Compare Appropriate Formats of Financial Statements-Btechnd
Compare appropriate formats of financial statements for different types of business
From the provided financial statements of both the business organisation i.e. R. Riggs and J & B Associates it can be analysed that each business organisation is involved in different types of business. From the financial statements i.e. profit and loss account and balance sheet provided, following analysis has been drawn:
From the financial statements it is analysed that R. Riggs is the sole trader or sole proprietor. Reason for stating R. Riggs as sole trader is as follows:
- Riggs has used own capital for their business operations i.e. own capital that is shown in the balance sheet.
- Apart from using own capital R. Riggs has added net profit earned in the own capital and using net profit earned as capital for the business organisation.
- In balance sheet of R. Riggs, drawings have been drawn from the capital of the business organisation.
- Riggs has not used equity shares and preference shares in its business operations and has invested its own fund.
From the financial statement of J & B associates it can be analysed that they are in partnership business. Following is the reason for stating J & B Associates as partnership business:
- Major reason for stating J & B Associates as partnership business is that there are two partners in the business i.e. J & B.
- From the profit and loss account it can be analysed that interest on drawing has been charged on the profit of the reporting period. Apart from interest on drawing there is interest on capital that is paid to partners i.e. J and B.
- As per the balance sheet of J & B Associates it can be analysed that fixed assets are shown at historic value and no depreciation has been charged on the fixed assets.
Using financial statements of R. Riggs and J & B associate above, calculate (for each business) the gross profit margin, net profit margin, current ratio and quick ratio. Comment on your results.
- Riggs
| Ratios | Calculation | Comments |
| Gross Profit Margin | Gross Profit / Sales * 100 62,645 / 157,165 * 100 = 39.86 % | GP ratio indicates ability of R. Riggs related to profit making capability from core business operations. In this case, R. Riggs has shown adequate results in terms of earning gross profit. As compared to industry standards they are above the standard(Liu 2013). |
| Net Profit Margin | Net Profit / Sales * 100 23,937 / 157,165 * 100 = 15.23 % | Net profit margin indicates profit making capacity in terms of cost management and profit making ability in terms of administrative management. R. Riggs has below average results in terms of NP margin. They shall improve their profitability to attract more investors. |
| Current Ratio | Current Ratio / Current Liabilities 18,874 / 5,657 = 3.34 times | Current ratio is the indicator of liquidity in working capital. Higher current ratio indicates high level of liquidity and vice versa. R. Riggs has maintained higher level of current ratio. But they had idle funds or current assets as compared to its current obligations(Values 2013). |
| Quick Ratio | Liquid Ratio / Current Liabilities 18,874 – (2400 + 230) / 5,657 = 2.87 times | Liquid ratio indicates more liquid position of working capital, as this ratio ignore prepaid expenses and stock from the calculation of ratio. R. Riggs has adequate liquid ratio that and positive results has been obtained. |
You are required to calculate the following ratios for the year ended 30th April 2015. State the formulae also used
Statement showing calculation of ratios of Staton Plc as at 30th April 2015
| Ratios | Calculation | Comments |
| Gearing Ratio | Long term Liabilities (Fixed interest or cost bearing) ÷ Equity Share Capital (Variable cost bearing) | 7880000 / 5000000 * 100 |
| Earnings per share | Net Profit ÷ No. of Equity Shares | 750000 / 5000000 £ .15 per share |
| Dividend per share | Dividend Paid ÷ No. of Equity Shares | 200000 / 5000000 £ .04 per share |
| Dividend Cover | Net Profit ÷ Dividend Paid | 750000 / 200000 3.75 times |
| Price / Earnings ratio | Market price per share ÷ earning per share | 80 / 0.15 5.33 times |
Write a brief report to Jane advising with reason, whether or not she should invest in Staton Plc
| Ratios | Comments | |
| Gearing Ratio | 68.65 % | 157.6 % |
| Earnings per share | 0.12 | £ .15 |
| Dividend per share | 3.75 | £ .04 per share |
| Dividend Cover | 3.2 times | 3.75 times |
| Price / Earnings ratio | 5 times | 5.33 times |
From the above table it can be analysed that there is differnce in results of Staton Plc in both the years. Gearing ratio has been increased that means Staton Plc is at higher risk bracket related to use of debt in capital employed as compared to equity. On the ither hand, Jane shall consider earnings per share which has been increased by 0.03 paise per share this shows improvement in business operations and profitability of Staton Plc. But dividend per share has been decreased as compared to last year but this can be positive point for Jane as Staton Plc is saving their funds for using it in business expansion. As per price earning ratio, it has been increased as compared to last year and is positive point for Jane to make investment(Glakas 2011).
It is concluded that Jane shall make investment in Staton Plc on the basis of its performance.
Conclusion
From the above report it can be analysed that sources of finance has different implications and shall be taken into account while selecting appropriate sources of finance. Cost of finance and its tax implication are two most important aspects of sources of finance. Financial p
lanning shall be incorporated in the decision making process and various information shall be used by different decision makers for making decisions. Net present value and payback period are two important methods of capital appraisal technique that can be used by the organisation for decision making process. Balance sheet and income statement are two important financial statements that reflect various decision making information. Ratio analysis is the decision making technique that is used by the decision makers.Order Now