Assignment Sample on Accounting and Finance
Introduction
Accounting and finance cover a broad area of business activities of an organization. This involves the identification, summarization, evaluation, of accounting transactions of a business during the year. It is quite evident that an organization has to deal with different types of transactions of business which sometimes become difficult to manage. In this situation, the concept of accounting and finance can assist in mitigating all the difficulties of business. Generally, ASOS plc engaged in the manufacturing and distribution business of fashion and cosmetic products in the UK. This company deals with more than 800 brands of its clothes and accessories and operates its business in more than 150 countries of the world. Apart from that, this company has 4000+ employees who work towards the success of this company. In addition, this study involves the different types of ratio calculation for measuring the financial performance of ASOS plc. It is quite evident that managing 800 brands of products and services is not an essay job so the calculation of ratios reflects the fair view of this company’s operation.
1. Calculation of ratio
Ratios play an important role in reflecting the level of performance of a company which they made during the year. Apart from that, the ratio also helps to compare the results of two different years so that the performance based on the comparison can be derived (Antonelli et al. 2018, p. 21). In this study, a range of ratios is calculated which reflects the profitability, liquidity, and efficiency performance of ASOS plc in 2019 and 2020. Considering the above profitability, liquidity, and efficiency aspect of ASOS plc the financial performance of this company can be derived. Apart from that, the percentages of ratios also show the concern areas of this company that needs to be mitigated. Besides, the calculation of profitability, liquidity, and efficiency ratios of the company is given below.
Profitability ratios
It is quite evident that the profitability ratios are one of the strong indicators of the profit performance of a company. Apart from that, it also shows the ability of a company to generate a high profit by using its annual revenue, assets, and equities. Profitability plays an important role for a company since dividends are distributed to the shareholders of a company on the basis of profit. Due to this, shareholders of a company also look forward to having a positive profitability in the company so that they can receive a sufficient percentage of dividends (Chitra-Sriyani and Silva, 2020, p. 191). Profitability ratios also attract the different investors of a company since investors invest their money into the company for getting a high return. In addition, profitability ratios involve the gross profit ratio, net profit ratio, and return on capital employed. The calculation of these ratios is given below.
| Calculation of GP ratio | |||
| 2020 | 2019 | ||
| Gross profit ratio | 47.42 | 48.81 | |
| Gross profit | £ 1,547.40 | £ 1,334.30 | |
| Sales | £ 3,263.50 | £ 2,733.50 | |
Table 1: Calculation of GP ratio
(Source: asosplc.com, 2020)
| Calculation of NP ratio | |||
| 2020 | 2019 | ||
| Net profit ratio | 3.47 | 0.90 | |
| Net profit | £ 113.30 | £ 24.60 | |
| Sales | £ 3,263.50 | £ 2,733.50 | |
Table 2: Calculation of NP ratio
(Source: asosplc.com, 2020)
| Calculation of ROCE ratio | |||
| 2020 | 2019 | ||
| Return on capital employed | 12.52 | 6.99 | |
| Earnings before interest and taxes | £ 142.10 | £ 33.10 | |
| Capital employed | £ 1,135.30 | £ 473.30 | |
| Total assets | £ 1,989.40 | £ 1,245.50 | |
| Current liabilities | £ 854.10 | £ 772.20 | |
Table 3: Calculation of ROCE ratio
(Source: asosplc.com, 2020)
Liquidity ratios
Liquidity ratio also plays an important role for a company since it shows the liquidity condition of the company. Apart from that, this reflects the ability of a company to maintain its debts with the help of its liquid assets. Liquid assets of a company include the total current assets excluding the value of inventories and prepaid expenses (Cohen and Karatzimas, 2018, p. 316). This ratio is important for the suppliers or creditors of the company since it reflects their ability to pay off all the debts owed by the company. The liquidity ratios include the current ratio, quick ratio, and cash ratio. The listed ratios are a strong indicator of the liquidity position of a company. Hence, the calculation of liquidity ratios is given below.
| Calculation of Current ratio | |||
| 2020 | 2019 | ||
| Current ratio | 1.19 | 0.81 | |
| Current assets | £ 1,019.80 | £ 623.20 | |
| Current liabilities | £ 854.10 | £ 772.20 | |
Table 4: Calculation of Current ratio
(Source: asosplc.com, 2020)
| Calculation of Acid test ratio | |||
| 2020 | 2019 | ||
| Acid test ratio | 0.57 | 0.11 | |
| Liquid assets | £ 487.40 | £ 86.40 | |
| Current assets | £ 1,019.80 | £ 623.20 | |
| Inventories | £ 532.40 | £ 536.80 | |
| Prepaid expenses | £ – | £ – | |
| Current liabilities | £ 854.10 | £ 772.20 | |
Table 5: Calculation of Acid test ratio
(Source: asosplc.com, 2020)
| Calculation of Cash ratio | |||
| 2020 | 2019 | ||
| Cash ratio | 0.48 | 0.00 | |
| Cash and cash equivalent | £ 407.50 | £ – | |
| Current liabilities | £ 854.10 | £ 772.20 | |
Table 6: Calculation of Cash ratio
(Source: asosplc.com, 2020)
Efficiency ratios
Efficiency ratios are also a crucial aspect for a company since it reflects the effectiveness of a company to manage their expenses of the business. It is quite evident that ASOS plc has a large number of expenses which they incurred behind the manufacturing process of their products and services. Moreover, these ratios are calculated as a percentage of the revenue of the company. This means the more revenue this company has the more expenses they incur (Delina, 2017, p. 73). Apart from that, efficiency ratios include the debtor’s collection period and creditors’ collection period. Both the ratios show the effectiveness of this company to collect and pay all the expenses owed by the company. Besides, the calculation of these ratios is reflected below.
| Calculation of Debtors turnover ratio | |||
| 2020 | 2019 | ||
| Debtors collection period | 54.12 | 37.55 | |
| Total revenue | £ 3,263.50 | £ 2,733.50 | |
| Trade debtors | £ 60.30 | £ 72.80 | |
Table 7: Calculation of Debtors collection period
(Source: asosplc.com, 2020)
| Calculation of Creditors turnover ratio | |||
| 2020 | 2019 | ||
| Creditors collection period | 2.13 | 2.09 | |
| Cost of sales | £ 1,716.10 | £ 1,399.20 | |
| Trade creditors | £ 806.10 | £ 669.00 | |
Table 8: Calculation of Creditors collection period
(Source: asosplc.com, 2020)
2. Evaluation of financial performance
The financial performance of ASOS Plc can be evaluated with the help of some financial ratios. That ratio reflects the fair performance of this company in the financial market and also shows the ability of this company to maintain its business activities.
Profitability performance
Profitability performance of this company can be measured with the help of GP, NP, and ROCE ratios. Considering the calculation provided in table 1 that includes the calculation of gross profit ratio, it can be said that it shows the profit of this company as a percentage of revenue (Dodik, 2018, p. 434). This ratio can be calculated by dividing the value of GP by the total revenue generated by the company during the year. The GP ratio of this company is 47.42 in 2020 and 48.81 in 2019 that shows a downfall in the percentage of ratios. This happened due to having less profit as a percentage of revenue.
On the other hand, the profitability ratios also include the net profit of this company. The net profit ratio is calculated in table 2 which shows the ratio of 2019 and 2020. This ratio indicates the ability of the company to generate the net income of the business based on the sales. NP ratio can be calculated by dividing the NP generated during the year by the total sales of the business. The NP ratio of ASOS Plc is 3.47 in 2020 and 0.90 in 2019 that shows a significant increase in the percentage of NP. This is because the net income of this company increased in 2020 relating to 2019.
In addition, the calculation of table 3 includes the figures of return on capital employed of this company. The ROCE ratio of this company indicates the capital efficiency of this company and also reflects the ability of this company to generate profit on the basis of capital employed of business (Jensen, 2020, p. 315). The ROCE ratio can be derived by dividing the earnings before tax by the capital employed. The ROCE ratio of this company in 2020 is 12.52 and 6.99 in 2019 that shows a significant increase in the percentage of profit. This profit increase happens due to having an increase in the value of profit of this company.
Liquidity performance
Liquidity performance of this company can be evaluated with the help of the current ratio, acid-test ratio, and cash ratio. These ratios reflect the true position of liquidity of this company (Malcioğlu and Aydin, 2020, p. 188). By considering the table 4 that involves the calculation of the current ratio, it can be said that the debt-paying ability of this company can be measured with the help of this ratio. The current ratio of this company can be derived by dividing the current assets by the current liabilities of this company. The CR of this company is 1.19 in 2020 and 0.81 in 2019. The percentage of ratio shows the enhancement in CR which means the debt-paying ability of this company increased in the current year.
Apart from that, the Acid test ratio of this company shows the liquid assets and liquid liabilities which are used by the company for paying their debts. The acid test ratio is derived in table 5 which is calculated by dividing the total CA by the total CL of this company. The ATR is 0.57 in 2020 and 0.11 in 2019 which increases in the current year. Apart from that, it is a good indication for the company since they have more liquid assets in comparison to liquid liabilities.
On the other hand, liquidity also involves the cash position of this company which is determined by the cash and cash equivalent. In table 6, a cash ratio is calculated that shows the percentage of liquid cash held by the company in both 2019 and 2020 (Ng and Li, 2016, p. 373). The cash ratio is 2020 is 0.48 and 0.00 in 2019. This means in 2019 this company does not have any liquid cash but in 2020 it has some liquid cash which they use for paying their debts.
Efficiency performance
Efficiency ratios are the most crucial ratios for the customers and suppliers of the company. This ratio also reflects the ability of the company to manage its expenditures of the business. Considering table 7 that includes a calculation of debtor’s collection period, it can be illustrated that the ability to collect money from customers is reflected in this table. The DTR of this company is 54.12 in 2020 and 37.55 in 2019 that shows an increase in the ability of the company. This ratio indicates that this company will become more efficient in 2020 relating to 2019.
On the other hand, creditors turnover ratio of this company is calculated in table 8 which shows the ability of this company to pay its debts to suppliers. Apart from that, the CTR is 2.13 in 2020 and 2.09 in 2019 that does not include a large increment (Smieliauskas et al. 2018, p. 437). This indicated that the payment procedure of creditors of this company is almost the same in the current year relating to the previous year.
Based on all the performance ratios of ASOS Plc, it can be illustrated that the performance level of this company is high in the financial market. This helps the company to operate its business effectively in the current year. Moreover, the ratio of this company indicates that it is a profitable company so investors can invest their money in the company for getting a high return.
Conclusion
The above statements reflect the financial performance of ASOS Plc in 2019 and 2020. Based on the profitability ratios, it can be concluded that this company generates more profit in the current year relating to the previous year since their ratios show an increasing percentage. Apart from that, considering the liquidity as well as efficiency ratio of this company, it can be concluded that this company has a good liquidity position and also they use its liquid cash for paying their expenses of the business.
References
Antonelli, V., Raffaele D’alessio, Rossi, R. and Funnell, W., 2018. Accounting and the banality of evil. Accounting, Auditing & Accountability Journal, 31(8), pp. 2165-2191.
asosplc.com (2020) Overview, Available at https://www.asosplc.com/~/media/Files/A/Asos-V2/reports-and-presentations/2020-annual-report.pdf [Accessed on 30th March 2021]
Chitra Sriyani De, S.L. and Silva, K.D., 2020. Determinants of public sector accounting reforms. The International Journal of Public Sector Management, 33(2), pp. 191-205.
Delina, L., 2017. Multilateral development banking in a fragmented climate system: shifting priorities in energy finance at the Asian Development Bank. International Environmental Agreements : Politics, Law and Economics, 17(1), pp. 73-88.
Dodik, S., 2018. 0RW1S34RfeSDcfkexd09rT2Sharia1RW1S34RfeSDcfkexd09rT2 accounting standard for sukuk (Islamic bond) accounting in Indonesia. Journal of Islamic Accounting and Business Research, 9(3), pp. 434-447.
Jensen, G., 2020. The IPSASB’s recent strategies: opportunities for academics and standard-setters. Journal of Public Budgeting, Accounting & Financial Management, 32(3), pp. 315-319.
Malcioğlu, G. and Aydin, M., 2020. Corrigendum to “Analysis of Market Efficiency at Borsa Istanbul: Harvey Linearity Test” [Journal of Accounting, Finance and Auditing Studies 2/1 (2016) 113-124]. Journal of Accounting, Finance and Auditing Studies, 6(4), pp. 188-193.
Ng, F. and Li, I., 2016. Case-mix accounting beyond the hospital: Foundations for a customer-perspective in accounting for healthcare. Pacific Accounting Review, 28(4), pp. 373-385.
Smieliauskas, W., Bewley, K., Gronewold, U. and Menzefricke, U., 2018. Misleading Forecasts in Accounting Estimates: A Form of Ethical Blindness in Accounting Standards?: JBE. Journal of Business Ethics, 152(2), pp. 437-457.
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