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Question:
Describe and analyse the role of accounting information in a business context.

Analyse a set of financial statements including balance sheet, profit and loss accounts and cash flow statements.

Demonstrate the relationship between accounting data and financial planning and resource allocation decisions. 

 
Answer:
1.a:

In the Books of Weather & Sons

Adjustment Trial Balance :-

As on 30th June,2016

Sl. No.

Account

Unadjusted Trial Balance

Adjustments

Adjusted Trial Balance

 

 

Debit

Credit

Debit

Credit

Debit

Credit

1

Retained Profit

 

88000

 

 

 

88000

2

Sales

 

636000

 

 

 

636000

3

Share Capital

 

100000

 

 

 

100000

4

Share Premium

 

200000

 

 

 

200000

5

Inventory

87000

 

 

 

87000

 

6

Purchases

230000

 

 

 

230000

 

7

Trade Payables

 

86000

 

 

 

86000

8

Trade Receivables

205000

 

 

 

205000

 

9

Bank

83900

 

 

 

83900

 

10

Motor Expenses

12987

 

 

 

12987

 

11

Maintenance

12000

 

 

 

12000

 

12

Salaries & Wages

106000

 

 

 

106000

 

13

Adminitration Expenses

33220

 

 

 

33220

 

14

Telephone

5687

 

4300

 

9987

 

15

Heat & Light

14300

 

 

5000

9300

 

16

Equipment at Cost

318000

 

 

 

318000

 

17

Provision for Depreciation on Equipment

 

45000

 

40950

 

85950

18

Motor Vehicle at Cost

45000

 

 

 

45000

 

19

Provision for Depreciation on Motor Vehicles

 

6000

 

11250

 

17250

20

Rent

68000

 

 

8000

60000

 

21

Advertising

19118

 

 

 

19118

 

22

Bad Debts

3788

 

 

 

3788

 

23

Provision for Bad Debts

 

2000

 

 

 

2000

24

Long Term Loan

 

90000

 

 

 

90000

25

Interest

9000

 

 

 

9000

 

26

Equipment Depreciation

 

 

40950

 

40950

 

27

Motor Vehicle Depreciation

 

 

11250

 

11250

 

28

Prepayments

 

 

13000

 

13000

 

29

Accrual Telephone

 

 

 

4300

 

4300

31

Income Tax Expense

 

 

18300

 

18300

 

32

Provision for Income Tax

 

 

 

18300

 

18300

33

Loan Interest Accrued

 

 

 

 

 

 

 

 

1253000

1253000

87800

87800

1327800

1327800

1.b:-

In the Books of Weather & Sons

Income Statement

as at 30th June, 2016

Particulars

Amount

Amount

 

($)

($)

Revenues :

 

 

Sales

 

636000

Total Revenue (A)

 

636000

Expenses :

 

 

Cost of Goods Sold:

 

 

Purchase

230000

 

Opening Inventory

87000

 

 

317000

 

Less : Closing Inventory

50000

267000

Motor Expenses

 

12987

Maintenance

 

12000

Salaries & Wages

 

106000

Administration Expense

 

33220

Telephone

 

9987

Heat & Light

 

9300

Rent

 

60000

Advertising

 

19118

Bad Debts

 

3788

Interest

 

9000

Equipment Depreciation

 

40950

Motor Vehicle Depreciation

 

11250

Income Tax Expense

 

18300

Total Expenses (B)

 

612900

Net Income (A-B)

 

23100

1.c:-

In the Books of Weather & Sons

Balance Sheet

as at 30th June, 2016

Particulars

Amount

Amount

 

 

 

ASSETS

 

 

Current Assets

 

 

Cash at Bank

 

83900

Trades Receivable

205000

 

Less : Provision for Bad Debt

2000

203000

Closing Inventory

 

50000

Prepaid Expenses:

 

 

Rent

8000

 

Heat & Light

5000

13000

Total Current Assets

 

349900

Non-current Assets

 

 

Equipment at Cost

318000

 

Less : Provision for Depreciation on Equipment

85950

232050

Motor Vehicles at Cost

45000

 

Less : Provision for Depreciation on Motor Vehicles

17250

27750

Total non-current assets

 

259800

Total Assets

 

609700

LIABILITIES

 

 

Current Liabilities

 

 

Trades Payable

 

86000

Provision for Income Tax

 

18300

Accrued Telephone Charges

 

4300

Total Current Liabilities

 

108600

Non-Current liabilities

 

 

Long Term Loan

 

90000

Total Non- Current Liabilities

 

90000

Total Liabilities

 

198600

Equity

 

 

Share Capital

 

100000

Share Premium

 

200000

Retained Earnings

 

111100

Total Equity

 

411100

 

 

 

Total Liabilities & Equity

 

609700

Workings:-

In the Books of Weather & Sons

Adjustment Journal Entry

     

Dr.

Cr.

Date

Particulars

Amount

Amount

 

 

 

($)

($)

30th June ,2016

Prepaid Heat & Light A/c.

Dr.

5000

 

 

To,

Heat & Light A/c.

 

5000

 

(Being prepaid heat & light expenses adjusted with the Heat & Light Expense for the year)

 

 

30th June ,2016

Preapid Rent A/c.

Dr.

8000

 

 

To,

Rent A/c.

 

8000

 

(Being prepaid rent expenses adjusted with Rent Expense for the year)

 

 

30th June ,2016

Depreciation on Equipment A/c.

Dr.

40950

 

 

To,

Provision for Depreciation on Equipment A/c.

 

40950

 

(Being depreciation charged on equiment for the year)

 

 

30th June ,2016

Depreciation on Motor Vehicle A/c.

Dr.

11250

 

 

To,

Provision for Depreciation on Motor Vehicle A/c.

 

11250

 

(Being depreciation charged on motor vehicle for the year)

 

 

30th June ,2016

Income Tax Expense A/c.

Dr.

18300

 

 

To,

Provision for Income Tax A/c.

 

18300

 

(Being provision created for income tax payable)

 

 

30th June ,2016

Telephone A/c.

Dr.

4300

 

 

To,

Accrued Telephone A/c.

 

4300

 

(Being accrued telephone charges adjusted with telephone charges for the year)

 

 

 

In the Books of Weather & Sons

Statement of Change in Equity

as at 30th June, 2016

Particulars

Share Capital

Share Premium

Retained Earnings

 

($)

($)

($)

Opening Balance

100000

200000

88000

 

 

 

 

Add : Net Income for the year

 

0

23100

Closing Balance

100000

200000

111100

2:-
Introduction:-

Last decade was one of the toughest periods for global airlines industry. The industry faced several issues and the many airlines companies had to take strong stands to cope up with the financial crisis. The crisis period had risen mainly due to high rising fuel cost, operational hazards and change in passengers’ preferences. Big airlines companies had suffered from these issues greatly. Many big airlines were at a verge of winding up, while many companies merged with each other to enjoy the cost benefits in operational activities. However, this was an advantageous period for the small and medium companies. Due to small infrastructures and cost effective operations, this sub-sector of airlines industry did not face the challenges so strongly. Rather, as the big companies were not able to run their operations properly, these small and medium companies took the opportunity and turned the attentions of the clients by offering much lower fares than the big companies.

The small airline companies are still capitalizing the opportunity and establishing themselves as one of the leading brands in national and international levels both. Now, apart from low fare, many such companies are offering other benefits to the passengers also. Initially, many passengers often complained about the services of the low-fare air companies. In actual, it was not possible for them to provide a-class service like the big companies in the crisis period. However, nowadays many companies are trying to improve their services so that the gap between the low-fare airlines and big airlines can be filled as much as possible and the passengers, who do not bother about amount of fares but needs good quality service, may also turn their attention towards the low-fare airline companies.

Ryanair Ltd and EasyJet are two low-cost airlines companies, who operate mainly in the European countries. Ryanair Ltd. is an Irish company, having its headquarter in Dublin with operational bases at Dublin and London Stansted airports. As per the report on 2013, it was the busiest airline in respect of passenger numbers and largest airline in Europe in terms of scheduled passengers carried (Ryanair.com, 2016). EasyJet is a British company, which operates from London Luton airport. It uses to provide services across 32 countries through 700 routes. In 2014, it was ranked the second-largest European airline, after Ryanair, in terms of passengers carried (Easyjet.com, 2016).

The report is prepared to compare the financial performances of Ryanair Ltd. and EasyJet for the period from 2013 to 2015. For the evaluation and comparison, the performances of the companies are measured by using various ratios.

 
Financial Analysis:-

The best procedure to evaluate the activities and growth of any company is to measure its financial performances over the years. There are various techniques, which are used to measure and evaluate the financial performances. The most widely-used technique of such measurement is financial ratio analysis.

Financial ratio analysis can be defined as the comparison of various financial items or categories. The ratios describe the relationship between two or three financial items and the impact of one item over other item. It helps not only to measure the various financial aspects of the company but also to take various decisions regarding strategy planning, budgeting, investment etc.

The financial ratios are categorized into various sections according to the nature of the outcomes. The most useful ratios for measuring the financial performances are profitability ratios, liquidity ratios and efficiency ratios (Healy and Palepu 2012).

Profitability Ratio Analysis:-

Profitability ratios explain the profit generating capacity of the company from different aspects. The income or profit of the company can be compared with various related financial items, such as cost, assets, capital etc. Each ratio describes how the related financial items are affecting the profit or income of the company. It also helps to explain the financial strength and performance level over the period.

Out of many profitability ratios, the operating profit margin ratio is selected to compare the profit generating capability of Ryanairs and EasyJet for the last three years and shown in the following graph (As per Appendices 1) :-

Operating Profit Margin

Operating Profit margin ratio compares the operating profit with the revenues, earned by the company for a specific period. It denotes how much operating profit has been generated out of the total revenue and how much expenses are spent for operational activities. The operating profit margins of Ryanairs have remained higher than EasyJet for the last three years. It denotes that Ryanair is able to generate more operating profit out of the revenue than EasyJet. It can also stated that the Ryanair is spending comparatively lesser operation costs than EasyJet. However, the graph is denoting that ratios of Ryanair are not stable. It had gone down in 2014 in comparison to 2013 and in 2015, it has again risen with at significant rate. On the other hand, EasyJet has maintained a steady growth over the years (Brigham and Ehrhardt 2013).

Return on Capital Employed is another profitability ratio, which evaluates the return, provided by the firm to the shareholders and long-term creditors. It measures how efficiently the business is utilizing its capital to generate revenues and profits. The return on capital employed of Ryanairv and EasyJet over last three years are shown and compared in the following graph:-

Return on Capital Employed

The above graph denotes that though Ryanairs has earned higher revenues over the year than EasyJet, the latter has generated higher returns over the period for its investors than the former. Ryanairs has maintained a stable rate of return, but the returns of EasyJet has increased at a significant growth rate over the three years. It means that EasyJet has not only maintained a better efficiency level than Ryanairs, but also improved the level internally over the years. The company is utilizing its capital more effectively and hence, from an investor’s perspective it will be better option for investment.

Liquidity Ratio:-

Liquidity Ratio is used to measure the liquidity aspect of the business. It explains how much liquid asset is available to the firm for covering its current liabilities. Liquid assets are one of the major components of working capital, which is used to continue the daily operation of a business. Therefore, if a business does not have adequate amount of liquid assets, then it cannot operate its activities smoothly. Moreover, a business may generate higher profits, but due to lack of sufficient liquid assets, it cannot payoff its current liabilities, which can result into insolvency.

Quick ratio is considered to be the most effective liquid ratios. It denotes how much cash and easily convertible current assets are available to meet the current liabilities, when they will be due and payable. The quick ratios of Ryanair and EasyJet from 2013 to 2015 are shown in the graph below:

Quick Ratio

From the above graph, it can be stated that Ryanairs has maintained the quick ratios properly over the years, as it has remained above 1.5 in all the three years. It means that the company always has adequate enough cash and cash equivalent assets to cover its current liabilities. However, the quick ratios of EasyJet have gone downwards over the period. The positive fact is that the ratio is still above 0.5, which is considered as a general benchmark for quick ratio. The downward trend denotes that the company has not been maintaining proper cash funds for paying off its short-term liabilities or it is suffering from shortage of cash funds.

Time Interest Earned Ratio measures the capability of the company to pay off the interest expenses out its income before interest and tax or EBIT. If a company does not generate enough income to pay off the interest amount, then the debts will increase more. Therefore, it is important to evaluate the interest payment capability of the company. The time interest earned ratios of the two companies are shown in the following graph:-

Time interest Earned Ratio

The above graph indicates that both the companies have maintained high ratios over the periods and both have followed a significant upward trend. Hence, it can be stated that both the companies are very much capable to pay off the interest expense out of its net income. However, as the interest expenses of EasyJet are very low for the last two years, the ratios for the two periods have been very high in comparison to Ryanairs (Needles et al. 2013).

Efficiency Ratios:-

Efficiency ratios measure the efficiency level of the business in respect to utilization of the assets to generate income. It helps the management to identify the loopholes or drawbacks in the daily operational activities and also explains where the management should give more focus to increase the revenue and profit.

Accounts Receivable Turnover Ratio describes the average collection period from the debtors. In other words, it explains how much time the business is taking to convert the accounts receivable assets into cash asset. Cash is very important current asset for daily operational activities. Hence, the business cannot realize cash from the credit sales faster then, it would face problems to continue the operational activities. The accounts receivable turnover ratios of the two companies are shown and compared in the following graph:-

Accounts Receivable Turnover Ratio

It is clear from the above graph that the ratios of Ryanairs are not stable over the period, but it remains quite higher than Easyjet, which depicts that the company has been more efficient over the years to convert the accounts receivables into cash. It also explains why Ryanairs has better quick ratios than EasyJet.

Asset Turnover Ratio depicts the efficiency level of the business in utilizing the total assets for generating profits. Business firms acquire the assets for continuing the operating activities and generating revenues. Therefore, if the total revenue, generated, is not adequate in comparison to the total assets, then it can be stated that the assets, acquired by the firm, are not utilized effectively in the operations. The asset turnover ratios of the two companies are shown in the graph below:-

Asset Turnover Ratio

The Asset turnover ratios of Ryanairs are quite fluctuating over the period and also quite low comparing that of EasyJet. It indicates that the former company is not utilizing its assets properly, whereas, EasyJet has used it fewer assets more efficiently to generate higher returns in the last three years (Brigham and Houston 2012).

Conclusion:-

It can be concluded from the above analysis that both the companies have some flaws in its financial performances over the last three years. Ryanairs has generated higher operating profits but it has failed to provide higher return on employed capital and assets. It has mainly caused by the higher non-operating expenses and inefficient utilization of high value assets.

On the other hand, though the operating profits are comparatively lower, EasyJet has been able to maintain steady growth in the operating profit. It has provided better return on capital and assets. The main concern for the company is the lower quick ratio and accounts receivable turnover ratios. It indicates that the company is not able to convert its profits into cash funds.

 
References:-

Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.

Brigham, E.F. and Houston, J.F., 2012. Fundamentals of financial management. Cengage Learning

Easyjet.com. (2016). Book direct for our guaranteed cheapest prices | easyJet.com. [online] Available at: https://www.easyjet.com/en [Accessed 9 Aug. 2016].

Healy, P.M. and Palepu, K.G., 2012. Business Analysis Valuation: Using Financial Statements. Cengage Learning

Needles, B.E., Powers, M. and Crosson, S.V., 2013. Financial and managerial accounting. Nelson Education

Ryanair.com. (2016). Official Ryanair website | Cheap flights | Exclusive deals. [online] Available at: https://www.ryanair.com/gb/en/ [Accessed 9 Aug. 2016].

Bibliography:-

/investor.ryanair.com/wp-content/uploads/2015/07/Annual-Report-2015.pdf. (2016).investor.ryanair.com. [online] Available at: https://investor.ryanair.com/wp-content/uploads/2015/07/Annual-Report-2015.pdf [Accessed 9 Aug. 2016].

/www.ryanair.com/doc/investor/2013/final_annual_report_2013_130731.pdf. (2016). www.ryanair.com. [online] Available at: https://www.ryanair.com/doc/investor/2013/final_annual_report_2013_130731.pdf [Accessed 9 Aug. 2016].

Corporate.easyjet.com. (2016). Reports and accounts - easyJet plc. [online] Available at: https://corporate.easyjet.com/investors/reports-and-accounts.aspx?sc_lang=en [Accessed 9 Aug. 2016].

Dashtbayaz, M.L., Mohammadi, S. and Mohammadi, A., 2014. Strategic Management Accounting. Research Journal of Finance and Accounting,5(23), pp.17-21.

David, F. and David, F.R., 2016. Strategic Management: A Competitive Advantage Approach, Concepts and Cases

Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia

Horngren, C., Harrison, W., Oliver, S., Best, P., Fraser, D. and Tan, R., 2012.Financial Accounting. Pearson Higher Education AU

Horngren, C.T., Sundem, G.L., Schatzberg, J.O. and Burgstahler, D., 2013.Introduction to management accounting. Pearson Higher Ed

investor.ryanair.com/wp-content/uploads/2015/04/2014-Annual-Reports-Annual-Report.pdf. (2016). investor.ryanair.com. [online] Available at: https://investor.ryanair.com/wp-content/uploads/2015/04/2014-Annual-Reports-Annual-Report.pdf [Accessed 9 Aug. 2016].

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Manyaeva, V.A., Piskunov, V.A. and Fomin, V.P., 2016. Strategic Management Accounting of Company Costs. International Review of Management and Marketing, 6(5S), pp.255-264

Pratt, J., 2013. Financial accounting in an economic context. Wiley Global Education

Taylor, P.A., 2014. Financial managment 4

Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning

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