Download - businessaccoutning
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Shows a summary of cash inflows and outflows
Do you remember this?
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Year 11
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Users of Users of Financial Financial
Info.Info.
CompetitorsCompetitors – all – all limited companies limited companies must publish their must publish their
accountsaccounts
Inland RevenueInland Revenue
WorkersWorkers
InvestorsInvestors
Lenders of Lenders of money money e.g. e.g.
banksbanks
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Shows the flow of sales and costs over a period of time, usually a year, and the level of profits or losses made as a result of trading.
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The trading account shows the difference between the cost of goods sold and the sales revenue.
The difference is known as gross profit.
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The profit and loss account begins with the gross profit from the trading account.
Any other income is added to the gross profit. Then all other expenses (overheads) are subtracted, to give net Profit.
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SalesLess cost of sales= Gross profitLess expenses= Net profit
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Pete runs a takeaway pizza parlour in Mexborough. He has been trading for 12 months and is drawing up his profit and loss account.
How will he work out how much money he has taken over the 12 months?
Sales = price x number sold
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Pete’s takings are as follows;
6,000 x pizzas at £7 each.
10,000 x chips at £1.50 each
8,000 x garlic bread at £4 each
What is his sales figure?
42,000
15,000
32,000
£89,000
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Next we need to work out how much it has cost him to buy his raw materials to make these goods.
Cost of goods sold = opening stock + purchases – closing stock
Has Pete any opening stock?
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£6,000
£2,800
£1,200
£ 600
TOTAL = £10,600
Pete’s purchases are as follows;
Prepared dough 2,000 packets at £3 each
Frozen chips 280 boxes at £10 each
Toppings and tomato base £1200
Sundries £600
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What is Pete’s gross profit?
Gross profit = sales – COGS
89,000 – 10,600 = £78,400.
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What else will we have to take off Pete’s profit figure?
Overheads / expenses – the general costs of running the business.
For example.....
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Pete’s expenses are as follows;
Wages £10,000
Rent £12,000
Advertising £ 2,500
Insurance £ 1,000
Vehicle £ 5,000
Telephone £ 3,000
Utilities £ 5,000
TOTAL EXPENSES ?
£38,500
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So, what is Pete’s net profit?
Net profit = GP – expenses
NP = 78,400 – 38,500 = £39,900
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Cost of goods sold is also stated as cost of sale
Sales
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Profit and Loss Account for Pete's Pizza Parlour 2010
$ $Sales 89,000Cost of Goods Sold 10,600Gross Profit 78,400Less Expenses Wages 10,000 Rent 12,000 Advertising 2,500 Insurance 1,000 Vehicles 5,000 Telephone 3,000 Utilities 5,000 38,500Net Profit 39,900
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Mr Reading's Burger Bar £OOO £OOO
Sales (Turnover) 300 Cost of Sales Opening Stock 40 Purchases 120 160 Less Closing Stock 30 130 Gross Profit 170 Less expenses Wages 50 Insurance 2 Rates 11 Rent 30 Telephone 11 Advertising 4 Depreciation 5 IT 3 Light and heat 2 118 Net Profit 52
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Mr Reading's Burger Bar Plc 2007 2008 £OOO £OOO £OOO £OOO Sales (Turnover) 300 350
Cost of Sales Opening Stock 40 30 Purchases 120 145 160 175
Less Closing Stock 30 35
130 140Gross Profit 170 210
mbnjLess expenses
118 135Net Profit 52 75
Corporation Tax 12 17Profit After Tax 40 58
Divends paid 15 20Retained profit carried forward 25 28
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The Balance Sheet shows the value of a business’s assets and liabilities at a particular time.
This lets managers/owners know how much their business is worth.
Before we can complete a balance sheet you must know some key terms.
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Assets:- Are items of value which is owned by the business.
Assets are broken down into two categories.
Fixed Assets:- Are likely to be kept by the business for more than one year. EG. Premises, vehicles, equipment.
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Current Assets:- Are assets that are held for a short period of time.
E.G. Cash, Stock, Debtors (people who owe you money)
Liabilities:- Are items owed by the business.
Again liabilities are broken down into to kinds.
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Long-Term Liabilities:- Anything that business has to pay back after one year. E.G Loans
Current Liabilities:- Are amounts owed by the business which have to be paid within one year. E.G Overdraft, Creditors (people you owe money to).
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If the value of assets are greater than liabilities, then the business is said to be wealthy. Business’s would like to see this increase every year.
To calculate the Owner’s Wealth (Shareholders fund) we use this equation.
Total Assets-Total liabilities=Owner’s Wealth
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Balance Sheet - Mr Reading's Burger Bar Ltd - 31st March 2005 Fixed Assets
Property 80 Machinery 40 Vehicles 30
150 Current Assets Stock 5 Debtors 12 Cash 3 20 Current Liabilities Creditors 14 Unpaid Tax 1 15 Net Current Assets (Working Capital) 5 Net Assets 155 Financed by: Shareholder's Funds Share Capital 80 Retained Profit 50 Long Term Liabilities Bank Loan 20 Debentures 5 Capital Employed 155
These two figures must balance
What it’s doing with its money
Where its got it money from
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Capital Capital EmployedEmployed
Net Net AssetsAssets
They must always They must always balancebalance
=
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Balance Sheet - Mr Reading's Burger Bar Ltd - 31st March 2005
Fixed Assets Property 80 Machinery 40 Vehicles 30
150
The business has The business has bought some fixed bought some fixed
assetsassets
Fixed Assets will last for Fixed Assets will last for MORE THAN ONE YEAR MORE THAN ONE YEAR – –
they will have they will have depreciateddepreciated but we don’t need to worry but we don’t need to worry
about this here…..about this here…..
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Current Assets
Stock 5
Debtors 12
Cash 3
20
Current Assets last for a Current Assets last for a FEW MONTHSFEW MONTHS
Liquidity Liquidity of assets of assets increasesincreases
Raw Raw materials materials or finished or finished products it products it hasn’t soldhasn’t sold
People People who owe who owe
the the business business e.g. trade e.g. trade
creditcredit
The most The most liquid – liquid –
money the money the firm hasn’t firm hasn’t
spentspent
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Current Liabilities
Creditors 14 Unpaid Tax 1 15
They They have to have to be be paid paid within within one year one year of the of the date of date of the the Balance Balance SheetSheetThe opposite The opposite
to debtors – to debtors – the business the business owesowes them. them. This is This is money owed money owed to suppliersto suppliers
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Fixed Assets Property 80 Machinery 40 Vehicles 30
150Current Assets
Stock 5 Debtors 12 Cash 3 20
Current Liabilities Creditors 14 Unpaid Tax 1 15 Net Current Assets (Working Cpaital) 5Net Assets 155
Net Current Net Current Assets Assets = = Current Current Assets – Assets – Current Current LiabilitiesLiabilities
-+ It’s also It’s also
called called working working capital capital – – does the does the business business have have enough enough capital to capital to pay off its pay off its short-term short-term debts?debts?
Net Current Assets + Fixed Assets = Net Current Assets + Fixed Assets = Net Net AssetsAssets. This is the net worth of the . This is the net worth of the business – everything its spent its cash on!business – everything its spent its cash on!
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Financed by: Shareholder's
Funds Share Capital 80 Retained Profit 50
Long Term Liabilities
Bank Loan 20
Debentures 5 Capital Employed 155
Capital Employed is what you Capital Employed is what you get when you add get when you add shareholders funds and long shareholders funds and long term liabilities. term liabilities. It must equal It must equal Net Assets!Net Assets!
Money put Money put into into
business business from share from share
issueissueAll the profit All the profit retained for retained for
future future investmentinvestment
Money that Money that is borrowed is borrowed from other from other people – people –
debts that debts that take over a take over a year to payyear to pay
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For stakeholders it is very important to analyse the final published accounts of companies.
They could tell us of the performance of the company and the financial strength of the company.
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There are many ratios that can be calculated from a set of accounts. These ratios are used to compare performance and liquidity.
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Gross Profit Margin %=Gross Profit X100
Sales Turnover
This shows how much gross profit the company is making for every pound. An increase will mean that prices have increased or the cost of goods have been reduced.
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N.P Margin= Net Profit X100 Sales Turnover
This will be lower than the G.P margin because other expenses would have been deducted. The higher the result the better.
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ROCE(%)= Net Profit X100 Capital Employed
The higher the figure the more efficient the business is running. It means the business is making higher profits for each dollar invested in the business.
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Liquidity Ratios calculate how quickly the business can pay back its short term debts.
Current Ratio= Current Assets Current Liabilities
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A safe current ratio should be between 1.5-2. Anything less than one means that the business will struggle to pay off its debt.
This ratio is good but it forgets that not all current assets such as stock can be sold straight away.
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Acid Test Ratio= Current Assets-Stock Current Liabilities
Anything below 1 is a worry for the business as that means it currently can not pay off it’s debts. If it is too high it suggests the business has too much money not being used correctly.
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Ratios are only good when you are comparing them to previous year or similar businesses together.
It is important to remember that ratios:-Are based on past results-May be out of date (businesses change)-Different companies may value assets
differently
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In pairs can you go through the ratio case study of Frank Frankfurters
Then
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You need to work through this in your own time