OEM has increased from 19.06 per cent to 22.07 per cent reflecting an increase in the operating expenses of the business. This reflects poor control of the business over its expenses which is not a good indication. The sales growth rate has become negative to -22.85 per cent which shows very low sales made by the company. This has mainly occurred due to the pandemic during which the company could not make the desired sales. ROCE has decreased from 14.19 per cent to -3.85 per cent due to the reducing operating profits. This shows poor employment of capital within the business which is resulting in negative gains.

b) Liquidity:

The current ratio of the company has decreased from 1.60 to 1.46 due to the reducing current assets along with increasing current liabilities. The excess of current assets over current liabilities reflect that the company possesses the ability to manage positive working capital which is important for the business to manage its liquidity. On the other hand, the acid test ratio of the company is increasing from 0.77 to 0.81 due to the reducing inventory balance. This represents that if inventory is removed from the current assets, the company will not be able to pay dues to the investors.

c) Working capital management:

The current ratio of the company has decreased from 1.60 to 1.46 due to the reducing current assets along with increasing current liabilities. The excess of current assets over current liabilities reflect that the company has positive working capital. The positive working capital shows that the business has the ability to pay its expenses successfully which is good for its working capital management process.

d) Solvency & risk:

The gearing ratio is increased from 45.56 per cent to 47.95 per cent reflecting an increase in debt capital. The increasing gearing ratio is an indication that the company is increasing its leverage and tax shield along with the increased risk of rising interest rates. Interest cover has decreased from 17.75 to -3.1 reflecting the inability of paying interest expenses during the year.

e) Shareholder return:

Return on shareholders investment has reduced from 14.32 per cent to -7.04 per cent reflecting poor earnings of the company. The company is unable to manage the funds that shareholders have provided which is resulting in negative profits.

f) Overall financial performance:

PE ratio is decreasing from 19.02 to -29.32 due to the decreasing EPS of the company. This shows that the firm is highly undervalued in the industry as the investors have estimated for the reduction in the share price of the company in the future period of time.  EPS of the company is decreasing from 16.3 to -6.8 due to the reducing net profit of the company. The reducing EPS is not good for the company as it shows poor ability to make returns over the investment done within the business. Asset turnover has reduced from 0.62 to 0.55 reflecting lesser sales made using the available total assets of the business. In one way this results in wastage of resources and assets that the business possesses. Receivable days are increasing from 46.98 days to 61.90 days due to the increasing debtor balance. This shows that IBSTOCK PLC is providing its customers with more credit periods. This increases the risk of bad debt as the customers are getting more time to clear their dues. Payable days have increased from 48.83 days to 60.43 days due to the increase in the balance of creditors. This shows that the company is making late payments to the creditors which might negatively affect the relationship of the company with its suppliers. Inventory days is decreasing from 121.43 to 85.23 due to the increasing sales. This shows that the company is converting inventories into sales quickly which is good for its performance. Overall performance of the company is poor because of reducing sales and increasing losses. However, the liquidity and gearing performance of the company is good. 

 

 

Part 3: Essay

i. Separate entity concept

As commented by Yasyshena (2019), a separate entity concept is a principle of accounting that states recording transactions of a business separately from the transactions of the owner. This means that the business and its owner are completely different and the entity has its own legal status which is separate from that of the owner. This concept is applied to every type of business. For instance, amounts that have been withdrawn by the owner for personal expenses are treated as drawings and cannot be deducted from the income as an expense.

ii. Accruals or matching concept

In the views of Ali et al. (2019), the concept of accrual accounting is an accounting principle that states economic events must be recognised after matching the expenses to the revenues while recording the transactions. In addition, the transactions must be reported on the day of occurrence in place of the date of payment received or made. This means there is no relation between cash received or not if the transaction has been completed it will be recorded in the books. Also, revenue from sales must be reported against the expense of purchase as per the matching principle.

iii. Going concern concept

Based on the understanding of Barker et al. (2020), going concerned is the principle of accounting for a company having resources in sufficient quantity to continue operating the business indefinitely until evidence for the contrary is provided. This means that the company is nowhere near to bankruptcy or liquidity. If a company is not a going concern, then it means that it will have to liquidize its assets and has gone bankrupt. This means that the business will sooner cease to exist within the industry due to its poor financial health. the opposite of this would be considered as a going concern that is far away from bankruptcy.

iv. Prudence concept

As suggested by AN and AK (2020), the concept of prudence states that organisations must not overestimate the value of revenues earned or underestimate the amount of expenses incurred. In addition, organisations must be conservative while recording the value of assets by not underestimating liabilities. The result must be conservative restated financial statements. This ensures that the values of assets, liabilities, expenses and incomes are true as well as transparent for the users of financial statements. Therefore, the value of liabilities must always be on the higher side than what it should be as per this accounting concept.

References

Ali, M.N., Almagtome, A.H. and Hameedi, K.S., (2019). Impact of accounting earnings quality on the going-concern in the Iraqi tourism firms. African Journal of Hospitality, Tourism and Leisure, 8(5), pp.1-12.

AN, A.Š.A.P. and AK, S.K.K., (2020). he Concept of Prudence in heory and Practice. International ournal of Economic Sciences, 9(1), pp.156-178.

Barker, R., Penman, S., Linsmeier, T.J. and Cooper, S., (2020). Moving the conceptual framework forward: Accounting for uncertainty. Contemporary Accounting Research, 37(1), pp.322-357.

Yasyshena, V.V., (2019). Principles of accounting policies of intangible assets. INNOVATIVE ECONOMY, (3-4), pp.156-162.

 

 

Appendices

Balance sheet
Consolidated	31/12/2020 GBP	31/12/2019 GBP
	12 months IFRS	12 months IFRS
Assets
Fixed assets	493,211,000	519,328,000
- Intangible fixed assets	95,163,000	102,594,000
- Tangible fixed assets	398,048,000	386,255,000
- Other fixed assets	0	30,479,000
Current assets	143,030,000	163,095,000
- Stock	63,386,000	84,327,000
- Debtors	54,750,000	53,859,000
- Other current assets	24,894,000	24,909,000
* Cash & cash equivalent	19,552,000	19,494,000
TOTAL ASSETS	636,241,000	682,423,000
Liabilities & Equity
Shareholders funds	397,871,000	464,301,000
- Capital	4,096,000	4,093,000
- Other shareholders funds	393,775,000	460,208,000
Non-current liabilities	183,936,000	204,559,000
- Long term debt	110,949,000	127,725,000
- Other non-current liabilities	72,987,000	76,834,000
* Provisions	72,987,000	76,834,000
Current liabilities	98,010,000	102,219,000
- Loans	6,863,000	6,981,000
- Creditors	53,191,000	55,975,000
- Other current liabilities	37,956,000	39,263,000
TOTAL SHAREH. FUNDS & LIAB.	679,817,000	771,079,000

 

Profit & loss account
Consolidated	31/12/2020 GBP	31/12/2019 GBP
	12 months IFRS	12 months IFRS
Operating revenue (Turnover)	318,403,000	412,715,000
- Sales	n.a.	n.a.
Costs of goods sold	267,729,000	250,008,000
Gross profit	50,674,000	162,707,000
Other operating expenses	70,286,000	78,684,000
Operating P/L [=EBIT]	-19,612,000	84,023,000
- Financial revenue	1,777,000	2,703,000
- Financial expenses	6,105,000	4,735,000
Financial P/L	-4,328,000	-2,032,000
P/L before tax	-23,940,000	81,991,000
Taxation	4,081,000	15,516,000
P/L after tax	-28,021,000	66,475,000
- Extr. and other revenue	n.a.	n.a.
- Extr. and other expenses	n.a.	n.a.
Extr. and other P/L	n.a.	-383,000
P/L for period [=Net income]	-28,021,000	66,092,000