10.4% indicates the company is realizing a net profit of $10.4 for every $100 of sales revenue. In comparison with gross profit, the net profit margin is relatively low as the company has more operating expenses. ROCE ratio = net profit / capital employed =8,400 / 47,000 *100% = 17.9% ROCE shows how efficient the company is using its capital employed to generate profit. Being high, the company makes more profit for each dollar of capital employed. Stock turnover rate =cost of goods sold / average stock =39,100 / 7,300 = 5.36 Times. This ratio shows how well a firm is managing its inventory levels by measuring the number of times inventory is sold and replaced. An inventory turnover of 5.36 times is very good and the company is very efficient in managing its inventories. Current ratio = current assets / current liability =20,900 / 5,700 = 3.667= 1: 3.7 Current ratio (working capital ratio) measures the ability of a firm to meet its near-term obligations. Having a current ratio of more than 2 is very good and the company is very liquid and is able to meet its short-term obligations with lots of ease. Acid test ratio = (current assets - stock) / current liability = (20,900 - 6,400) / 5,700 = 2.54 =1:2.5 Acid test ratio measures the ability of a firm to meet its near-term obligations using very liquid assets. A quick ratio of greater than 2 is very good and the company is able to meet its short-term obligations with lots of ease using very liquid assets. Gearing ratio = long-term liability / capital employed =10,000 / 47,000 * 100% = 21.28% This ratio measures how leverage a company is thus showing the finance risk of a company. The company has low loan payment as well as risks because its gearing is less than 50%. Differences between financial statement of sole proprietorship and Limited Liability Company. Because all profits belong to the owner, a Sole proprietorship firm should only prepare capital account. A sole proprietor does not need to prepare income statement because but should only show capital account on the balance sheet. However, on the other hand, limited li88ability company is required to prepare both balance sheet and income statement for the public to see the financial performance and financial position. Task 3 Atlantic UK plc and Subsidiary Shire UK ltd Consolidated income Statement For the year ended 31 December 2012 Total revenue 1075000 Less: cost of sales 497,500 Gross profit 577,500 Less operating expenses Sundry expense 237,500 Profit before taxation 340,000 Less: taxation 25,000 Profit after taxation 315,000 Less: Non-controlling interest 18,000 Net profit 297,000 Workings a) total revenue= 850000+22500= 1075000 b) cost of sales= 460000+37500= $497,500 c) sundry expense= 150000+875000= $237500 d) total taxation= 15000+10000= $25000 e) Non-controlling interest= 20% *$90000=$ 18,000 Atlantic UK plc and Subsidiary Shire UK ltd Consolidated statement of financial position As at 31 December 2012 Non-current assets Goodwill 36,000 Other long term assets 860,000 896,000 Current assets Cash in hand 7000 Cash at the bank 18000 Accounts receivable 215000 Inventory 275000 Total Current assets 515,000 Total assets 1,411,000 Less liabilities Current liabilities Accounts payable 120,000 Other trade accounts payable 115000 Total current liabilities 235,000 Long-term liabilities Differed taxation 240,000 Total liabilities 475,000 Net Assets 936,000 Financed by Atlantic’s share Capital 450,000 Reserves plus retained profits 426,000 Add non-controlling interest 60,000 Total equity 936,000 Workings 1) goodwill calculation Goodwill investments 200,000 Less: Retained profit (80%85000) 4,000 Less: Nominal value of share in Shire UK plc (80%*200000) 160,000 Goodwill 36,000 2) Calculation of reserves plus retained profit Retained profit Atlantic (350000+180000-285000) 245,000 Shire (100000+75000-90000) 85,000 Deduct dividend paid 75,000 10,000 Deduct: pre-acquisition retained profit 5,000 5000 Deduct: non-controllable interest (0.2*5000) 1000 4000 Groups retained profit 249,000 Dividend received by Atlantic 60,000 Pre-consolidated profit (297,000-180,000) 117,000 Reserves plus retained profit 426,000 References Accounting-simplified.com, (n.d.). 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