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Taha, Marumbo, Lisa
Accounting
Part AComment upon the
financial performance and position of each business and compare the two. In your appraisal and evaluation you are expected to use relevant ratios.
Identify who (other than the owner) would have an interest in the financial performance of the businesses and explain why they would be interested.
Topic
Part B
Taha• Introducti
on• Part B
Lisa• Profitability
ratios
Marumbo• Liquidity
ratios
Taha • Conclusio
n
Outline
Assessing business performance trends from
year to year. For Example: Net Profit Margin,
Gross Profit Margin.
Comparing business with rival businesses.
Helps firm obtain loan.
Uses of Ratios
Identify who would have an interest in the financial performance of the businesses and explain why they would be interested.Taha
Suppliers.
Manager.
Bank Manager.
Shareholders.
Investors.
Who would have an interest in the financial performance of the business. (Stakeholders)
Profitability ratiosLisa
Gross profit margin is a measure of the
profitability of the business after all direct
costs associated.
The higher, the better.
Formula:
Gross profit margin= Gross profit / Sales ×
100%
Gross profit margin
Hove Outdoor Pursuits
156738 ×100%397389=39.42%
283,689 x100%669,430=42.5%
Gross profit margin
Brighton Sport
Hove Outdoor Pursuits
Brighton Sport
37 38 39 40 41 42 43
Gross profit margin
A measure of the proportion of sales represented by over heads of business.
Formula:Overheads= Overheads / Sales × 100%
HOP-- rent
Overhead/turnover
68,384 × 100%397389= 17.2 %
66,084 × 100%669,430= 9.9 %
Overhead/turnover
Hove Outdoor Pursuits Brighton Sport
Hove Outdoor Pursuits
Brighton Sport
0 2 4 6 8 10 12 14 16 18
Overhead/turnover
The operating profit margin is a type of profitability ratio
known as a margin ratio.
The information with which to calculate the operating
profit margin comes from a company's income statement
Keeping control over fixed costs is important – could be
easy to overlook for example the amount of waste -
paper, stationery, lighting, heating, water, etc.
Formula:
Operating Profit Margin = Net profit / Sales Revenue
×100%
Operating profit margin
Hove Outdoor Pursuits
885,13 × 100%397,389= 22.3 %
217,972 × 100%669,430= 32.6 %
Operating profit margin
Brighton Sport
Hove Outdoor Pursuits
Brighton Sport
0 5 10 15 20 25 30 35
Operating profit margin
A measure of how effectively the business uses its net assets to generate profit.
The higher, the better.
Formula: Return on capital employed= Net Profit (before finance costs)/ Capital × 100%
Brighton sport- mortgage
Return on capital employed
Hove Outdoor Pursuits
885,13 × 100%99,703= 88.8%
217,972 × 100%246,930= 88.3%
Return on capital employed
Brighton Sport
Hove Outdoor Pursuits
Brighton Sport
88 88.1 88.2 88.3 88.4 88.5 88.6 88.7 88.8
Return on capital employed
Liquidity RatiosMarumbo
Current ratio =Current assets Current liabilities
A measure of a business’s ability to meet its
short term obligations/payments as they
fall due
Current ratio
Hove Outdoor Pursuits
977,65 × 100%280,06= 3.49%
143,645 × 100%34,630=4.15%
Current ratio
Brighton Sports
Hove Outdoor Pursuits
Brighton Sports
3 3.2 3.4 3.6 3.8 4 4.2
Current ratio
Quick ratio (Acid test)= Current assets less Inventory Current liabilities
A more stringent measure of a business’s
ability to meet its short term
obligations/payments as they fall due
Quick ratio (Acid test)
Hove Outdoor Pursuits
384,15 × 100%280,06=1.37
670,75 × 100%346,30= 1.94
Quick ratio
Brighton Sports
Hove Outdoor Pursuits
Brighton Sports
0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2
Quick ratio
Inventory (stock) turnover = Average stock x 365 Cost of salesOR Cost of sales Average stock
A measure of how effectively a business manages its stock
Average stock = Opening stock + Closing stock 2
Inventory (stock) turnover
Hove Outdoor Pursuits
554,65 x365 239,967 =84.4
741,12 x365 383,839 =70.5
Inventory turnover
Brighton Sports
Hove Outdoor Pursuits
Brighton Sports
60 65 70 75 80 85
Inventory turnover
Debtor collection period =
Accounts receivable x 365
Credit sales
A measure of how effective a business is in
collecting its debts
Debtor collection period
Hove Outdoor Pursuits
36115 x365397389=33.2
43680 x365669430=23.8
Debtor collection period
Brighton Sports
Hove Outdoor Pursuits
Brighton Sports
0 5 10 15 20 25 30 35
Debtor collection period
Creditor payment period= Accounts payable x 365 Credit purchases
A measure of how quickly a business pays
its suppliers
Creditor payment period
Hove Outdoor Pursuits
18786 x365248650= 27.6
32,654 x365386348= 30.8
Creditor payment period
Brighton Sports
Hove Outdoor Pursuits
Brighton Sports
26 27 28 29 30 31
Creditor payment period
ConclusionTaha
Glautier, M. and Morris, D. (2011)Accounting theory and practice. Sussex Library. available from:http://prism.talis.com/sussex-ac/items/1047850?query=accounting&resultsUri=items%3Fquery%3Daccounting
Wood, F. and Sangster, A. (2008)Business accounting. Essex: Pearson Education Limited. Eleven Edition
Reference
Thank you