Accounting and Finance 18th July, 2022

Chapter-24,25,26
Key Terms:
1. Final accounts are produced at the end of the financial year and give details of the profit or loss made
by a business in a year.
2. An income statement is a financial statement that records the income of a business and all post in
curd to earn that income over it period of time.
3. The revenue is the income to business during a period of time from the sale of goods and services.
4. Gross profit is the difference between revenue and post of sales. Net profit is a profit made by a
company after deducting all costs from revenue.
5. It is calculated by subtracting overhead cost from gross profits.
6. Retained profit is the profit left after paying taxes and dividend to shareholders that is used for
reinvestment into the business.
7. Depreciation is the fall in the value of a fixed asset over time.
8. Operation/overhead expenses are those which are incurred in running of a business they are they
cannot be calculated on a product. These include administration expenses, office expenses, selling
expenses, general expenses, and distribution expenses.
9. Direct expenses are those which can be easily calculated on a product.
10. The statement of financial position shows the value of a business assets and liabilities at a
particular time.
11. Items that are held by a business are known as assets. They are of two types: current assets and non
current assets. Current assets are those which can be converted into cash within one year. It includes
Bank, cash, marketable securities, short term investment, inventories, bills receivables, and prepaid
expenses.
12. Liabilities are debts owed by the business. They are of two types. Non current liabilities and current
liabilities. Current liabilities are those which have to be paid with a year. It includes bills payable,
overdraft, short term loan.
13. Non current liabilities are those which a company has to pay after a year includes long term bank loan,
long term bonds, and debentures.
14. Working capital is the difference between current assets and current liabilities.
15. Capital employed=Shareholders’ fund + Non current liabilities.
16. Liquidity is the ability of a business to pay back its short term debts. It is measured by current ratio and
quick ratio or acid test ratio.
17. Profitability is the measurement of the profit made relative to either the value of sales achieved or the
capital invested in the business.
18. Profitability ratios include ROCE, gross profit margin, and net profit margin.

CHAPTER-25

EXAM STYLE QUESTIONS

Case 1

a) Assets that are held for long period of time like plant, building, -----
b) Cash in hand, Bank balance, marketable securities, short term investments; inventories are the
examples of current assets.
c) The increase in non-current liabilities might be used to takeover the business for £4 million which is
on sale. Secondly, this money can be used to buy non-current assets like building plant machinery.
d)

1
 e) The given information shows the non-current liabilities and equity held by the company but it is very
limited because many other essential information is missing in the table, market price of share,
future prospects of the company which it would like to take over, retained profit

Case 2

a) Total equity is the difference between total assets and liabilities. It is amount invested in a company
by investors which includes share capital and retained earnings.
b) Bills payable, overdraft, short term loan
c) There are chances that company might have reduced its inventories so there is reduction in current
assets. Secondly, company might have less cash balances if compared with previous year.
d) The given information does not show profit for the year earned by the company. It will help in
calculating return on capital employed (ROCE) that potential investors always look at to calculate
how much return a company is getting in relation to the amount invested in the company. Net profit
margin is also not shown in the given data which help a potential investor to know the percentage of
profit a company is getting in relation to its sales revenue. Thirdly, Price earning ratio also not
highlighted in the given data it tells in investor the current share price of a company in relation to its
earnings.
e) In terms of liquidity the position of company is very less because current ratio is reduced from 1:1 in
2017 to 0.82:1 in 2018. It shows that the company is not able to pay its short term loan, suppliers, day
to day expenses. It means that suppliers may not supply raw materials on time and production would
not be continued. However, there is decrease in capital gearing ratio from 44% in 2017 to 30% in
2018. It shows last for investors in the company. I would like to say that data does not highlight many
essential information like

CHAPTER-26 [Exam style questions ]

a) The capital that is invested in a company is known as capital employed. It includes shareholders’ fund and non-
current liabilities.
b) Some new customers added with the company. Company may have increased price of its products.
c) Due to decrease in cost of sales, due to increase in prices of products
d) By reducing overheads: TC could increase its net profit by reducing selling expenses, distribution expenses,
administration expenses, office expenses.
TC could increase its net profit by reducing labour costs.
e) Management of TC will not be satisfied with the profitability of the company because of reduction in gross profit
margin, net profit margin, and return on capital employed despite increase in revenue TC should try to reduce
its over a expenses so that its net profit will improve and net profit margin and ROCE will also improve.

CASE2
a) The ability of a company to pay its short term that is known as liquidity.
b) Cash in hand, bills receivables, trade disables, bank balance, and prepaid expenses.
c) Because of increase in credit sale, creditors are increasing. Secondly, Fashion ltd might using more bank
overdraft.
d) Two stakeholder groups are investors and suppliers government
Investors are interested in fashion’s limited account because they have to decide whether or not to make
investment in this company on the basis of information revealed in the account they will decide. Besides,
Suppliers also look carefully at the fashion limited account because they have to decide how much goods can
be sold on credit to it.
(e) In 2018, Current ratio=1.46; Quick ratio=0.8
In 2017, Current ratio=2; Quick ratio= 1.125
Yes bank must be wooried about liquidity because in year 2018, both CR and QR reduced significantly.