Higher Nationals

Assignment Brief – BTEC (RQF)

Higher National Diploma in Business(BusinessManagement)

Student Name /ID Number

Unit Number and Title Unit 5: Accounting Principles
Academic Year 2022/2023
Unit Assessor Doan Nguyen Trang Phuong & Ha Phuoc Vu
Assignment Number and Title Production and Interpretation of Financial Statements (2 of 2)
Issue Date 09 February 2023
Submission Date 07 March 2023
IV Name
Date

Submission Format:

The submission is in the form of a portfolio of evidence compiled using the evidence produced for two
assignments, it will also include the following.

A detailed letter to a named client. The letter must be clear worded, well-structured and should make use of
appropriate business language and terminology. The letter can also include clearly-labelled tables and
charts. It will accompany and support the appropriately constructed financial statements (income statement
and statement of financial position) for the business in question.

The word count is 2,000–2,500 words, although you will not be penalised for going under or exceeding the
total word limit. A bibliography should be provided using the Harvard referencing system (or an alternative
system). Inaccurate use of referencing may lead to issues of plagiarism if not applied correctly.
Unit Learning Outcomes:

LO2 Prepare basic financial statements for unincorporated and small business organisations in
accordance with accounting principles, conventions and standards.
LO3 Interpret financial statements.

Transferable skills and competencies developed

 Managing financial data
Written communication using a range of media
Manipulating and interpreting data using spreadsheets
 Effective communication of relevant information across the organisation and to appropriate
stakeholders
 Creation and interpretation of information and showing how that information can be used most
effectively to add value to the organisation
Ability to use quantitative skills to manipulate data, evaluate, estimate and model business problems
Application of accounting knowledge to consistently deliver high-quality, accurate data and
information in a timely fashion.

Vocational scenario

Having successfully completed your six-month probation as a Graduate Trainee at the accountancy firm, you have
now been attached to a unit in the firm that deals with the provision of accountancy and consultancy services to small
businesses that are typically set up as sole traders, not-for-profit or partnerships. The firm is careful about
which small and emerging businesses it works with as it seeks to spot growth potential and identify and work with
clients that have scalable business models.

Assignment activity and guidance

You are initially working with a selection of these small businesses that have been trading for several years and
which now need annual trading statements to be compiled and submitted in line with government requirements. You
have been given:
 an extended trial balance for each business, including accruals, prepayments and figures for bad debts and
depreciation
 a range of comparative key performance ratios from the previous year.

These local businesses do not make use of contemporary software to support its book-keeping and accounting
function. This is something which concerns you as you feel that it represents an opportunity for the business to save
time and resource.

Your supervisor, one of the firm’s Key Account Managers, has asked you to compile the year-end financial
statements ready for submission and provide, for each client, some detailed analysis of the figures produced, which
will be presented in the form of an accompanying letter. Specifically, you will
undertake the following:

1. From the data provided, you are required to prepare the year-end financial statements, taking into
consideration accounting principles, conventions and standards. You will need to make and show appropriate
adjustments to both the income statement and the balance sheet.

2. Write an accompanying letter to the client that will be sent with the completed financial statements. The letter
needs to include:
 calculation of relevant profitably, liquidity, asset usage and investment ratios
 critical evaluation of the performance to the business year on year (making reference to data you have
calculated and data provided from the previous year), with reference to relevant benchmarks as well as any
limitations of using financial ratios as performance measures
 an outline of the benefits of contemporary accounting software packages, with examples of products on the
market
 justified conclusions and recommendations for your client.
Learning Outcomes and Assessment Criteria

Pass Merit Distinction

LO2 Prepare basic financial statements for unincorporated and small
business organisations in accordance with accounting principles, LO2 and LO3

conventions and standards

P3 Prepare financial statements
from a given trial balance for sole
traders, partnerships and
not-for-profit organisations, to
meet accounting principles,
conventions and standards.
M2 Produce financial statements
from a given trial balance, making
appropriate adjustments.
D2 Critically evaluate financial
statements to assess organisational
performance using a range of
measures and benchmarks to make
justified conclusions.

LO3 Interpret financial statements

P4 Calculate and present

financial ratios from a set of final
accounts.
P5 Compare the performance of
an organisation over time using
financial ratios.
M3 Evaluate the performance of
an organisation over time, using
financial ratios with reference to
relevant benchmarks.

Pearson Education 2022

Higher Education Qualifications
Assignment Brie
Table of contents
INTRODUCTION................................................................................................................3
About Ernst & Young Global Limited (EY) in United Kingdom.....................................3
ACCOMPANYING LETTERS...........................................................................................4
1. Letter 1: For sole trader Adam Lee............................................................................4
2. Letter 2: For partnership of Tom, Jerry, and Donald...............................................13
REFERENCES...................................................................................................................19
APPENDIX........................................................................................................................21
Appendix 1. Adjustments for a Profit and Loss Account and a Balance Sheet for the
sole trader Adam Lee......................................................................................................21
Appendix 2. Statement of Profit and Loss for the year ended 31 May 2021 for the sole
trader Adam Lee..............................................................................................................21
Appendix 3. Statement of Retained Earnings for the year ended 31 May 2021 for the
sole trader Adam Lee......................................................................................................22
Appendix 4. Statement of Financial Position at 31 May 2021 for the sole trader Adam
Lee...................................................................................................................................22
Appendix 5. Adjustments for a Profit and Loss Account and a Balance Sheet for the
partnership of Tom, Jerry and Donald............................................................................23
Appendix 6. Statement of Trading, Profit and Loss for the year ended 31 December
2021 for the partnership of Tom, Jerry and Donald........................................................24
Appendix 7. Statement of Profit and Loss Appropriation for the year ended 31
December 2021 for the partnership of Tom, Jerry and Donald......................................24
Appendix 8. Statement of Partner Capital for the year ended 31 December 2021 for the
partnership of Tom, Jerry and Donald............................................................................25
Appendix 9. Statement of Financial Position at 31 December 2021 for the partnership of
Tom, Jerry and Donald....................................................................................................25
Appendix 10. Key performance ratio of the sole trader Adam Lee................................26
Appendix 11. Key performance ratios of the partnership of Tom, Jerry and Donald.....26

1
Figure 1 : Ey's logo...............................................................................................................3

Table 1. Adam Lee's company key performance ratios.......................................................5

Table 2. Tom, Jerry and Donald’s company key performance ratios....................................14

2
INTRODUCTION
About Ernst & Young Global Limited (EY) in United Kingdom
The international professional audit company Ernst & Young is headquartered in London,
England. EY is a member of the Big4, a grouping of the four largest professional audit
firms in the world, together with Deloitte, KPMG, and PwC. EY provides fundamental
services, including advisory (consulting service), assurance (assured service), tax (tax
consultant), transactions (transaction consulting), growth markets: organizing events,
specialty services: climate change programs, family businesses, etc., to help clients
overcome their most challenging issues and improve the working environment for clients.

Figure 1 : Ey's logo

While our firm is in charge of providing general accounting and consulting services to
smaller businesses, I am in charge of creating the year-end financial statements and the
supporting letters, which contain a thorough appraisal of the material. The benefits of
technical applications will also be emphasized in these letters.

3
ACCOMPANYING LETTERS
1. Letter 1: For sole trader Adam Lee
Viet Mate Travel
389/16 Ha Huy Tap street, Thanh Khe District
Danang city
VietNam
Phone number: +84 306.03492
Email: vietmate.ceo@gmail.com
Ernst & Young (EY) Accounting & Auditing company
Bitexco Financial tower,20/F
Ho Chi Minh city
Vietnam
Phone number: +84 2838.
3245.252 Email:
eyhcm@vn.ey.com Tuesday, 28th
February, 2022
Dear Mr. Adam Lee,

Hopefully, your firm is good. My name is Pham Tran Cat Anh, and I work as an accountant
for Arthur Young & Co. and Ernst & Whinney. Regarding the supply of general accounting
and consulting services, which included a thorough review of your company's financial
accounts, I am writing to you now. This letter will go through your financial ratio, a
comparison, the benefits of using technology, an evaluation, and recommendations for
your company.

4
Financial statements, ratios and comparisons
The values of a few important performance ratios for this fiscal year, as well as comparisons
with those from the prior year, are the second thing I'd want to share with you. All of the
proportional financial ratios have usually grown from 2020 to 2021, as you can see in Table
1 that I've supplied below.
KEY PERFORMANCE RATIOS
Fomula Previous year's value Current year's value

ROS ( Returned of Sales) Profit before tax * 100%

12% 20.75%
Total sales and revenues

Assets turnover Net sales 2.01 1.68

Average total assets

Inventories turnover Cost of goods sold 7.88 4.53

Average inventories

Account receivable turnover Net sales + VAT 10.10 12.34

Average account receivables - Allowance for doubtful debt

Account payable turnover Purchases - Purchase returns 7.00 5.78

Average account payables

* 100%
ROA (Returnon Assets) Profit before tax 20% 34.86%
Average total assets
* 100%
RE (Return on Assets Variation) Profit before tax + interest expense 22% 36.88%
Average total assets
* 100%
ROE (Return on Equity) Profit after tax 38% 47%
Average owner's equity

Current ratio Current assets 2.02 6.85

Current liabilities

Quick ratio Current assets - Inventory - Other currentassets 1.51 1.83

Current liabilities

0.55 0.89
Cash ratio Cash & Cash equivalents
Current liabilities

0.45 0.27
Debt ratio Total liabilities
Total assets
0.20 0.14
Long-term debt to long-term capital ratio Long-term debt
Long-term debt + Total shareholder's equity
0.22 0.16
Long-term debt to shareholder’s equity ratio Long-term debt
Total shareholder's equity
11.90 18.22
ICR (Interest coverage ratio) Profit before tax + interest expense
Interest expense

Table 1. Adam Lee's company key performance ratios

Two factors, profit before taxes and revenue, which are displayed in the financial
accounts, have an influence on ROS (appendix). The improvement in the company's
efficiency as a result of the rising ROS ratios may indicate that high profitability is about
to follow. The company's strong operational performance is demonstrated by the fact that this
year's ROS ratio (20.75%) is 8.75% higher than the one from the previous year (12%).
Revenues and
5
costs are considered while calculating ROS. Hence, widening the gap between revenue
and cost of products is the most effective strategy to increase sales. I'd like to recommend
to augment the goods’ price. Price increases are the simplest approach to grow a business
since they are actively managed by the company. The market demand for your goods or
services may increase if you alter your prices, terms, or billing requirements. Be mindful
of what your rivals are providing, though, as well as your own profit margins, since this
might result in a gap between your business and that of your rivals, which could be
detrimental to your bottom line. Furthermore, synchronize marketing and sales can be
another way. Marketing activities with the aid of sales could be able to increase the
productive efficiency and income of your firm.
Asset turnover ratio is a measure of how well a company utilizes its assets to produce
revenue (Hayes, 2022). This year's asset turnover has decreased by 0.33, which may be
used as evidence that the company's performance is deteriorating and that it is producing
less money per pound of assets inefficiently. This shows that the company's management
and use of its resources to generate revenues are less effective.
The inventory turnover ratio measures how frequently a business has sold and restocked
its goods over a certain period of time. Being indicative of robust sales, a greater ratio is
preferable than a low one. The inventory turnover ratios decreased in 2021, going from 7.88
to 4.53. This demonstrates that the business had poor and low sales. The market demand
for the products, an overabundance of inventories (sometimes called overstocking), etc.,
might be to blame for this decline. Pricing, production, marketing, purchasing, and
warehouse management are just a few of the areas where the organization has to make wiser
judgments. The corporation may sell its stock of liquidation products to other businesses
at a discount if the product is no longer in demand. This is the greatest approach to
prevent unsold inventory, and the business can receive some money back to use for
research and to provide a better new product to the market.
The capacity to collect on the credit extended to consumers is gauged by the company's
turnover of accounts receivable. A high turnover of accounts receivable might result from
a client's prompt repayment and the business's effective cash collection. Accounts
receivable turnover increased by 2.24 percent to 12.34 percent this year from 12.23
percent in 2016. The cash ratio is still low even if the accounts receivable conversion
index is heading in the right way. In order to accommodate the capital conversion and
existing debt liquidity, the corporation needs tighten its debt collection practices. To
increase this ratio, I would like to provide the following suggestions: Consider offering
discounts for cash and advance payments, increase the variety of payment methods, and
set follow-up reminders.

6
A company's ability to pay its short-term suppliers and invoices is shown by its account
payable turnover ratio. A rising ratio signifies that the business properly manages its debts
and cash flow. The firm pays its suppliers more promptly than it did in previous times when
the turnover ratio increases. Creditors might use the ratio to decide whether or not to
extend a line of credit to the company. The turnover of accounts payable, however,
moderately decreased by 1.22 in 2021. This might be viewed as a negative element when
thecompany is in debt and faces a solvency risk.
A company's profitability in relation to its total assets is shown by its return on assets
(ROA). How well a corporation uses its resources to generate profits is gauged by its ROA.
The performance that the corporation may achieve will increase as the ROA ratios rise.
This suggests that the company might generate greater revenue with less capital. The
ROA ratio for this year was 34.86%, which was 14.86% higher than the figure for last
year (20%). Using this number, it can be shown that the company is effective at running
the business by making use of its resources.
Return on Asset Variation (RE), which ignores the effect of the funding policy, gauges
how well a company uses its assets. The RE is compared against interest rates to decide if
a corporation should raise equity from its shareholders or borrow money from banks. The
company can borrow money to turn a profit if the RE ratio is greater than the interest rate.
If not, the company should reconsider about borrowing money on a regular basis since its
earnings would be less than the cost of its debt, which might lead to future financial
issues. This year's RE ratio significantly increased from 22% to 34.88%, showing that the
corporation made good use of its assets without resorting to debt equity.
When comparing a company's net income to its shareholders' equity, the return on equity
(ROE) metric may be used to assess a company's profitability and the efficiency with which
it generates those profits (Fernado,2022). The business has a high ROE, which indicates
that it is effectively converting equity investment into profits. The ROE ratio went from
38% to 47% this year, an increase of 9%. Despite an increase, this number still represents
a relatively low level. Divided by shareholders' equity, return on equity (ROE) represents
a company's net profit. One method to boost ROE ratios is to increase net profit.
The current ratio assesses a company's capacity to repay yearly or short-term debts
(Fernado, 2022). Investors may learn more about a company's ability to pay down its
short- term debt using its current assets by comparing a company's current ratio to those
of its competitors and peers. The ability of the business to repay debt is improved by
greater current ratios. The optimal current ratio is 1.5 to 3. (Delolmo, 2022). The company
lacks immediate liquidity for its current liabilities if its current ratio is larger than 1. The firm
can satisfy its short-term commitments due within a year since this year's current ratio is
fairly
7
strong, having improved by 4.85 from 2.02 to 6.85. Using this resource will help the
business raise profits, profitability ratios, and financial performance. For instance, the
business may think about taking out short-term loans to invest and create more goods, or
it might run marketing campaigns to attract new consumers.
The quick ratio, according to Seth (2022), gauges a company's ability to cover its short-
term obligations without having to liquidate goods or seek for more funding. Prepayments
and inventory, in particular, are ignored since they would either require steep discounts to
be liquidated or could not be turned into cash as rapidly. The ratio indicates a company's
liquidity and financial health, and the higher it is, the better; the lower it is, the more
probable it is that the company would struggle to make debt payments. The average acid-
test ratio is typically one, meaning the business has enough assets to pay off all of its current
liabilities. The quick ratios for this year are 0.32 higher at 1.83. This demonstrates that
there is no risk of the company's debts becoming in default. To guarantee the company's
financial stability, this ratio should be maintained.
The cash ratio gauges a company's availability of cash and cash equivalents, such as easily
marketable securities (Kenton, 2021). An organization has enough cash and cash
equivalents to entirely pay off its short-term loans if its cash ratio is equal to or higher
than one, which is regarded to be a favorable sign. A ratio of less than 0.5 is deemed
risky, which indicates that the company has twice as much short-term debt as cash. This
year observed the ratio of 0.34 increased. Although the two ratios (current and quick
ratios) mentioned above don't reveal anything about a company's ability to manage its cash
flow and guarantee that it can pay off its short-term debts, they do indicate that a company
can pay those debts. However, a company may experience cash flow problems. I would like
to provide you some suggestions on how to fix this issue. By getting rid of unnecessary
equipment, we can gain cash and significantly lower the cost of equipment maintenance.
Besides, accounts receivable must be settled promptly and on schedule, in addition to
monitoring the company's expenditures. Specifically, the business may think about
revising the conditions of payment, automating age-old practices (such as reminding
customers to pay via emails). Furthermore, you can consider to convert short-term debt to
long-term debt might result in reduced monthly payments and a longer payback time for the
company. Consider options like debt consolidation and loan refinancing as well, which
may help you lower your monthly payments now while also saving you money over time.
Since last year, the debt ratio has decreased by almost 0.2. Yet, since enterprises are seen
as having a high amount of risk, this is more advantageous for them. A company is
frequently referred to as having "high financial leverage" when its debt ratio is high
(above

8
0.5 or 50%). The amount of risk for the company is decreased by lowering the debt ratio.
Also, this raises the bank's acceptance rate for loans.
Your company has to keep an eye on long-term solvency risk in addition to short-term
liquidity risk. The ratio of long-term debt to long-term capital determines what proportion
of a company's revenue comes from debt or other financial commitments. It helps analysts
and investors make investment decisions by giving them a clearer understanding of a
company's financial situation. A higher ratio means that the firm is using more debt than
equity to fund itself, which means that there is a greater responsibility to repay debt and a
greater danger of loan forfeiture if debt cannot be returned on time. The ratio of long-term
debt to long-term capital for the firm in 2021 is 0.14, which is 6% less than it was in the
previous year. The better the firm can avoid financial risks, the lower the ratios.
Assessing how heavily a company relies on debt involves looking at its long-term debt to
shareholder equity ratio. If the ratio is higher, the company is taking on more debt and
risk. On the other hand, a very low one can also suggest that a company is not using debt
funding to grow (Fernando, 2022). According to estimates, the ratio from the prior year
(0.22) is
0.6 larger than its value in 2021. (0.16). This company's long-term debt is considerably
lower than its shareholders' equity. When the macro environment triggers a downturn in
the economy or a sector, debt payments may start to pose a modest danger to the firm.
The interest coverage ratio (ICR) gauges a company's ability to maintain consistent
income or to repay the interest on its debt from profits. The interest coverage ratio
enhances the capacity of the firm to pay interest on debt; on the other hand, the interest
coverage ratio decreases the ability of the business to do so. Lee's firm displayed a strong
indication in 2020 at 11.90, and this number steadily grew to 18.22 through 2021. This
ratio of the firm grew by 1.5 times this year compared to last year, demonstrating that the
ability of the company to pay debts is growing as a result of more income and reduced
interest expenditures. It is a sign of its strong financial status.
In addition to examining financial performance ratios, the business should think about
evaluating non-financial ones, which can have several benefits. It is evidently simpler and
quicker to measure and obtain data. The business must wait until the end of the fiscal year
to create and collect information about its financial performance. Yet, it is possible to
achieve the non-financial indication. Even the conclusion of each shift, for instance. Also,
it is more adaptable than financial one because the company is free to create whatever
policies that suit their objectives without being constrained by limitations like interim
research findings or consumer indices.

9
I suggest that the organization take use of the balance scoredcard approach (BSC), a
strategic management performance indicator used to discover and enhance various
internal business operations and the effects they produce externally. The four key business
metrics that are measured by the balanced scorecard are learning and growth perspective,
internal business process perspective, customers perspective, and finances perspective:

 Learning and growth perspective: The primary goal is to evaluate the knowledge and
skills of the workforce in the company. For each person to contribute to the
expansion of enterprises, they must continually study, broaden their expertise, and
use technology.
 Internal business process perspective: To find any gaps, holdups, bottlenecks,
shortages, or waste in the internal operating process, the corporation should
undertake an internal business process analysis. KPIs for each employee and the
standard of work that employees can do may be used to measure it.
 Customers perspective: The business must improve customer happiness and brand
perception in order to assess this viewpoint. The business needs to be concerned with
enhancing its offering program, increasing the percentage of sales from new
products, and other issues, and it needs to establish some clearly defined benchmarks
for evaluation. For instance, the business might think about improving the standard
of its customer service and its product quality.
 Finances perspective: From a financial standpoint, the major goals are to boost sales,
boost profitability, and cut operating expenses to the absolute minimum. The
subject of how to increase the company's profit must be addressed by the business.
The business may think about establishing various benchmarks and goals each year,
such as raising net profit, cash flow market share, and ROE, or cutting operational
expenses.
Advantages of digital accounting
In the current explosive 4.0 industrial revolution, digital transformation is a phrase that
many organizations are interested in and focused on. Successful digital transformation
will make it easier to collect and process information, creating opportunities to provide
useful information for managers (Zybery and Rova, 2014). Just like other business areas,
accounting and auditing will greatly benefit from using digitalization to organize, process
and evaluate financial data, thereby improving productivity and saving costs and time.
Hence, I'd like to outline a few advantages of accounting software and explain why I
chose to utilize it to put up your company's year-end financial statements.
Time and financial savings are the initial benefits of accounting software (Tanski-
Phillips, 2022). I am aware that your time and money are your most valuable resources as a
business
10
owner. The accounting procedure might be made simpler and the work required to
produce financial statements reduced with the aid of accounting software, making it
quicker than with the assistance of the conventional approach. I was able to give you
those statements as quickly as I could as a result. After obtaining the data, you may look
more closely at how your business is performing to get suggestions for what should be
trimmed and where.
Another indisputable advantage of accounting software is its ability to improve accuracy
and decrease mistakes while working with large amounts of data and accounting regulations
(Jasim and Raewf, 2020). Transposition errors, entry reversals, and omission errors are only
a few examples of typical mishaps. Accounting software helps its customers avoid such,
preserving the accuracy, cleanliness, and organization of their data.
Last but not least, accounting software helps us export financial statement reports swiftly
and simply (Tanski-Phillips, 2022). A spreadsheet's data collection might require hours of
manual labor. With accounting software, getting the required report only only a few
mouse clicks. In the coming future, the work of accountants and auditors will require the
use of advanced information systems and artificial intelligence to perform a number of
tasks, such as analysis, reporting and perform the desired outputs. Therefore, it can be
said that the tasks related to management accounting and financial accounting are
influenced or developed as a result of the digital revolution itself (Kruskopf et al., 2020).
Therefore, in order to quickly acquire and grasp modern technologies, accountants need to
learn new skills continuously (Daugherty and Wilson, 2018).
In summary, accounting software offers a variety of advantages, such as saving time and
money, eliminating bias and mistakes, and quickly and accurately presenting financial
results. Digital accounting brings many benefits to businesses, some companies are now
investing a lot of resources in digitizing accounting processes to create a leading business
advantage. Therefore, businesses should soon have a roadmap to apply suitable digital
accounting for themselves.
Choosing which accounting software to use in accordance with the structure of the
business is very important. Currently, there are popular accounting software such as Misa,
Fast, Bravo, Zoho Books, etc. Including Misa software, which has been trusted by more
than 150,000 businesses. Misa software consolidates all operations on one business
management platform, applies advanced technologies such as AI, Blockchain, flexibly
connects services to improve work productivity, reduce costs and increase profits. profits
for businesses by automatic accounting, automatic tax reporting, financial reporting.
Moreover, Misa also connects the General Department of Taxation, Banks, E-Invoices,
Digital Signatures, Point of Sale Software, etc. to form a faster and more convenient data
processing ecosystem and help your business view operating reports anytime, anywhere.
11
It is my pleasure to have your firm as a client. Please contact me if there is any further
questions.
Your sincerely,
Pham Tran Cat Anh.

12
 2. Letter 2: For partnership of Tom, Jerry, and Donald
Sen company

222 Nguyen Hoang, Hai Chau District

Danang city
VietNam
Phone number: +84 152.46852
Email: sentravel.vn@gmail.com
Ernst & Young (EY) Accoungitng & Auditing company
Bitexco Financial tower,20/F
Ho Chi Minh city
Vietnam
Phone number: +84 2838.
3245.252 Email:
eyhcm@vn.ey.com Tuesday, 28th
February, 2022
Dear Mr. Tom, Mr. Jerry and Mr. Donald,
Hopefully, your firm is good. My name is Pham Tran Cat Anh, and I work as an accountant
for Arthur Young & Co. and Ernst & Whinney. Regarding the supply of general accounting
and consulting services, which included a thorough review of your company's financial
accounts, I am writing to you now. This letter will go through your financial ratio, a
comparison, the benefits of using technology, an evaluation, and recommendations for
your company.

13
Financial statements, ratios and comparisons
KEY PERFORMANCE RATIOS
Fomula Previous year's value Current year's value

ROS ( Returned of Sales) Profit before * 100%

42% 60.13%

Assets turnover
2.01 1.04

Inventories turnover Cost of goods

20.00 6.40

Account receivable turnover Net sales

12.00 15.31

ROA (Return on Assets) Profit before * 100%

40% 62.44%

ROE (Return on Equity) Profit * 100%

45% 64.11%

Table 2. Tom, Jerry and Donald’s company key performance ratios.

ROS is influenced by two variables: revenue and profit before taxes, both of which are
shown in the financial statements (appendices). The increase in the company's efficiency
brought on by the growing ROS ratios might portend impending high profitability. The fact
that this year's ROS ratio (60.13%) is 18.13% higher than last year's (42%), a sign of the
company's outstanding operational success. While determining ROS, expenses and
revenues are taken into account. So, the best way to boost sales is to expand the gap between
revenue and product costs. I suggest raising the price of the items. Price hikes are the most
straightforward strategy for expanding a firm since the company actively manages them.
If you modify your prices, conditions, or billing specifications, the market's demand for
your goods or services can rise. But be aware of what your competitors are offering as
well as your own profit margins, since this may cause a gap between your firm and that of
your competitors, which might be bad for your bottom line. Moreover, synchronizing
marketing and sales is an additional option. Sales-driven marketing initiatives may be able
to boost your company's productivity and revenue.
Asset turnover ratio is a gauge of how well a business uses its assets to generate income
(Hayes, 2022). The company's performance is declining, and the fact that it is making less
money per pound of inefficiently used assets may be seen by the 0.97 decline in asset
turnover this year. This demonstrates how ineffectively the corporation manages and
utilizes its resources to generate revenue.
The inventory turnover ratio calculates how frequently a company over a certain time
period has sold and refilled its inventory. A higher ratio is preferable to a low one as it
signals strong sales. In 2021, the inventory turnover ratios dropped from 20.00 to 6.40. This
implies that the company's revenues were weak and low. This reduction might be attributed

14
to a lack of consumer demand for the goods, excessive inventories (also known as
overstocking), etc. The firm needs to make better decisions in a number of areas,
including pricing, production, marketing, purchasing, and warehouse management. If a
product isno longer in demand, the firm may offer to sell its inventory of liquidation
goods at a discount to other companies. The firm can get some money back to utilize for
research and to provide a better new product to the market. This is the best way to prevent
unsold inventory.
The company's turnover of accounts receivable serves as a barometer for its ability to
collect on the credit granted to customers. When a customer pays their debts on time and
the company is successful in collecting the money owed, there may be a high turnover of
accounts receivable. From 12.00 percent in 2016 to 15.34 percent this year, the accounts
receivable turnover rate climbed by 3.24 percent. Even if the index for the conversion of
accounts receivable is moving in the correct direction, the cash ratio is still low. The
company must make its debt collection procedures more stringent in order to
accommodate the capital conversion and the liquidity of the current debt. I would like to
provide the following recommendations in order to improve this ratio: Think about giving
discounts for cash and advance payments, broaden the range of acceptable payment options,
and establish follow-up reminders.
Return on assets (ROA) measures a company's profitability in relation to its total assets
(ROA). The ROA of a company serves as a barometer for how well it uses its resources to
produce profits. If the ROA ratios grow, the firm may do better. This implies that the
business may increase income while using less cash. The ROA ratio for this year was
62.44%, 22.44% higher than the ROA ratio for last year (40%). By using this figure, it can
be demonstrated that the corporation effectively manages its resources to run the business.
The return on equity (ROE) statistic may be used to evaluate a company's profitability and the
effectiveness with which it generates those profits by comparing a company's net income to
its shareholders' equity (Fernado,2022). A high ROE for the company shows that it is
successfully transforming equity investment into profits. The ROE ratio increased 9% this
year, from 45% to 64.11%. This value still indicates a low level, notwithstanding a rise. The
net profit of a corporation is represented by return on equity (ROE), which is shareholders'
equity divided. Increasing net profit is one way to improve ROE ratios.
In addition to examining financial performance ratios, the business should think about
evaluating non-financial ones, which can have several benefits. It is evidently simpler and
quicker to measure and obtain data. The business must wait until the end of the fiscal year
to create and collect information about its financial performance. Yet, it is possible to
achieve the non-financial indication. Even the conclusion of each shift, for instance. Also,
it is more adaptable than financial one because the company is free to create whatever
15
policies that suit their objectives without being constrained by limitations like interim
research findings or consumer indices.
I suggest that the organization take use of the balance scoredcard approach (BSC), a
strategic management performance indicator used to discover and enhance various
internal business operations and the effects they produce externally. The four key business
metrics that are measured by the balanced scorecard are learning and growth perspective,
internal business process perspective, customers perspective, and finances perspective:

 Learning and growth perspective: The primary goal is to evaluate the knowledge and
skills of the workforce in the company. For each person to contribute to the
expansion of enterprises, they must continually study, broaden their expertise, and
use technology.
 Internal business process perspective: To find any gaps, holdups, bottlenecks,
shortages, or waste in the internal operating process, the corporation should
undertake an internal business process analysis. KPIs for each employee and the
standard of work that employees can do may be used to measure it.
 Customers perspective: The business must improve customer happiness and brand
perception in order to assess this viewpoint. The business needs to be concerned with
enhancing its offering program, increasing the percentage of sales from new
products, and other issues, and it needs to establish some clearly defined benchmarks
for evaluation. For instance, the business might think about improving the standard
of its customer service and its product quality.
 Finances perspective: From a financial standpoint, the major goals are to boost sales,
boost profitability, and cut operating expenses to the absolute minimum. The
subject of how to increase the company's profit must be addressed by the business.
The business may think about establishing various benchmarks and goals each year,
such as raising net profit, cash flow market share, and ROE, or cutting operational
expenses.
Advantages of digital accounting
In the current explosive 4.0 industrial revolution, digital transformation is a phrase that
many organizations are interested in and focused on. Successful digital transformation
will make it easier to collect and process information, creating opportunities to provide
useful information for managers (Zybery and Rova, 2014). Just like other business areas,
accounting and auditing will greatly benefit from using digitalization to organize, process
and evaluate financial data, thereby improving productivity and saving costs and time.
Hence, I'd like to outline a few advantages of accounting software and explain why I
chose to utilize it to put up your company's year-end financial statements.

16
Time and financial savings are the initial benefits of accounting software (Tanski-
Phillips, 2022). I am aware that your time and money are your most valuable resources as
a business owner. The accounting procedure might be made simpler and the work
required to produce financial statements reduced with the aid of accounting software,
making it quicker than with the assistance of the conventional approach. I was able to
give you those statements as quickly as I could as a result. After obtaining the data, you may
look more closely at how your business is performing to get suggestions for what should be
trimmed and where.
Another indisputable advantage of accounting software is its ability to improve accuracy
and decrease mistakes while working with large amounts of data and accounting
regulations (Jasim and Raewf, 2020). Transposition errors, entry reversals, and omission
errors are only a few examples of typical mishaps. Accounting software helps its
customers avoid such, preserving the accuracy, cleanliness, and organization of their data.
Last but not least, accounting software helps us export financial statement reports swiftly
and simply (Tanski-Phillips, 2022). A spreadsheet's data collection might require hours of
manual labor. With accounting software, getting the required report only only a few
mouse clicks. In the coming future, the work of accountants and auditors will require the
use of advanced information systems and artificial intelligence to perform a number of
tasks, such as analysis, reporting and perform the desired outputs. Therefore, it can be
said that the tasks related to management accounting and financial accounting are
influenced or developed as a result of the digital revolution itself (Kruskopf et al., 2020).
Therefore, in order to quickly acquire and grasp modern technologies, accountants need to
learn new skills continuously (Daugherty and Wilson, 2018).
In summary, accounting software offers a variety of advantages, such as saving time and
money, eliminating bias and mistakes, and quickly and accurately presenting financial
results. Digital accounting brings many benefits to businesses, some companies are now
investing a lot of resources in digitizing accounting processes to create a leading business
advantage. Therefore, businesses should soon have a roadmap to apply suitable digital
accounting for themselves.
Choosing which accounting software to use in accordance with the structure of the
business is very important. Currently, there are popular accounting software such as Misa,
Fast, Bravo, Zoho Books, etc. Including Misa software, which has been trusted by more
than 150,000 businesses. Misa software consolidates all operations on one business
management platform, applies advanced technologies such as AI, Blockchain, flexibly
connects services to improve work productivity, reduce costs and increase profits. profits
for businesses by automatic accounting, automatic tax reporting, financial reporting.
Moreover, Misa also connects the General Department of Taxation, Banks, E-Invoices,
17
Digital Signatures, Point

18
of Sale Software, etc. to form a faster and more convenient data processing ecosystem and
help your business view operating reports anytime, anywhere.
It is my pleasure to have your firm as a client. Please contact me if there is any further
questions.
Your sincerely,
Pham Tran Cat Anh.

19
REFERENCES
Daugherty, P. R., Wilson, H. J. (2018). Human machine: reimagining work in the age of
AI. USA: Harvard Business Press.
Delolmo, M. (2022). Current Ratio: Calculation, Formula & Examples. [online] Layer
Blog. Available at: https://blog.golayer.io/finance/current-ratio- calculation#:~:text=A
%20current%20ratio%20between%201.5 [Accessed 24 Feb 2023].
Fernando, J. (2022a). Current ratio explained with formula and examples. [online]
Investopedia. Available at: https://www.investopedia.com/terms/c/currentratio.asp
[Accessed 24 Feb 2023].
Fernando, J. (2022b). Debt-to-Equity (D/E) Ratio Formula and How to Interpret It. [online]
Investopedia. Available at: https://www.investopedia.com/terms/d/debtequityratio.asp
[Accessed 24 Feb 2023].
Fernando, J. (2022c). Inventory Turnover Ratio: What It Is, How It Works, and Formula.
[online] Investopedia. Available at:
https://www.investopedia.com/terms/i/inventoryturnover.asp [Accessed 24 Feb 2023].
Fernando, J. (2022d). Return on Equity (ROE) Calculation and What It Means. [online]
Investopedia. Available at: https://www.investopedia.com/terms/r/returnonequity.asp
[Accessed 24 Feb 2023].
Hayes, A. (2022). Asset Turnover Ratio. [online] Investopedia. Available at:
https://www.investopedia.com/terms/a/assetturnover.asp [Accessed 24 Feb 2023].
Jasim, Y., A., Raewf, M. (2020) ‘Information Technology's Impact on the Accounting
System’. Cihan University-Erbil Journal of Humanities and Social Sciences. 4(1), pp.50-
57. Doi: 10.24086/cuejhss.v4n1y2020.pp50-57
Kenton, W. (2021). Understanding the Cash Ratio. [online] Investopedia. Available at:
https://www.investopedia.com/terms/c/cash-ratio.asp [Accessed 24 Feb 2023].
Kruskopf, S., Lobbas. C., Meinander. H., Söderling. K., Martikainen. M., Lehner. O. (2020).
‘Digital accounting and human factors: theory and practices’. ACRN Journal of Financial
and Risk Perspectives, 9, pp. 78-89.Doi: https://doi.org/10.35944/jofrp.2020.9.1.006

20
Seth, S. (2022). How the quick ratio works. [online] Investopedia. Available at:
https://www.investopedia.com/terms/q/quickratio.asp [Accessed 24 Feb 2023].
Tanski- Phillips, M. (2022) Accounting Terms You Should Know. [online] Patriot.
Available at: https://www.patriotsoftware.com/blog/accounting/accounting-terms/
[Accessed 24 Feb 2023].
Zybery, I., Rova, L. (2014). ‘The role of the accountants in the framework of the modern
technological developments and digital accounting systems’. European Scientific Journal,
ESJ, 24. Doi: https://doi.org/10.19044/esj.2011.v24n0p%p

21
APPENDIX
Appendix 1. Adjustments for a Profit and Loss Account and a Balance Sheet for the sole
trader Adam Lee
Adjustment
1. Inventory as at the close of business has been valued at cost at £55,000.
Closing inventory= £55,000, reported on Balance sheet as a current asset ( Inventory)
COGS= (opening inventory + purchases) - closing inventory = (£50,000+ £258,000- £15,000)- £55,000)= £238,000, reported on Income Statement
2. Wages and salaries need to be accrued by £800.
Accruals (related to Salaries expense) at 31 May 2021 = £800 : reported on Balance sheet (Accruals)
Accruals salaries charged to profit and loss for the year = ( Amounts of Salaries paid during the year + Closing accruals) - Opening accruals =
(£58,800 + £800) - 0= £59,600, reported on Income Statement (salary expenses)
3. Other operating expenses are prepaid by £300
Closing prepayment (related to insurance expenses)= £300, reported on Balance sheet as an asset (Prepayment)
Prepaid operating expense charged to the Income statement = (Opening prepayment + Amounts of Insurance expenses paid during the year)
- Closing prepayment = (0 + £17,700) - £300 = £17,400
4. A bad debt of £7,600 included in the trade receivables balance of £42,600 is to be written off.
Bad debt expense = £7,600: reported on the Income Statement (Bad debt written off)
Trade receivables balance at 31 May 2021 = £42,600 - £7,600 = £35,000: reported on the Balance sheet (Trade receivables)
5. The allowance of doubful debts is to be adjusted so that it is 2% of trade receivables.
Allowance required for the whole year: 2% * £35,000 = £700: reported on the Balance sheet right under Trade receivables.
Increase in allowance charged to profit andloss = Allowance required - Opening allowance = £700 - £500 = £200 reported on the Income
statement.
6. Depreciation of the year ended 31 May 2021 has still to be provided for as follows:
* Land and building at cost: £ 120,000
Depreciation for a year = 1,5% * the original cost= 1,5% * £ 120,000= £1,800
Depreciation expense of £1,800 will be charged to Income Statement
Accumulated depreciation at 31 May 2021 = Opening accumulated depreciation + Depreciation= £20,000 + £1,800= £21,800, which is reported
on Balance sheet right under Land and bulding at cost
* Plant and machinery at cost: £80,000
Depreciation for a year = 25% *( Historical cost - accrumulated depreciation of plant and machinery)= 25% * (£ 80,000- £ 38,000)=
£10,500 Depreciation expense of £20,000 will be charged to Incom Statement
Accumulated depreciation at 31 May 2021 = Opening accumulated depreciation + Depreciation= £38,000 + £10,500= £48,500, which is reported
on Balance sheet right under Plant andmachinery at cost

Appendix 2. Statement of Profit and Loss for the year ended 31 May 2021 for the sole trader
Adam Lee
ADAM LEE
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 MAY 2021

£000 £000
Sales 423,200
Less : Cost of good sold
Opening inventory 50,000
Purchases 258,000
Purchase returns (15,000)
Closing inventory (55,000) (238,000)
Gross profit 185,200
Discounts received 4,800
190,000
Less : Expenses
Wages and salaries 59,600
Loan interest 5,100
Depreciation
Land and building 1,800
Plant and machinery 10,500
Bad debt expense 7,600
Allowance of doubtful debts 200
Prepaid operating expense 17,400 (102,200)
Net profit for the year 87,800

22
Appendix 3. Statement of Retained Earnings for the year ended 31 May 2021 for the sole
trader Adam Lee.
ADAM LEE
STATEMENT OF RETAINED EARNINGS FOR THE YEAR ENDED 31 MAY 2021

£000
Net profit for the year 87,800
Less : Drawings (24,000)
Retained Earnings 63,800

Appendix 4. Statement of Financial Position at 31 May 2021 for the sole trader Adam Lee
ADAM LEE
STATEMENT OF FINANCIAL POSITION AT 31 MAY 2021

£000 £000 £000

Non-current assets Cost Accumulated depreciation NBV
Land and building (Cost - Accumulated Depreciation) 120,000 (21,800) 98,200
Plan and machinery (Cost - Accumulated Depreciation 80,000 (48,500) 31,500
Current assets
Inventory 55,000
Trade receivables net of allowance for Doubtful debts 35,000
Less : Allowance of doubtful debts (700)
Prepayments 300
Cash in bank 32,300
Cash in hand 300 122,200
Total asset 251,900

Equity and Liabilities

Opening capital 121,300
Net profit for the year 87,800
Drawings (24,000)
Closing capital 185,100
Non-current liabilities
Loan 30,000
Current liabilities
Trade payables 36,000
Accruals 800 36,800
Total equity and liabilities 251,900

23
Appendix 5. Adjustments for a Profit and Loss Account and a Balance Sheet for the
partnership of Tom, Jerry and Donald.
ADJUSTMENT
1. Inventory at 31 December 2021 was valued at £10,000.
Closing inventory= £10,000, reported on Balance sheet as a current asset ( Inventory)
COGS= (opening inventory + purchases) - closing inventory = (£15,000+ £80,000- £5,000)- £10,000)= £80,000, reported on
Income Statement
2. Partners are to receive 5% interest on their capital.
Account for interest in capital
Tom = 5%* £50,000 = £2,500
Jerry = 5%* £25,000 = £1,250
Donald= 5%* £25,000 = £1,250
3. Interest on drawings is to be charged at 5%.
Account for interest on drawings
Tom = 5%* £3,000 = £150
Jerry = 5%* £2,500 = £125
Donald= 5%* £3,500 = £175
4. Jerry and Donald are to receive salaries of £1,000 each.
Partners' salaries:
Jerry = £1,000
Donald = £1,000
5. There was an amount of £3,500 outstanding for salaries at December 31, 2021.
Closing accruals = £3,500; BS, current liabilities (accruals)
Accrued salaries expenses = (Amounts of paid during the year + Closing accruals) - Opening accruals = (£8,000 + £3,500) - 0= £11,500
; IS, operating expenses ( carriage outwards)
6. £4,000 was due but unpaid for carriage outwards.
Closing accruals = £4,000; BS, current liabilities (accruals)
Accrued carriage outwards expenses= ( Amounts of paid during the year + Closing accruals) - Opening accruals = ( 0 + £4,000)- 0= £4,000
; IS ,operating expenses (carriage outwards).
7. Insurance paid in advance amounted to £1,000.
Closing prepayment = £1,000; BS, current assets
Insurance charged to IS = (Opening Prepayment + Amounts of insurance expenses paid during the year) - Closing prepayment
= (0 + £3,000) - £1,000 = £2,000; IS, operating expenses (insurance)
8. The allowance of doubful debts is to be adjusted so that it is 2% of trade receivables.
Allowance required for the whole year = 2% * £20,000 = £400, reported on the BS right under Trade receivables
Increase in allowance charged to profit and loss = Allowance required - Opening allowance = £400 - 0 = £400, reported on the IS
9. Depreciation is to be charged as follows:
* Leasehold premises: 10% per annum using the straight line method.
Opening accumulated depreciation: £5,000
Depreciation charge for a year = 10% * historical cost = 10% * £100,000= £10,000
Closing accumulated depreciation = £5,000 + £10,000= £15,000; BS, non- current assets
* Office furniture: 10% per annum using the reducing balance method..
Opening accumulated depreciation: £500
Depreciation charge for a year = 10% * (historical cost - accumulated depreciation) = 10% * ( £92,500- £500) = £9,200
Closing accumulated depreciation = £500 + £9,200= £9,700; BS, non- current assets
Total depreciation charged to Profit and Loss account = 15,000 + 9,700 = 24,700; IS, operating expenses (Depreciation)

24
Appendix 6. Statement of Trading, Profit and Loss for the year ended 31 December 2021
for the partnership of Tom, Jerry and Donald.
TOM, JERRY AND DONALD
STATEMENT OF TRADING, PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 2021
£000 £000 £000
Sales 305,000
Sales returns (5,000)
NET SALES 300,000
Less : Cost of good sold
Opening inventory 15,000
Purchases 80,000
Purchases returns (5,000)
Closing inventory (10,000) (80,000)
GROSS PROFIT 220,000
Add : Discount Received 10,000
230,000
Less Expenses :
Salaries 11,500
Advertising 2,000
Light&Heat 500
Insurance 2,000
Carriage Outwards 4,000
Discount allowed 10,000
Allowance of doubful debts 400
Depreciation:
Leasehold premises 10,000
Office furniture 9,200 (49,600)
NET PROFIT FOR THE YEAR 180,400

Appendix 7. Statement of Profit and Loss Appropriation for the year ended 31 December
2021 for the partnership of Tom, Jerry and Donald.
TOM, JERRY AND DONALD
STATEMENT OF PROFIT AND LOSS APPROPRIATION FOR THE YEAR ENDED 31 DECEMBER 2021
£000 £000 £000
Net profit 180,400
ADD:
Interest on Drawings:
Tom 150
Jerry 125
Donald 175 450
180,850
LESS:
Interest in Capital
Tom 2,500
Jerry 1,250
Donald 1,250 5,000
Salaries:
Jerry 1,000
Donald 1,000 2,000 (7,000)
173,850
Share of residual Profit/Loss
Tom (2/4) 86,925.00
Jerry (1/4) 43,462.50
Donald (1/4) 43,462.50 173,850

25
Appendix 8. Statement of Partner Capital for the year ended 31 December 2021 for the
partnership of Tom, Jerry and Donald
TOM, JERRY AND DONALD
STATEMENT OF PARTNER CAPITAL FOR THE YEAR ENDED 31 DECEMBER 2021
£000 £000 £000
Tom Jerry Donald
Balance as at 31 December 2021 8,000.00 (4,000.00) 6,000.00
ADD:
Interest on Capital 2,500.00 1,250.00 1,250.00
Salary 1,000.00 1,000.00
Share of Profit/Loss 86,925.00 43,462.50 43,462.50
97,425.00 41,712.50 51,712.50
LESS:
Drawings (3,000.00) (2,500.00) (3,500.00)
Interest on Drawings (150.00) (125.00) (175.00)
Balances 94,275.00 39,087.50 48,037.50

Appendix 9. Statement of Financial Position at 31 December 2021 for the partnership of

Tom, Jerry and Donald.
TOM, JERRY AND DONALD
STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 2021

£000 £000
Non-current assets Cost Acc. Dep.
Leasehold premises 100,000 (15,000)
Office furniture 92,500 (9,700)
Current assets
Inventory 10,000
Trade Receivables 20,000
Less : Allowance for Doubtful Debts (400)
Prepayment 1,000
Cash at bank 65,000
Cash in hand 25,500

Total assets

Current liabilities
Accrued salaries expenses 3,500
Accrued carriage outwards expenses 4,000
Capital account
Tom 50,000
Jerry 25,000
Donald 25,000 100,000
Current account
Tom 94,275.00
Jerry 39,087.50
Donald 48,037.50 181,400

Total capital and liabilities

26
Appendix 10. Key performance ratio of the sole trader Adam Lee
KEY PERFORMANCE RATIOS
Fomula Previous year's value Current year's value

ROS ( Returned of Sales) Profit before tax * 100%

12% 20.75%
Total sales and revenues

Assets turnover Net sales 2.01 1.68

Average total assets

Inventories turnover Cost of goods sold 7.88 4.53

Average inventories

Account receivable turnover Net sales + VAT 10.10 12.34

Average account receivables - Allowance for doubtful debt

Account payable turnover Purchases - Purchase returns 7.00 6.75

Average account payables
* 100%
ROA(Return on Assets) Profit before tax 20% 34.86%
Average total assets
* 100%
RE (Return on Assets Variation) Profit before tax + interest expense 22% 36.88%
Average total assets
* 100%
ROE (Returnon Equity) Profit aftertax 38% 47%
Average owner's equity

Current ratio Current assets 2.02 3.32

Current liabilities

1.51 1.83
Quick ratio Current assets - Inventory - Other current assets
Current liabilities

0.55 0.89
Cash ratio Cash& Cashequivalents
Current liabilities
0.45 0.27
Debt ratio Total liabilities
Total assets
0.20 0.14
Long-term debt to long-term capital ratio Long-term debt
Long-term debt + Total shareholder's equity
0.22 0.16
Long-term debt to shareholder’s equity ratio Long-term debt
Total shareholder's equity
11.90 18.22
ICR (Interest coverage ratio) Profit before tax + interest expense
Interest expense

Appendix 11. Key performance ratios of the partnership of Tom, Jerry and Donald
KEY PERFORMANCE RATIOS
Fomula Previous year's value Current year's value

ROS ( Returned of Sales) Profit before tax * 100%

42% 60.13%
Total sales and revenues

Assets turnover Net sales

2.01 1.04
Average total assets

Inventories turnover Cost of goods sold

20.00 6.40
Average inventories

Account receivable turnover Net sales + VAT

12.00 15.31
Average account receivables - Allowance for doubtful debt

ROA (Return on Assets) Profit before tax * 100%

40% 62.44%
Average total assets

ROE (Return on Equity) Profit after tax * 100%

45% 64.11%
Average owner's equity

27