Final Accounts

HOW DO BUSINESSES KNOW THEY ARE MAKING A PROFIT? Profit is the difference between the money received from the sale of a good and service and the cost of providing the good or service. Very simply: PROFIT = SELLING PRICE – COST PRICE

Profit is the difference between the money received from the sale of a good and service and the cost of providing the good or service.

Very simply:

PROFIT = SELLING PRICE – COST PRICE

The Final Accounts Final Accounts are the summary financial statements produced at the end of each year’s trading. They include: The Trading Account Profit & Loss Account Usually prepared together and The Balance Sheet

Final Accounts are the summary financial statements produced at the end of each year’s trading. They include:

The Trading Account

Profit & Loss Account

and

The Balance Sheet

The TRADING ACCOUNT shows the Gross Profit – profit made from buying and selling goods. It is not the final profit. The PROFIT & LOSS ACCOUNT shows the Net Profit – the final profit. It is the Gross Profit add income from any other sources minus any expenses. THE FINAL ACCOUNTS

THE FINAL ACCOUNTS If we are dealing with a Sole Trader, then the profit is all theirs. However, the profit is divided between all of the owners in a partnership or company. This is done in the APPROPRIATION ACCOUNT. The BALANCE SHEET is like a snapshot of a business, showing what the business has and what the business owes. It shows the overall value of a business.

How does a business know if it is doing well? The profit figure can be a good guide as to whether a business is performing well. Certainly, a profit is better than a loss.

Which business is doing best? Take these 2 businesses and look at their profits: Profits of more than £2 billion vs Profits of £15,000 George’s Groceries

Financial Ratios Tesco is a large multinational company whereas George’s Groceries is a small local business. It is therefore more meaningful to use ratios to analyse the performance of a business rather than comparing figures.

Using Ratios With ratios, businesses can compare their own performance over a period of time and they can also compare themselves to other similar businesses .

There are 3 areas to be analysed: Profitability Liquidity Efficiency

There are 3 areas to be analysed:

Profitability

Liquidity

Efficiency

PROFITABILITY RATIOS ~ compare profits with sales, expenses and capital Gross Profit as a Percentage of Net Sales Net Profit as a Percentage of Net Sales Return on Capital Employed

Gross Profit as a Percentage of Net Sales

Net Profit as a Percentage of Net Sales

Return on Capital Employed

LIQUIDITY RATIOS ~ look at a business’s ability to pay its everyday expenses Working Capital Ratio (sometimes referred to as The Current Ratio) Acid Test Ratio

Working Capital Ratio (sometimes referred to as The Current Ratio)

Acid Test Ratio

EFFICIENCY RATIOS ~ look at how efficient the business is operating Rate of Stock Turnover

Rate of Stock Turnover

How do we calculate the ratios Gross Profit Percentage Gross Profit Net Sales X 100 = ? %

How do we calculate the ratios Net Profit Percentage Net Profit Net Sales X 100 = ? %

How do we calculate the ratios Return on Capital Employed Net Profit Opening Capital X 100 = ? %

How do we calculate the ratios Working Capital Ratio Current Assets Current Liabilities = ?:1

How do we calculate the ratios Acid Test Ratio Current Assets - Stock Current Liabilities = ?:1

How do we calculate the ratios Rate of Stock Turnover Step 1: Calculate the Average Stock Opening Stock + Closing Stock 2 Step 2: Calculate the Rate of Stock Turnover Cost of Goods Sold Average Stock = ? times = Average Stock