Accountin Principals Task 2

Accounting Principals
Table of Contents
1. Financial statement.....................................................................................................3
2. Interpret financial statements- Accompanying letter..........................................6
2.1. Ratio Calculations................................................................................................7
2.1.1. Profitability Ratio..........................................................................................7
2.1.2. Liquidity Ratio.............................................................................................10
2.1.3. Efficiency Ratio...........................................................................................11
3. Conclusion and Recommendation........................................................................13
4. References...................................................................................................................15
1
1. Financial statement
Nectar Enterprises
Statement of comprehensive income
For the year ended 31st December 2021

1,556,750,00
Sales 0
(-) Cost of sales
Opening stocks 45,000,000
1,112,500,00 1,157,500,00
Purchases 0 0
1,091,968,00
(-) Closing stocks 65,532,000 0
Gross Profit 464,782,000

(+) Other Income
0 0
464,782,000

(-) Expenses
Sales and Distribution
Distribution expenses 92,000,000
Bad depts 90,000
Doubtful depts 4,058,000 96,148,000

Administrative Expenses
Dep.Furniture and fittings 1,159,375
Dep.Building 4,270,000
Dep.Machinery 18,180,000
Administrative Expenses 145,200,000
Electricity Expenses 120,000
Water Expenses 15,000
Staff training cost 34,000 168,978,375

Other Expenses
0 0

Financial Expenses
Financial Expenses 7,300,000
Bank loan interest 600,000 7,900,000 273,026,375

Net profit transferred to the
capital 191,755,625
2
Nectar Enterprises
Statement of financial position
For the year ended 31st December 2021
Cost Acc.Dep Carrying Value

Non-Current Assets
51350000 1838000 49512000
Land and Building 0 0 0
18180000 3953400 14226600
Machinery 0 0 0
64338662
Furniture and Fittings 9275000 3274375 6000625 5

Current Assets
Inventories (stock) 65532000
Trade Receivable
(Debtors) 96102000
Prepayments 6500000
18443400
Cash and Cash Equivalent 16300000 0

82782062
TOTAL ASSETS 5

Equity and Liabilities
43543000
(+) Retained Earning 0
19175562
(+) Net profit 5
Share Capital and 67718562
Reserves 50000000 5

Non-Current Liabilities
Bank loan 50000000 50000000

Current liabilities
Trade Payable (Creditor) 82400000
Interest Payable 600000
bank loan 10000000
10063500
Accruals 7635000 0

TOTAL EQUITY AND 82782062
LIABILITIES 5

3
2. Interpret financial statements- Accompanying letter
Nectar Enterprises
XY Company
08th January 2022
FAO
Dear Sir/Madam,
The financial inquiry of your financial statement summaries for the year ending
December 31, 2021, is the subject of this letter. The letter also explains why it is
important to express an opinion on whether or not the budget summaries accurately
reflect the results and financial situation. All depictions are created to the best of our
knowledge and belief.
We also guarantee for the reasonableness of the key presumptions we made while
conducting the analysis.
We also attest to the accuracy and fairness of the evaluations.
4
2.1. Ratio Calculations

2.1.1. Profitability Ratio
Using information at a single point in time, profitability ratios are a class of financial
measurements that are used to evaluate a company's capacity to generate profits in
relation to its sales, maintenance costs, profit & loss assets, or shareholders' equity
over time (Hayes, 2022).
 Gross Profit Ratio

Revenue less the cost of items sold is known as gross profit, or sometimes just gross
income (COGS). It reflects the revenue generated by the business after all expenses
related to producing its goods or rendering its services have been paid. The income
statement of the business displays gross profit. It provides information about how
well a business manages its costs of production, including as labor and materials, in
order to make money from the sales of its products and services (Tamplin, 2022).
Gross profit × 100

Gross Profit Ratio=
Sales
When comparing the previous and current year ratio there is 5.24% increase. It offers
a yardstick for contrasting the performance of the business with that of rivals. This
rise in profit margins can be a sign that the business has differentiated its goods from
those of rivals.
Particulars Previous Year Current Year

Gross profit *100 32000000000 46478200000
Sales 1,300,000,000 1,556,750,000
Gross profit ratio 24.62 29.86
 Net Profit Ratio

"The sum of cash left over" after all costs and revenues have been deducted is
referred to as net profit. Because it occurs at the bottom of an income statement, net
5
profit is often referred to as the "bottom line." It can also be referred to as net
earnings or net income. The net profit statistic, which is employed in publicly traded
corporations to determine their earnings per share, thoroughly illustrates the
profitability of an organization (EPS) (Tamplin, 2022).
Net profit ×100

Net Profit Ratio=
Sales
There’s been a 1.57% increase in the ratio which represents that the company had
an increase in net profit than the previous year. This number indicates that the
organization has a healthy financial status comparing to previous year.

Net profit *100 14,643,000,000 19,965,562,500
Sales 1,300,000,000 1,556,750,000
Net profit ratio 11.26 12.83
 Operating Profit Ratio

The amount of money a business makes from its operations is represented by the
operating profit ratio. It illustrates the financial viability of a business's core operations
before any negative financial or tax consequences. As a result, it is among the more
accurate measures of a management team's effectiveness in running a business.
What more profit an organization makes every rupee of sales is determined by the
operating margin ratio. Operating profit margin ratios that are higher are viewed
favorably. because they show how well a business manages its operations and its
ability to turn sales into profits (Dhand, 2022).
Operating Profit × 100

Operating Profit Ratio=
Sales
The operating profit ratio has decreased by over 0.28%, as shown by the ratio
analysis below, which indicates that operational costs were higher than in the prior
year.

Operating profit *100 17,043,000,000 19,965,562,500
Sales 1,300,000,000 1,556,750,000
6
Operating profit ratio 13.11 12.83
 Return on Equity
A metric of economic condition known as "return on equity" (ROE) is obtained by
dividing net income by shareholders' equity. ROE is referred to as the return on net
assets since shareholders' equity is determined by subtracting a company's debt
from its assets. ROE is regarded as a barometer of a company's profitability and how
well it produces profits. The management of a firm is more effective at generating
income and growth from its equity financing the higher the ROE (Fernando, 2022).
Net income
Return on equity =
Shareholder ' s equity
One important indicator of a company's success is return on equity, and a higher

return on equity value is beneficial to the business. The company's inability to
generate money from new investments is indicated by the changing return on equity
(Chetlur, n.d.).

Net income 146,430,000 199,655,625
Shareholder's equity 485,430,000 677,185,625
Return on Equity 0.30 0.29
 Return on Assets
"A financial ratio" known as return on assets (ROA) measures a company's
profitability in relation to its "total assets". ROA can be used by corporate
management, analysts, and investors to assess how effectively a company uses its
resources to make a profit. The metric is frequently represented as a percentage
using the net income and average assets of a corporation. A company's ability to
manage its balance sheet to produce profits is more effective and efficient when its
ROA is higher; on the other hand, a lower ROA suggests there is potential for
improvement (Hargrave, 2022).
Net income
Return on Assets=
Total Assets
7
The company is producing money with each passing calendar year, as evidenced by
the fact that return on asset is rising with each passing year.

Net income 146,430,000 199,655,625
Total assets 759,715,000 827,820,625
Return on Assets 0.19 0.24
2.1.2. Liquidity Ratio

Liquidity ratios quantify a company's liquidity. They reveal whether a business can
use its liquid assets to pay off debts and other responsibilities (Asokan, 2022).
 Current Ratio
A liquidity ratio called the current ratio assesses a company's capacity to settle short-
term debts or those that are due within a year. It explains to investors and analysts
how a business can use its present assets to the fullest extent possible to pay down
its current liabilities and other payables (Fernando, 2022).
Current Assets
Current Ratio=
Current Liabilities
The ratios over the past two years are low when compared to the benchmark. This
could be the cause because, in order to operate the firm profitably, trade receivables
are smaller than trade payables.

Current assets 121,900,000 184,434,000
Current liabilities 274,285,000 100,635,000
Current Ratio 0.44 1.83
 Quick Ratio
The “liquidity ratio” or “acid-test ratio” are other names for the “quick ratio”. It gauges
a company's capacity to use rapid assets to pay its short-term financial obligations. It
is mostly used by analysts to evaluate a company's creditworthiness or determine
how quickly it can settle its debts if they are now due. Quick assets are those that
can be turned into cash in less than a year (or the operating cycle, whichever is
longer) (Tamplin, 2022).
8
Cash+ marketable securities+ accounts receivable

Quick Ratio=
Current Liabilities
When comparing the previous and current year ratio there is an increase. A ratio
larger than 1 shows that the business has adequate liquid assets to cover its
liabilities right away. The quick ratio should be taken into account together with other
metrics, such as earnings-per-share and rate-of-return on investments, because it
does not provide a complete picture of a company's financial health (Tamplin, 2022).

Cash + marketable securities+ accounts
76,400,000 112,402,000
receivable
Quick ratio 0.28 1.12
 Cash Ratio
A measure of a “company's liquidity” is the “cash ratio”. It particularly determines the
proportion of “current liabilities” to “total cash” and “cash equivalents” held by a
corporation. The indicator assesses a company's capacity to pay off its short-term
debt with cash or resources that can be converted into cash quickly, including readily
tradable securities. When determining how much money, if any, they would be
prepared to loan a company, creditors can utilize this knowledge to their advantage
(Kenton, 2022).
Cash+Cash equivalent
Cash Ratio=
Current Liabilities
Cash Ratio is below 1. The fact that there are more current liabilities than cash and
cash equivalents indicate that there is not enough cash on hand to pay down the
current debt.

Cash and cash equivalent 15,400,000 16,300,000
Cash ratio 0.06 0.16
9
2.1.3. Efficiency Ratio

The efficiency ratio is frequently used to evaluate how well a corporation utilizes its
internal assets and liabilities. The amount and use of equity, the turnover of
receivables, the repayment of liabilities, and the overall utilization of machinery and
inventories can all be calculated using an efficiency ratio. Additionally, the activity of
both investment and commercial banks can be monitored and analyzed using this
ratio (Kenton, 2021).
 Inventory Turnover Ratio

The number of sales or uses of inventory during a specific time period is measured
by the inventory turnover ratio. You need to know your average inventory and cost of
goods sold in order to calculate it. The ratio can be used to estimate how much
opportunity there is for improvement in the inventory control procedures at your
company. For instance, a high turnover ratio typically denotes solid sales and low
holding expenses, but a low ratio could indicate that your company is either carrying
too much inventory or not selling enough (Wood  & Crawford, 2022).
Net cost of goods sold

Inventory Turnover ratio=
Average inventory /2
As an assumption of previous year ITR is grater than current year ITR. It shows that
there is an increase in cost of goods sold and decrease in average inventory.
In general, a greater ratio value is preferable because it typically denotes robust

sales. A lower percentage may indicate sluggish sales and/or dwindling consumer
demand for the product (Jenkins, 2022).

Cost of goods sold 980,000,000 1,091,968,000
Average inventory 45,000,000 55,266,000
Inventory Turnover ratio 21.78 19.76
 Receivable Turnover Ratio

The ability of a business to recover its accounts receivable is shown by an essential
financial indicator called the receivables turnover ratio. Accounts receivable collection
is essential for a business to meet its obligations on time (Averkamp, 2022).
Credit sales
Receivable Turnover ratio=
Average Accounts receviable/2
10
A high turnover rate for receivables can be a sign of effective receivables

management and a high percentage of reliable clients that pay their obligations on
time. It's bad to have a low turnover ratio of accounts receivable. That's because it
can be the result of a weak credit policy, a lousy collection process, or clients who
aren't financially stable or creditworthy (MURPHY, 2022).So comparing to previous
year there is a 1.49 degrease in RTR so it shows a weak financial stable to
comparing previous year.

Credit sales 1,300,000,000 1,556,750,000
Average Accounts receivable 61,000,000 78,551,000
Receivable Turnover ratio 21.31 19.82
 Payable Turnover Ratio

A short-term liquidity metric called the accounts payable turnover ratio is used to
quantify how quickly a business pays its suppliers. The number of times a company
pays off its "accounts payable" in a given period is indicated by the account payable
turnover. A company's short-term debt to its suppliers and creditors is known as
accounts payable. " The accounts payable turnover ratio" demonstrates how
effectively a business pays its short-term bills and suppliers (Murphy, 2020).
credit purchase
Payable Turnover ratio=
Average accounts payable /2
There is a 2.71 increase comparing to previous year so it is a advantage that the

company can get more investors also, creditors and investors are always look at the
payable turnover ratio because increasing Account turn over ratio is a signal that
business performed good within a given time period.

Credit purchase 1025000000 1112500000
Average accounts payable 145000000 113700000
Payable Turnover ratio 7.07 9.78
11
3. Conclusion and Recommendation

Given the above ratio analysis, it appears that Nectar Enterprises is in a strong
financial position, and investors will be eager to invest in the company's financial
divisions. The analysis shows that the company constantly maintains a high level of
margin, which is impacted by the company's decision to expand its business
operations abroad and by having a sizable internet presence (Chetlur, n.d.).
From an investment standpoint, the investor will search for possibilities for returns,
dividend payouts, and dividend growth that can be compared across the company's
last three years. Analysis of the dividend will indicate that the company's shares are
likely to increase in value in the near future. In order to remedy this scenario, the
corporation should investigate its earnings per share, dividend income, and payout
ratio (Chetlur, n.d.). The corporation is advised to continue the planning for the
process of expanding the business in light of the conversation.
Accounting for your company can quickly become a difficult and time-consuming
task. Your accounting gets more challenging as your firm expands. Additional
invoices, diary entries, financial statements, and so forth must all be produced.
Software development is now an essential component of modern enterprises in the
digital age. Simply put, accounting software aids in the automation of tasks involved
in the accounting process. Here are the top advantages and benefits of utilizing
accounting software, among many others (Deskera, 2020).
 improved business processes

 greater accuracy
 decreased operating costs
 a safe database
 Electronic record-keeping
 simplicity of tax compliance (Epstein, 2022)
Accounting software's main function is to make back-office tasks simpler. You might
choose from the following are few examples of accounting software:
 FreshBooks
12
 NetSuite ERP
 Gusto
 QuickBooks Online
 Tipalti Approve
Your accountant can continue carry out activities utilizing cloud-based accounting
software, even if they are not able to come into the office. A platform also gives you
the ability to automate processes that would otherwise take a lot of your time, in
addition to storing your financial data. Compared to using spreadsheets, its
capabilities give you access to accuracy, speed, and connectedness. Consequently,
to answer your question, you should think seriously about investing in accounting
software for your company. The use of this product will enable your company to meet
the demands of the modern digital world (Epstein, 2022).
13
4. References
Asokan, N., 2022. Agicap. [Online]
Available at: https://agicap.com/en/article/liquidity-ratio/
[Accessed 9 January 2023].
Averkamp, H., 2022. AccountingCoach. [Online]
Available at: https://www.accountingcoach.com/blog/receivables-turnover-ratio
Chetlur, A., n.d. Analysis of Financial Statement Formal Assignment Report.
Academia.
Deskera, 2020. Deskera. [Online]
Available at: https://www.deskera.com/blog/accounting-software-advantages-
benefits/#what-is-online-accounting-software
Dhand, A., 2022. Scripbox. [Online]
Available at: https://scripbox.com/pf/operating-profit-ratio/
Epstein, D., 2022. FinancesOnline. [Online]
Available at: https://financesonline.com/benefits-accounting-software-examples-
leading-solutions-explained/
Fernando, J., 2022. Investopedia. [Online]
Available at: https://www.investopedia.com/terms/c/currentratio.asp
Fernando, J., 2022. Investopedia. [Online]
Available at: https://www.investopedia.com/terms/r/returnonequity.asp
Hargrave, M., 2022. Investopedia. [Online]
Available at: https://www.investopedia.com/terms/r/returnonassets.asp
Hayes, A., 2022. Investopedia. [Online]
Available at: https://www.investopedia.com/terms/p/profitabilityratios.asp
Jenkins, A., 2022. Oracle NetSuite. [Online]
Available at: https://www.netsuite.com/portal/resource/articles/inventory-
management/inventory-turnover-ratio.shtml#:~:text=Inventory%20turnover%20is
%20the%20rate,lower%20one%20to%20weak%20sales.
Kenton, W., 2021. Investopedia. [Online]
Available at: https://www.investopedia.com/terms/e/efficiencyratio.asp
14
Kenton, W., 2022. Investopedia. [Online]

Available at: https://www.investopedia.com/terms/c/cash-ratio.asp
Murphy, C. B., 2020. Investopedia. [Online]
Available at:
https://www.investopedia.com/terms/a/accountspayableturnoverratio.asp
MURPHY, C. B., 2022. Investopedia. [Online]
Available at:
https://www.investopedia.com/terms/r/receivableturnoverratio.asp#:~:text=The
%20receivables%20turnover%20ratio%20measures,a%20certain%20period%20of
%20time.
Tamplin, T., 2022. Finance Strategists. [Online]
Available at: https://learn.financestrategists.com/finance-terms/quick-ratio/?
gclid=CjwKCAiAh9qdBhAOEiwAvxIokxdjs5CjTf58TNfYnF8rqAFoSI4VOYKhYEBrqvx
cH8WGYnUTZNvu4hoCJbkQAvD_BwE
Wood , M. & Crawford, H., 2022. NerdWallet. [Online]
Available at: https://www.nerdwallet.com/article/small-business/inventory-turnover
15

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Accounting Principals

Cost Acc.Dep Carrying Value

2. Interpret financial statements- Accompanying letter

08th January 2022

We also attest to the accuracy and fairness of the evaluations.

2.1. Ratio Calculations

 Gross Profit Ratio

Gross profit × 100

Particulars Previous Year Current Year

 Net Profit Ratio

Net profit ×100

Particulars Previous Year Current Year

 Operating Profit Ratio

Operating Profit × 100

Particulars Previous Year Current Year

Operating profit ratio 13.11 12.83

One important indicator of a company's success is return on equity, and a higher

Particulars Previous Year Current Year

Particulars Previous Year Current Year

2.1.2. Liquidity Ratio

Particulars Previous Year Current Year

Cash+ marketable securities+ accounts receivable

Particulars Previous Year Current Year

Particulars Previous Year Current Year

2.1.3. Efficiency Ratio

 Inventory Turnover Ratio

Net cost of goods sold

In general, a greater ratio value is preferable because it typically denotes robust

Particulars Previous Year Current Year

 Receivable Turnover Ratio

A high turnover rate for receivables can be a sign of effective receivables

Particulars Previous Year Current Year

 Payable Turnover Ratio

There is a 2.71 increase comparing to previous year so it is a advantage that the

Particulars Previous Year Current Year

3. Conclusion and Recommendation

 improved business processes

Kenton, W., 2022. Investopedia. [Online]

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