Role Of Accounting Information In Business Context

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. 

 

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

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

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

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

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.

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 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 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:-

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 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:

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:-

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 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:-

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:-

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).

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.

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