Course: BA (Hons) Accounting and Finance

Module: UGB105 Introduction to Financial Accounting

Module Leader: Caesar Nurokina

Word count: 2320

 Bob Paterson Trading account, Profit and Loss account and Statement of Financial
Position for the year ending on 30 April 2019

a) Bob Paterson
Trading account for the year ended 30 April 2019

£ £
Sales 30,000
Less Cost of goods sold:
Opening inventory 4,700
Add Purchases 15,700
20,400

Less Closing inventory (4,400)

Cost of sales (COGS) (16,000)
Gross profit 14,000

b)
Bob Paterson Profit and loss account 30 April 2019

£ £

Gross profit 14,000

Add other income -
14,000
Less Expenses
Shop Wages 4,420
Rent 4500
Insurance 120
Light & Heat 260
(9,300)
Net profit 4,700
c)

Bob Paterson
Statement of Financial Position as at 30 April 2019
£ £

Non-current assets

Fixtures and fittings 13,000

Current assets
Inventory 4,400
Account receivable 120
Bank 610
Cash 100
5,230
Total assets 18,230
Current Liabilities
Accounts payable (2,030)
Net assets 16,200

Capital 15,000
Balance at 1 May 2019 4,700
Add net profit for the year 19,700

Less Drawings (3,500)

Total Capital 16,200
1 b) Features of useful financial information:
Accountants provide economic information to their clients. It is of significance that the
information provided to the users of statement of financial position is useful, putted into context,
they may compare the data to something else for instance, may calculate a ratio. In addition,
the reason why this is important is because it allows the users to better plan, control and make
decisions. Basically, it is accepted that the information possesses certain key characteristics
such as accuracy, reliability, timeliness, relevance, clearness and consistency.

𝑨𝒄𝒄𝒖𝒓𝒂𝒕𝒆 (𝐹𝑎𝑖𝑡ℎ𝑓𝑢𝑙 𝑖𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛)

It’s very important that the presented information is complete, neutral and is free from errors
of content or principle but this doesn’t mean that the information must be perfectly accrued
because sometimes the accounting information relies on best estimates or the most likely
outcomes. The accuracy of the information depends from the accuracy of the data collection.
In addition, in order to have an extremely accurate information, more time is essential to check
the data. However, from the businesses perspective up to date it is better than “perfect”. The
presented information needs to be sufficiently accurate that we can make decisions. It is
essential from the management to bring accurate and full information for the position, progress
and performance of a business organisation. It is of significant importance that the person
preparing and presenting the financial statements should not include their own unfairness or
falsify facts.

𝑹𝒆𝒍𝒊𝒂𝒃𝒍𝒆
Reliable information should represent the information that users believe it represents. Critical
to the decision-making process is to have correct and timely information. Furthermore, correctly
used financial and prediction systems provides “snapshots” to enable a business to respond
quickly to events. In addition, the data presented has to be true and correct representation of the
facts. To verify that accounting data remains correct, accurate and reliable, accounting
departments use reconciliation methods.

𝑻𝒊𝒎𝒆𝒍𝒚
It is important that the information is available and is produced in time to support management
decision-making process. A lack of timeliness will weaken the usefulness of the information
(Atrill & McLaney, 2018). Therefore, the later accounting information is produced, the less
useful it becomes. In addition, undue delay in the preparation of financial statement would
reduce their significance and utility. The management in the large organisations needs
information for the business performance on a daily basis in order to take immediate actions
where needed. In essence roughly accurate information today is better than wholly accurate
information in two, three or four-days’ time. Therefore, they have the need to use fastest
information system.
𝑹𝒆𝒍𝒆𝒗𝒂𝒏𝒕
Relevant information is able to make contrast in the decisions that users made. Relevant is that
information which is applicable to the purpose required, such as decisions regarding future
event or to support an explanation of what has already happened. An accurate past prediction
enable confidence in the future predictions (Scott P. 2008). Therefore, relevance imposes the
fiscal information to be associated to an economic decision otherwise, that information is
useless.
Monetary information is useful if it has conformational and prognosing value. Conformational
value enables consumers to check and confirm earlier forecasts or considerations. Prognosing
value helps users in hypothesising future results.
In addition, materiality is a demeanour of relevance which is organisational-specified, which
means that the meaning of material for an organisation may not be with the same meaning to
another organisation. It is relative. Furthermore, an information is recognised as a material if it
is importantly enough to its user’s and if can influence their decision. (Nobes, 1997)

𝑪𝒐𝒏𝒔𝒊𝒔𝒕𝒆𝒏𝒕
The consistent quality of information is achieved by using the same method and standards of
measurement. (Davies & Crawford 2011) For example, when calculating inventory and the
value is established for a service or product, if the formula for the calculation continually
changes then the reports cannot provide the correct figures because the numbers cannot be
compared historically.

𝑪𝒍𝒆𝒂𝒓
Financial statements must be presented in clearest and understandability way in order to be
understood by those whom the report has been prepared. Furthermore, the reports must be
general acceptable and understandable. This can only be gained through the application of
certain “generally accepted accounting principles” in their process of preparation.
2 a)

𝑮𝒓𝒐𝒔𝒔 𝑷𝒓𝒐𝒇𝒊𝒕 𝑹𝒂𝒕𝒊𝒐 (𝑴𝒂𝒓𝒈𝒊𝒏) 𝑹𝒂𝒕𝒊𝒐:

𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑅𝑎𝑡𝑖𝑜 (𝑀𝑎𝑟𝑔𝑖𝑛) represents in percentage on how many of the company’s
revenue is made up of gross profit. It can be calculated by dividing the gross profit of an entity
by their net sales value. In order the ratio to be calculated information can be taken from the
trading section of the statement of comprehensive income. This ratio can be used to evaluates
an entity trading performance of on account of selling and purchasing or manufacturing
operations in other words as profitability of sales test (Wood & Sangster 2012).
Formula:

𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑅𝑎𝑡𝑖𝑜 (𝑀𝑎𝑟𝑔𝑖𝑛) = 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 × 100

Calculation of Gross Profit (Margin) Ratio of Danaye Ltd for the past two years

Year 1 Year 2
£000 £000
Gross Profit 1,920 × 100 2,200 × 100
Net Sales Revenue 4,940 6,850

Gross Profit Margin Ratio 39% 32%

Gross profit margin is lower in year 2 than the year 1 this may signify more competitive
environment.

𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑬𝒎𝒑𝒍𝒐𝒚𝒆𝒅:

𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 (𝑅𝑂𝐶𝐸) 𝑟𝑎𝑡𝑖𝑜 is used to find the returns from the capital
employed that an organisation generated within its business. It is calculated by dividing the
operating profit of an entity with its capital employed.
Formula:

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑 = 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑 × 100
Return on Capital Employed Ratio of Danaye Ltd for the past two years

Year 1 Year 2
£000 £000
Operating Profit 460 × 100 350 × 100
Capital Employed 3,810 4,760

Return on Capital Employed 12% 7%

Ratio

Return on Capital Employed ratio shows that is lower in year 2 than the year 1 this may signify
more competitive environment.

𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐 𝒐𝒓 𝑾𝒐𝒓𝒌𝒊𝒏𝒈 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑹𝒂𝒕𝒊𝒐

𝑇ℎ𝑒 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜 is computed by dividing the total of the current assets of an entity by the
total of its current liabilities.
Formula:

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Calculation of Current Ratio of Danaye Ltd for the past two years:

Year 1 Year 2
£000 £000
Current Assets 1,770 2,390
Current
Liabilities 560 840

Current Ratio 3.16 :1 2.85 :1

Both results met the rule of Thumb.

𝑻𝒓𝒂𝒅𝒆 𝑷𝒂𝒚𝒂𝒃𝒍𝒆 𝑷𝒂𝒚𝒎𝒆𝒏𝒕 𝑷𝒆𝒓𝒊𝒐𝒅:

𝑇ℎ𝑒 𝑡𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠’ 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑝𝑒𝑟𝑖𝑜𝑑 𝑟𝑎𝑡𝑖𝑜 expressed the time needed to pay the owned
amount to the supplier when you purchase on credit. It is calculated by trade payables of an
entity divided by its credit purchases.

Formula:

𝑇𝑟𝑎𝑑𝑒 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
𝑇𝑟𝑎𝑑𝑒 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 (𝐶𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠) 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑃𝑒𝑟𝑖𝑜𝑑 = 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠
× 365

Calculation of Trade Payable Payment Period Ratio of Danaye Ltd for the past two years:

Year 1 Year 2
£000 £000
Trade Payables 560 × 365 840 × 365
Credit Purchases 3,320 4,870

Creditors Payment Ratio 62 Days 63 Days

The result of Credit Payment ratio is on the preferable short time period.

𝑻𝒓𝒂𝒅𝒆 𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆 𝑪𝒐𝒍𝒍𝒆𝒄𝒕𝒊𝒐𝒏 𝑷𝒆𝒓𝒊𝒐𝒅:

𝑇ℎ𝑒 𝑡𝑟𝑎𝑑𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠’ 𝑐𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟𝑖𝑜𝑑 𝑟𝑎𝑡𝑖𝑜 𝑟𝑒𝑝𝑟𝑒𝑠𝑒𝑛𝑡𝑠 the time needed to customer to
pay the sales made on credit. The ratio is normally computed as a number of days needed for
the organisation to receive its cash from the trade made on credit. Both the collection efforts
put by the entity as well as the trade quality receivable are highlighted in this ratio.
Formula:

𝑇𝑟𝑎𝑑𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝑇𝑟𝑎𝑑𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 (𝐷𝑒𝑏𝑡𝑜𝑟𝑠) 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑 = 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
× 365
Calculation of Trade Receivable Payment Period Ratio of Danaye Ltd for the past two
years:

Year 1 Year 2
£ £
× × 365
Trade Receivables 820 365 1,230
Credit Sales 4,940 6,850

Debtors Collection Period Ratio 61 Days 66 Days

Average settlement period for receivables slightly increased. The result is on the preferred short
collection period, the reason why is preferred is because it benefits from point of view of the
liquidity it also, may reduce the level of bad debts a well as the administration costs on
collecting receivables. On the other hand, the policy strategy must be precisely considered
because a tight credit policy may result in reduce in the level of the sales level.
 2b)
(i)

Bank a/c
dr £ cr £
01/03/2018 Capital 500 01/03/2018 Purchases 150
10/03/2018 Sales 290 05/03/2018 Rent paid 50
27/03/2018 Sales 240 22/03/2018 Advertisement 25
26/03/2018 Drawings 100
31/03/2018 Balance c/d 705
1,030 1,030

01/04/2018 Balance b/d 705 02/04/2018 Purchases 100

14/04/2018 Loan from L Lock 450 05/04/2018 Rent paid 50
16/04/2018 Sales 330 23/04/2018 Drawings 75
26/04/2018 Sales 180 29/04/2018 Advertisement 30
30/04/2018 Balance c/d 1,410
1,665 1,665

01/05/2018 Balance b/d 1,410

(ii)

Capital a/c
dr £ cr £
31/03/2018 Balance c/d 500 01/03/2018 Bank 500

01/04/2018 Balance b/d 500

Purchases a/c
dr £ cr £
01/03/2018 Bank 150 30/04/2018 Balance c/d 250
02/04/2018 Bank 100
250 250

01/05/2018 Balance b/d 250

 Rent paid a/c
dr £ cr £
05/03/2018 Bank 50 30/04/2018 Balance c/d 100
05/04/2018 Bank 50
100 100

01/05/2018 Balance b/d 100

Sales a/c
dr £ cr £
30/04/2018 Balance c/d 1,040 10/03/2018 Bank 290
27/03/2018 Bank 240
16/04/2018 Bank 330
26/04/2018 Bank 180
1,040 1,040

01/05/2018 Balance b/d 1,040

Advertisement a/c
dr £ cr £
22/03/2018 Advertisement 25 30/04/2018 Balance c/d 55
29/04/2018 Advertisement 30
55 55

01/05/2018 Balance b/d 55

Drawings a/c
dr £ cr £
26/03/2018 Drowings 100 30/04/2018 Balance c/d 175
23/04/2018 Drowings 75
175 175

01/05/2018 Balance b/d 175

 Loan from L Lock a/c
dr £ cr £
30/04/2018 Balance c/d 450 14/04/2018 Loan from L Lock 450

01/05/2018 Balance b/d 450

(iii)

Gilberto Wahabo Trial balance as at 30 April 2018

Dr Cr
£ £
Bank 1,410
Capital 500
Purchases 250
Rent paid 100
Sales 1,040
Advertisement 55
Drowings 175
Loan from L Lock 450
1,990 1,990
 2 c) Calculation of the depreciation of John Prat vending machine bought on 1st Jan
2017 at cost of £16,000
(i)

Strait-line method £16000 × 12.5% = 2000

Rate of
Book value of asset Depreciation Accumulated Book value of asset
declining
Year at the start of the year balance Expense Depreciation at the end of the year
£ £ £ £ £
31-Dec-17 16,000.00 12.50% 2,000 2,000 14,000
31-Dec-18 14,000.00 12.50% 2,000 4,000 12,000
31-Dec-19 12,000.00 12.50% 2,000 6,000 10,000

(ii)

Reducing balance method at 15 % per annum

£16000 × 15% = 2400

Rate of
Book value of asset Depreciation Accumulated Book value of asset
declining
Year at the start of the year balance Expense Depreciation at the end of the year
£ £ £ £ £
31-Dec-17 16,000 15% 2,400 2,400 13,600
31-Dec-18 13,600 15% 2,040 4,440 11,560
31-Dec-19 11,560 15% 1,734 6,174 9,826

(iii)
𝑮𝒐𝒊𝒏𝒈 𝒄𝒐𝒏𝒄𝒆𝒓𝒏
The Going concern convention means that there is an assumption that an organisation will
continue to operate for the foreseeable future, assumed to be a year, and will not be forced
liquidate in a result of any reasons (Sethy, 2015). In other words, where is no evidence
demonstrating that the company will need to stop its operations in the nearest future therefore,
the organisation is recognised as going concern. Therefore, the value of the companies fixed
assets depends on what the organisation can contribute to the profit-making process of the
business (Nobes,1997).
Going concern concept is very important, for the shareholders because crucially presents the
companies stability. Furthermore, in order to guarantee the stability Auditors, have a test made
to evaluate an entity’s going concern volume. (Mostyn & Tan, 2010). In addition, the Going
concern helps to the organisation to obtain long-term loans or sources of investments.

𝑩𝒖𝒔𝒊𝒏𝒆𝒔𝒔 𝒆𝒏𝒕𝒊𝒕𝒚 𝒄𝒐𝒏𝒄𝒆𝒑𝒕

The concept of Business entity states that the business owners and the busines itself must be
separate and any transaction occurred must be recorded separately (Mostyn & Tan, 2010).
Basically, in the process of registration of the transactions, the only taken into account are the
events which affects the organisation, any other transactions are inapplicable and therefore not
included in the accounting records of a business. Furthermore, the information can lose its
usefulness in the case where the transactions made by the business entity are mixed with the
transaction made from its owners. Moreover, in the cases that evaluating the fiscal position of
more than one companies clearly on a certain date, this concept contributes. In addition, it
ensures that the businesses are separately taxed (Sethy, 2015). Among the different
organizations this concept has relatively widespread application.

𝑴𝒂𝒕𝒆𝒓𝒊𝒂𝒍𝒊𝒕𝒚
The concept of Materiality states that something should only be included in the financial
statement if it would be of interest to the stakeholders, it is unnecessary be material to every
stakeholder, but it must be material to a stakeholder before it deserve inclusion. (Wood &
Sangster, 2012)
The concept of materiality is applied like a test of the true and fair view of the financial
statement, and is useful for its users (Britton &Waterston, 2009). In addition, the meaning of
what is recognised as a material for one company may differ from one to another.
Reference list:

Atrill, P. and McLaney, E. (2018) Management Accounting for decision making. Harlow,
United Kingdom: Pearson. 9th edition.

Britton, A. and Waterston, C. (2009) Financial Accounting. Harlow: Financial Times Prentice
Hall. 5th edition.

Davies, T. and Crawford, I. (2011) Business Accounting and Finance. Harlow, United
Kingdom: Pearson.

Wood’s, F. and Sangster, A. (2012) Business Accounting. Harlow, United Kingdom: Pearson.
12th edition.

Mostyn, Gregory R., and Kim B. Tan. "Basic Accounting Concepts, Principles, and
Procedures." Issues in Accounting Education, vol. 25, no. 1, 2010, pp. 177-178.

Nobes, C. (1997) Introduction to financial accounting. London, United Kingdom:

International Thomson Business Press. 4th edition.

Scott, P. (2018) Introduction to management accounting. Oxford, United Kingdom:

Oxford. 3th edition.

Sethy, Vidya. "Top 8 Accounting Concepts Used in Management." Your Article Library,
15 July 2015, www.yourarticlelibrary.com/accounting/top-8-accounting-concepts-used-in-
management/61284.