Introduction to Accounting Accounting and Business Economics

Question: Discuss about the Introduction to Accounting for Accounting and Business Economics . Answer: Introduction: The trial balance, comprehensive income statement and the balance sheet of Jackson and sons have been prepared in the first part. The second part of the report comprised of the analysis of the performance of the two selected companies that is a Tesco and Sainsbury. The analysis has been done using the profitability ratio, liquidity ratio and efficiency ratio. 1: In the Books of Jackson Sons Trial Balance as on 30/11/16 Trial Balance Adjustment Updated Trial Balance Particulars Debit Credit Debit Credit Debit Credit Retained Profit 173,475 173,475 Sales 950,000 950,000 Share Capital 100,000 100,000 Share Premium 200,000 200,000 Inventory 55,000 55,000 Purchases 350,000 350,000 Trade Payables 98,000 98,000 Trade Receivables 205,000 205,000 Bank 83,900 83,900 Motor Expenses 8,700 8,700 Maintenance 2,000 2,000 Salaries Wages 120,000 120,000 Administration Expenses 67,545 67,545 Telephone 2,100 2,100 4,200 Heat Light 3,800 1,000 2,800 Equipment at Cost 450,000 450,000 Provision for Depreciation equipment 45,000 40,500 85,500 Motor Vehicle at cost 120,000 120,000 Provision for Depreciation motor vehicle 6,000 18,000 24,000 Rent 128,000 8,000 120,000 Advertising 12,980 12,980 Bad Debts 5,450 5,450 Provision for Bad Debts 2,000 2,000 Long Term Debt 50,000 50,000 Interest 10,000 10,000 Equipment Depreciation 40,500 40,500 Motor Vehicle Depreciation 18,000 18,000 Prepayments 9,000 9,000 Accrual 2,100 2,100 Income Tax Expense 12,000 12,000 Provision for Income Tax 12,000 12,000 TOTAL 1,624,475 1,624,475 81,600 81,600 1,697,075 1,697,075 b) In the Books of Jackson Sons Income Statement for the period ended 30/11/2016 Particulars Amount Amount Sales Revenue 950,000 Cost of Goods Sold: Opening Inventory -55,000 Add: Purchases -350,000 Less: Closing Inventory -85,000 -320,000 Gross Profit 630,000 Operating Expenses: Motor Expenses -8,700 Maintenance -2,000 Salaries Wages -120,000 Administration Expenses -67,545 Telephone -4,200 Heat Light -2,800 Rent -120,000 Advertising -12,980 Bad Debts -5,450 Equipment Depreciation -40,500 Motor Vehicle Depreciation -18,000 Total Operating Expenses -402,175 Earnings before Interest Tax 227,825 Less: Interest -10,000 Earning before Tax 217,825 Less: Income Tax Expense -12,000 Net Profit for the Period 205,825 c) In the Books of Jackson Sons Balance Sheets as on 30/11/16 Particulars Amount Amount CURRENT ASSETS: Bank 83,900 Trade Receivable 205,000 Less: Provision for Bad Debts -2,000 203,000 Closing Inventory 85,000 Prepayments 9,000 TOTAL CURRENT ASSETS 380,900 NON-CURRENT ASSETS:- Equipment at Cost 450,000 Less: Provision for Equipment Depreciation -85,500 364,500 Motor Vehicle at Cost 120,000 Less: Provision for Motor Vehicle Depreciation -24,000 96,000 TOTAL NON-CURRENT ASSETS 460,500 TOTAL ASSETS 841,400 CURRENT LIABILITIES: Trade Payables 98,000 Accruals 2,100 Provision for Income Tax 12,000 TOTAL CURRENT LIABILITIES 112,100 NON-CURRENT LIABILITIES: Long Term Debt 50,000 TOTAL NON-CURRENT LIABILITIES 50,000 TOTAL LIABILITIES 162,100 EQUITY: Share Capital 100,000 Share Premium 200,000 Retained Earnings 173,475 Add: Net Profit for the Period 205,825 379,300 TOTAL EQUITY 679,300 TOTAL EQUITY LIABILITY 841,400 Workings for Depreciation:- Particulars Equipment Motor Vehicle Cost Price 450,000 120,000 Less: Accumulated Depreciation 45,000 0 Net Cost 405,000 120,000 Depreciation Rate 10% 15% Depreciation for the period 40,500 18,000 2: Introduction: The selected companies are Tesco and Sainsbury. For the purpose of analysis, the ratios selected from the profitability ratio are net profit margin and return on equity. The analysis of liquidity ratio is done using the current ratio and quick ratio. Under the efficiency ratio, the selected ratio for the analysis are receivables collection period and inventory turnover period. Profitability Ratio Analysis:- Looking at the calculated profitability ratios of Tesco, the net profit margin was 004% in the year 2013 and it rose to 153% in the year 2014. The ratio was -9.26% in the year 2015 as compared to other years. The ratio turned out to be negative in the financial year because it incurred net loss of 5766 million. The gross loss of the group reported to be 2695 million. All this was the reason attributable to the negative net profit margin. The return on equity also went down in the subsequent year. The ROE of the year 2013 was 0.14%, the ratio increased to 7% in the year 2014. The ratio was negative at -82% in the year 2015. It can be seen that the ratio have fallen and turned out be negative in the financial year 2015 and this was because the group incurred comprehensive loss(Collier 2015). Graph 1: Return on Equity Source: (created by author) There was a fall in the net profit margin of Sainsbury in the financial year 2015. The ratio for the year 2013 stood at 258% as compared to 2.99% in the financial year 2014. The ratio fell to -0.70% in the year 2015. The return on equity for the year 2013 was 10% as compared to 12% in the financial year 2014. The ratio turned negative and fell to -3% in the financial year 2015. The company incurred a loss in the financial year 2015 and the total comprehensive loss stood at 195 million for the year 2015. Graph 2: Net Profit Margin Source: (created by author) Liquidity Ratio Analysis:- The quick ratio initially increased and subsequently decreased in the year 2015. The ratio stood at 1.59 in the year 2013 as compared to 2.06 in the year 2014. The ratio was reported at 1.15 in the financial year 2015. The fall in the quick ratio is indicative of the fact that the company is relying too much on its inventories to clear off its short term obligations. The quick ratio of Sainsbury had an increasing trend. The quick ratio was calculated at 0.30 in the year 2013, which increased to 0.50 in the year 2014. The ratio further increased to 0.51 in the financial year 2015. The high quick ratio indicates that the company is able to meet its financial obligation suing the funds available in hand. It also indicates that the company might facing difficulties in collecting its receivables(Stoer and Bulirsch 2013). Graph 3: Quick Ratio Source: (created by author) The current ratio of Tesco stood at 2.67 in the year 2014 as compared to 2.22 in the year 2013. The ratio fell to 1.52 in the financial year 2015. Though the current ratio has fallen, the company is able to meet its short term obligations using its current ratio. The current ratio fell as there was reduction in the current assets held and the current liabilities increased. The current ratio of Sainsbury was reported at 0.61 in the year 2013 and the ratio increased to 0.65 in the financial year 2014. However, the ratio remained constant at 0.65 in the financial year 2015. The reason behind the increasing current ratio is that the current assets of the company increased in the year 2015 and the current liabilities also increased and the increasing ratio indicates a good sign as the company is able to meet its short term obligations suing its current assets(Black and Al-Kilani 2013). Graph 4: Current Ratio Source: (created by author) Efficiency Ratio Analysis:- Under the analysis of efficiency ratio, there is a consecutive fall in the receivable collection period. The collection period was 14.54 in the year 2013 and it fell to 12.58 and 12.43 in the year 2014 and 2015 respectively. The fall in the receivables collection period indicating that the company is tying less of its funds in the account receivables and which can be used for other purpose. The receivables collection period of Sainsbury had an increasing trend and the figure stood at 4.79 in the year 2013. The collection period increased to 6.60 and 7.30 in the year 2014 and 2015 respectively. The increase in the collection period is not a good sign as the funds are tied up and there arises the risk of default in the payment made by the debtors(Atrill andMcLaney 2014). Graph 5: Receivables Collection Period Source: (created by author) The inventory turnover period also witnessed a fall. The figure stood at 23.06 in the year 2013 and this fell to 21.92 and 16.76 in the year 2014 and 2015 respectively. The low inventory turnover indicates that the company is not able to sell off its inventories and they are lying idle and there is a lack of liquidity(Collis et al. 2012). The inventory turnover ratio of Sainsbury is more or less stable in the period of analysis. In the year 2013, the figure stood at 16.36, which fell to 16.26 in the year 2014. The turnover period further fell to 16.13 in the year 2015. The fall in the period indicates the overstocking and poor liquidity of the company. Graph 6: Inventory Turnover Period Source: (created by author) Conclusion: The analysis of the performance of two companies have been done suing the ratios and it is concluded that the performance of both the companies is at par. In comparison to few parameters, Sainsbury has outperformed Tesco. Reference and Bibliography: Kuter, M.I., 2013. Introduction to Accounting: textbook.Krasnodar: Prosveshenie-Yug,20(3), p.5. Atrill, P. and McLaney, E., 2014.Accounting and Finance: An Introduction. Pearson Higher Ed. Biondi, Y. and Zambon, S. eds., 2013.Accounting and business economics: Insights from national traditions. Routledge. 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