Introduction to Accounting

TAP20%-A3
Cornwall Ltd
*All prices are in (£000)
Income Statement:

Sales revenue for Cornwall Ltd had increased in 2021 by £400 when compared to 2020,
whereas the operating profit was £900 which is £38 lower than the operating profit of 2020.
The causes which could be identified as to the unusual lowered operating profit seems to be
the changes in the operating expenses and Cost of Sales. An increase in both the Cost of
sales and operating expenses by £371 and £66 respectively seems to justify the fall in
operating profit compared to 2020, even though Cornwall Ltd had a significantly higher sales
revenue in 2021, £8000. However, due to the interest paid only being £55 for 2021 unlike
the £100 paid in 2020, Cornwall Ltd saw an increase in their profit for the year for 2021 at
£684 which was £5 more than 2020.

An increase in Profit of the year from the previous calendar year usually means the business
is doing great, the same cannot be said about Cornwall Ltd. The only reason Cornwall Ltd
were able to see an increase by £5 was purely due to the fall in “interest paid”. Thus,
moving forward Cornwall Ltd has to make sure that both cost of sales and operating
expenses has to be lowered especially since none of operating expenses are a unit-level
cost. Thus, resulting into Cornwall Ltd having a much better profit margin as the sales
revenue increases. Cornwall Ltd can achieve a lower cost of sales by adopting the use of
new technology or by simply getting supplies at a cheaper rate from a different supplier.
Although, opting to go for a cheaper supplier might lower quality of the products/services
provided by Cornwall Ltd.

Although, the interest paid was significantly lower in 2021 £55 compared to 2020 £100, it
would not be ideal for Cornwall Ltd to have an improvement in its income statement based
on the values of interest being paid. As there will be times in the near future when the
interest having to be paid might be significantly more due to loans, etc. taken by Cornwall
Ltd.

Statement of Financial Position:

The statement of financial position of Cornwall Ltd as at 31 Dec 2021 clearly shows that the
company is doing great and seems to be in great condition for the foreseeable future. It is
primarily due to the current assets, £2500 significantly outweighing the current liabilities,
£1525. Enabling Cornwall Ltd to pay off all the short term debts comfortably and still have
£975 worth of Current Assets. However, majority of the current assets are “receivables” at
£1600, only £100 being cash at bank and rest as inventory £800. Thus, Cornwall Ltd has to
make sure the money owed by the receivables are coming into the business before current
liabilities are paid otherwise Cornwall Ltd might have to sell of their Non current assets to
generate enough funds to pay for its debts. Thus it is not an ideal situation for Cornwall Ltd.
More over, Cornwall Ltd can have their receivables to pay before the firm is to pay all its
short term dues. Resulting to Cornwall Ltd having more cash at bank or cash in hand moving
forward as that would ideal for paying all the short term debts. Although, as it seems
Cornwall Ltd has taken huge amount of long term loans £3225. Which would definitely help
the business grow moving ahead but at the same time is affecting the firm’s profit of the
year due to interest being having to pay.

More over, Cornwall Ltd seems to have a huge amount of reserves worth £1650 which can
only be good for the firm as it shows that even in the long run Cornwall Ltd is destined to be
making enough profits that the company can increase its reserves. So at any point if
Cornwall Ltd had to pay a lot of money, that would be always available to them. Also, from
those reserves, the firm can opt to buy new assets which would only make Cornwall Ltd that
much stronger going forward. Furthermore, Cornwall Ltd would be able to get even more
loans in the near future as it is a profitable firm with a very strong reputation of paying up
its debts on time. Thus enabling themselves to get bigger and better loans from various
banks, resulting into Cornwall Ltd growing as a company.

Conclusion:

As per the statement of financial position Cornwall Ltd seems to be doing great due to very
good reserves, payable current liabilities as well as by not having unnecessary non current
assets. However, the income statement clearly showed that Cornwall Ltd can be run much
more profitable than it already is by simply reducing cost of sales as it had increased
significantly from 2020. Thus, maybe by shifting to a different supplier, Cornwall Ltd can
lower its cost of sales, resulting into a very strong profit of the year.