Profit and loss accounts prepared to find out the net profit or net loss of the business during a particular period usually the last 6 months or year. And starts from trading account which Leeds income from sales and the direct costs of making those sales. It is constructed by debit and credit, in debt side opening stock (goods unsold from last year becomes opening stock for new accounting year of) purchases(total purchased goods at cash and credit ) Cost of Goods Sold (all goods sold during accounting period), gross profit, expenses, wages, salaries, other expenses, in credit side sales(Sales income to run business for accounting period) closing stock(goods unsold till last day of accounting period net profit. Mainly its function is to observe profit.
The purpose and importance of preparing Profit and Loss Account's purpose is to solve out the net profit or net loss over a financial year. Profit and loss account is also prepared for identifying net revenue. And expenses that affect net income. P and L accounts show performance of profit by showing cash, stocks and assets.
P 3 What is balance sheet and purposes of balance sheet?
Balance sheet is a statement of assets and liabilities prepared on the last date of company's period to show the economic position of the business. Balance sheet is prepares a at the end of a year, in some companies prepares at the end of month. The balance sheet date is important to prepare a balance sheet through which financial position of a business can change quickly. balance sheet is prepared from trial balance after the balances of supposed accounts are transfer to profit and loss account. And remaining balance of personal and real accounts represents Assets or liabilities. As balance sheet contains Assets, liabilities.
Assets types are current assets (which are already in cash or can be quickly converted into cash e.g. cash, accounts receivable, note receivables closing stocks etc.)Fixed assets or long term (which are not for resale but for permanent use in business e.g. furniture, fixture, plants and machinery, land and building, investments etc), contra assets (these accounts operated for adjustments against any asset called contra assts e.g. accumulated depreciation, allownces for uncollectable)
Liabilities types are current liability (which is payable immediately or nearing future e.g. accounts payable, bills payable.) Fixed liabilities (which are not payable immedialtely, and paid after long period e.g. loan from partners, long term loans) Capital or owner's equity(the capital invested by the owner in order to run the business is called Capital) Drawings are the assets which are drawn by owner of business.
Balance Sheet
As on -----------
Assets
amount
Liabilities
amount
Current Assets
Cash
Bank
Bills
A/C receivables
Closing stock
Fixed Assets
Investments
Machinery
Land& building
Current Liabilities
Overdrafts
Bills payables
Creditors
Expense payables
Fixed Liabilities
Loans
Capital
Capital add net income
Less drawings
Total Assets
-----------
Total liabilities & capital
-----------
Purposes of Balance sheet
Balance sheet is used to explain many to explain the financial position of a business at a specific date. it also identifies ability or inability to assemble financial debt of business.it also shows whether as business can meet its current liabilities.it also shows whethera comoany has made profit or loss and able to increase business or not?
Task 7
Sales are the goods sold in s business. If the goods are sold for cash called cash sales. if goods are not sold with out receiving cash called credit sales. It is the total amount of sales made during a accounting period.
Gross profit: profit that business makes by buying and selling goods. The excess of income from sales over the cost of goods sold is called gross profit.
Gross profit = Sales - Cost of Sales.
Expenses which are paid for the sale and administration purposes, like wages, salaries, advertisements etc are called expenses.
Net profit: When a business earns profit after allowing for all the expenses earn in running the business is called net profit .Net profit = gross profit - expenses
Fixed assets are used to facilitate the business and for permanent use e.g building. Plants, land, equipments etc.
Current assets: These kinds of assets are already in cash or can be converted into cash after some time. Like stock, debtors and banks.
Current liabilities are payable without delay or in the a year e.g. different creditors, bills payables, expenses payables etc.
Working capital: the amount which remains for the business after the liabilities for purchasing the fixed assets has been acquitted. The excess of current assets over the current liabilities is also called working capital.
Working capital=current assets - current liabilities
Share capital financial values paid into the company by shareholders at the time(s) shares were issued.
P 8 Calculate Ratios, including formulae for R Ltd and T Ltd
R Ltd P Ltd
current ratio=current assets/current liabilities
current ratio = 180,000/120,000
answer 1.5
Acid test ratio=current assets-stock/current liabilities
= 180,000 - 110,000/120,000
Answer .583
Gross profit margin =gross profit/sales* 100
= 60000/250,000 * 100
= 24%
Net Profit margin = net profit/sales *100
= 25,000/250,000*100
Answer 10%
ROCE = Net Profit/capital employed*100
capital employed= net assets-current liabilities=(180,000+30,000)-90,000=120,000
ROCE=25,000/120,000*100=20.8%
Asset turnover=sales/net assets
= 250,000/120,000=2.08%
Stock turnover=cost of goods sold/average stock
First calculate Cost of goods sold is calculated by:
Cost of goods sold =Opening Stock +Purchases- Closing Stock
= 90,000+210,000-110,000=190,000
Average stock=(opening stock+ closing stock)/ 2
=(90,000+110,000)/2 =100,000
Stock turnover=cost of goods sold/average stock
190,000/100,000= 1.9Answer
Debtor collection period=debtors/credit sales of years *365
=
current ratio =current assets/current liabilities
= 80,000/32,000
= 2.5
Acid test ratio=current assets-stock/current liabilities
= 80000-50000/32000
= .938
Gross profit margin =gross profit/sales* 100
= 60000/160000*100
= 37.5%
Net Profit margin = net profit /sales*100
= 32000/160000*100
= 20%
ROCE = Net Profit/capital employed*100
capital employed= net assets-current liabilities=(80,000+16,000)-16,000=80,000
ROCE=32,000/80,000*100=40%
Asset turnover=sales/net assets
=160,000/96,000=1.6%
Stock turnover=cost of goods sold/average stock
First calculate Cost of goods sold is calculated by:
Cost of goods sold =Opening Stock +Purchases- Closing Stock
=30,000+120,000 -50,000=100,000
Average stock=(opening stock+ closing stock)/ 2
= (30,000+50,000)/2
=40,000
Stock turnover=cost of goods sold/average stock
= 100,000/40,000
= 2.5 Answer
Debtor collection period=debtors/credit sales of years *365
=
PART 9
What is Ratio analysis, description of it and purposes?
Ratio analysis is process used for financial analysis of business and by using ratios a company's financial statement's performance can be compare by last year. it also shows financial statement's strength and weaknesses of business. Significance of Ratio analysis is to evaluate financial performance of business like profitability, and analysis whether management has effectively uses all assets correctly to gain profit. As estimated financial statement can not be much useful until analyzed and interrupted by comparable tools so Ratio analysis is used. Ratio analysis provides useful data so it helps in managing future budget plans
Ratio Analysis types are stakeholders, profitability, solvency, liquidity, stock turnover asset turnover etc.
Stakeholders (made decisions to earn prospective of investment these are managers, share holders, potential shareholders, providers of finance, Govt authorities, employees, suppliers and customers.) managers collect information for increase of profit, share holders are group of investors who gain profit. Profitability analysis shows how much a business can generate profit from capital and sales. In Profitability different calculations are done like Gross profit (Sales-Cost of goods sold) gross profit margin ratio means every profit is made on £100 worth. if higher the result marigin is high.e.g 40% margin means every £1 company has made profit 40p.gross profit marigin=(gross profit/sales*100) but some times GP margin goes low because of low prices on sale, cash lose,unsold goods. net profit marign = net profit *100/sales.if profit margin will low it will show low safety margin and high risk that a decline in sales will wipe away profits and result in a total loss. if profit margin high it will show high safety.Return on Capital Employed (ROCE) = (Profit / capital employed * 100) ROCE is the rate of interest a business is making on the total capital employed in the business. Efficiency in use of capital from owner. Higher the ROCE higher marigin will be.
Liquidity
Solvency
Profitability
Share holders
Ratio analysis
