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Accounting and Finance

1) Financial Statements

Corporate accounting is based on the three traditional financial statements, the balance sheet, the cash flow statement, and the income statement. These statements also determine the financial status of an organization with customers, senior executives, lenders, vendors, and industry rivals (Palepu et al., 2020). For measuring financial ratios that offer quantitative insights into the success of a business, basic details contained herein can be used. While each balance sheet, cash flow, and income statement offer various financial information, they all provide an outline of the operations of a company.

Income Statement

Any of the things referred to as the report of profit and loss is associated with throughout revenue and expenditure on profits or losses. It offers a lot of information on a company's overall performance (Easton et al., 2018). The income statement generally applies to the actual, indirect, and investment costs paid by a corporation.

Balance Sheet

A financial statement in a firm’s balance sheet which is lists the snapshot of what a company owes owns and the shareholders’ invested amount is referred to as a balance sheet (Howe, 2018). There are two main categories in the balance sheet (1) “assets” and (2) “liabilities and shareholder’s equity”.

Cash Flow Statement

The cash flow statement describes the liquidity of company equivalents which enter and leave the company for a certain time. It evaluates how efficiently a business can raise revenue to finance its activities to pay liabilities (Avhad and Yadav, 2020). The Cash flow statement is important because the funding of its existing obligations and expenses is provided to investors by the liquidity (how much cash a corporation holds).

2)  Analysis Of Financial Statements Of Improve.Ltd

Financial Performance

This income statement reveals that, in revenue, the business generated a cumulative amount of £39,000,000, and the expense to achieve sales of £10,600,000 is roughly £28,400,000 with a gross profit of 2020 where the corporation generated sales of £37,000,000 with a Gross Profit of £26,700,000 in 2019. In the year 2020, there has been a relative rise in sales and gross profit. In sum, £22,400,000 was deducted from the profit in terms of operational and distribution expenditures, and £900,000 in general, and administrative costs and, in 2020, the operating income was £5,100,000. Including £996,000 in corporation tax, additional profits and expenses were added. In the end, the corporation saw a net profit of £3,984,000 during the 2020 term, while a total of £18,800,000 was deducted from the profit, leaving an operating income of £6,700,000 during 2020 and £1,200,000 in general and in administration. This was offset by additional profits and expenses, of which £1,316,000 was lowered in corporate tax. In the end, the group reported a net income for the year 2019 of £5,264,000. Due to growing administrative and operating costs, the net income for 2019 is greater than in 2020.

Financial Health

Financial Ratios

Name of ratio




Current Ratio

Current Assets ÷ Current Liabilities



Net Working Capital

Current Assets - Current Liabilities



Cash Ratio

( Cash + Marketable Securities ) ÷ Current Liabilities



Debt Ratio

Total Liabilities ÷ Total Assets



Equity Ratio

Total Equity ÷ Total Assets



Debt-Equity Ratio

Total Liabilities ÷ Total Equity



Times Interest Earned

EBIT ÷ Interest Expense



Return on Asset

Net Income after tax / Total assets



Return on Equity

Net income after tax / Shareholder's equity



Return on Capital

EBIT / (Total Assets - Current Liabilities)



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In the above financial ratio analysis, the current ratio for the year 2020 is 2.811 and for the year 2019 it is a current ratio higher than 1 is representing good financial health and it even got better in 2020 because the current ratio went up. The networking capital for 2020 is 6694 and for 2019 is 4510 which is representing that the company is in positive working capital funds and it can manage its day-to-day expenses very efficiently. The cash ratio of the company for 2020 is 0.99 which is equivalent to 1 representing that the company has a fairly stable amount of cash for the repayment of the liabilities on the company. The cash ratio got better in 2020 from 0.63 in 2019 to 0.99 as a stable cash ratio. The debt ratio for the company is also too low representing a stable and good financial health of the company i.e., 0.193 in 2020 as compared to 0.221 in 2019.

The debt ratio decreased in 2020 presenting that the company e managed its liabilities well over the year 2020. Equity ratio of the company also improved in 2020 from 0.779 to 0.807 having a very little change but when it comes to the millions of pounds, it matters a lot where is the debt-to-equity ratio for the company is also so to lo with the value of 0.239 in 2020 which is lower than 0.283 in 2019. The low debt to equity ratio debt ratio and current ratio shows that the company e is doing equity financing and it is managing it well as all the financial ratios have shown a better performance as compared to the previous year of 2019. Times interest earned represents the times of income earned on the interest expense and for Improve Ltd. it was 55.83 times in 2019 and it decreased to 42.5 times in 2020 because of the capital structure and financing technique i.e., equity financing. Return on asset decreased from 23.15% to 14.81% in 2020 similarly return on equity decreased from 47.85% to 36.22% and the same goes for return on capital which came down from 34.6% in 2019 to 21.98% in 2020. These decrease in returns are mainly due to 2 large operating and administrative expenses in 2020 resulting in less net income than for the previous year.

“Cash Flow from Operations” – Improve Ltd.’s Cash Flow from Operations is generated from home services by Improve Ltd.’s properties. Additionally, Improve Ltd.’s home and garden improvement services. Improve Ltd.’s Cash flow from operation shows an increasing trend primarily due to a decrease in payables. Improve Ltd.’s Net cash outflow from operating activities was £2,594,000 in 2020 and £1,390,000 in 2020.

“Cash Flow from Investing Activities” – Improve Ltd.’s investing activities primarily include the purchases of home equipment, service equipment’s and other garden-related equipment. Improve Ltd.’s Net cash outflow from operating activities was £2,594,000 in 2020 and £1,390,000 in 2020.

“Cash Flow from Financing Activities” – Cash Flow from Financing is driven by proceeds from the issuance of debt, debt repayments. Improve Ltd.’s Cash Flows from Financing activities are constant each year due to the fixed amount of interest cost. In 2020, Improve Ltd.’s paid interest cost of £120,000, and the same goes for the previous year of 2019.

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3) Validity of the Concerns Raised By Uncle Dave

According to Uncle Dave, paying back all the loans to the bank is not a good option because the company is already working on equity financing and its operations are being carried out in a very low debt to equity ratio. The main concern of Improve Ltd. is its decreasing returns on asset, equity, and capital and it has to improve that area to get a good return. The time's interest earned ratio is representing that it has decreased significantly and there is something wrong with the operating income because the income cost is constant over 2 years so the company has to work on operating and administrative expenses which have increased significantly in 2020 resulting in low operating income which ultimately resulted in low net income. Paying back all the loans will increase the tax expense hands the company cannot bear only equity financing so instead of paying back all the loans, the company should decrease operating expenses.


Avhad, S.M. and Yadav, R.R., 2020. Cash Flow Statement.

Easton, P.D., McAnally, M.L., Sommers, G.A. and Zhang, X.J., 2018. Financial statement analysis & valuation. Boston, MA: Cambridge Business Publishers.

Howe, K.M., 2018. Valuation and cost of capital analysis: a market-value balance sheet approach. In New directions in finance (pp. 22-33). Routledge.

Palepu, K.G., Healy, P.M., Wright, S., Bradbury, M. and Coulton, J., 2020. Business analysis and valuation: Using financial statements. Cengage AU. 

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