Introduction to Accounting for 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.

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

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

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).

Return on Equity

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.

Net Profit Margin

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).

Quick Ratio

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).

Current Ratio

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).

Receivables Collection Period

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.

Inventory Turnover Period

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.

Black, G. and Al-Kilani, M., 2013. Accounting and finance for business. Pearson Higher Ed.

Collis, J., Holt, A. and Hussey, R., 2012. Business accounting: an introduction to financial and management accounting. Palgrave Macmillan.

Glaum, M., Baetge, J., Grothe, A. and Oberdörster, T., 2013. Introduction of International Accounting Standards, disclosure quality and accuracy of analysts' earnings forecasts. European Accounting Review, 22(1), pp.79-116.

Shah, P., 2013. Financial Accounting. OUP Catalogue.

Maher, M.W., Stickney, C.P. and Weil, R.L., 2012. Managerial accounting: An introduction to concepts, methods and uses. Cengage Learning.

Warren, C.S., Reeve, J.M. and Duchac, J., 2013. Financial & managerial accounting. Cengage Learning.

Stoer, J. and Bulirsch, R., 2013. Introduction to numerical analysis (Vol. 12). Springer Science & Business Media.

Giles, R., 2014. Finance & Accounting New 4th Edition. Lulu.com.

Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.

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