i) Purpose a) Trial Balance Is a list that represents all the expenses, assets (what the company owns), any type of incomes and liabilities. A trial balance only checks the sum of debits against the sum of credits so it isn’t the best way to guarantee no errors just by itself. b) Trading Account Is a part of a trading and profit and loss account which shows how the gross profit is generated through the firms trading activities. c) Profit and Loss Account Is to show whether the company made or lost money during the period being reported. The important thing to remember about an income statement is that it represents a period of time. This contrasts with the balance sheet, which represents a single moment in time. This checks if the company earned or lost money during the period reported. Always bear in mind that an income statement is that it represents a period of time. In contrast there’s the Balance sheet which represents a single moment of time. d) Balance Sheet The balance sheet summarizes an organization or individuals assets and liabilities at a specific point in time. Small businesses usually have simple balance sheets. Larger businesses tend to have more complex balance sheets and these are presented in the organizations annual report. Large businesses also may prepare balance sheets for different businesses sectors. A balance sheet is often presented alongside one for a different point in time (typically the previous year) for comparison.ii) Contents a) Trial Balance
Ensures a decent (but not perfect) business performance. If the total of the debit column does not equal the total value of the credit column then this would show that there is an error in the accounts (It can’t be spent more than the company’s profit). This error must be found before a profit and loss statement and balance sheet can be produced.b) Trading Account Where income and cost of goods sold should “be”. The trading account shows the gross profit made on cost of goods sold (COGS) allowing a comparison between the opening and closing stock. This helps the company profit to be analysed over years.c) Profit and Loss Account Is a list of different expenses that the company has paid such as discounts given to customers, expenses paid to deliver goods or services (transportation), depreciation of assets that the company owns (vehicles, machinery) or bad debts such as people who owe money to the business but are not in a position to pay. The income statement can be prepared in one of two methods. The Single Step income statement adds revenues and subtracts expenses. The Multi-Step income statement takes several steps to find the bottom line, starting with the gross profit. It then calculates expenses and then deducted from the gross profit. Adding to income from operations is the difference of other revenues and other expenses. When combined with income from operations, this yields income before taxes. The final step is to deduct expenses from gross profit, which finally produces the net income for the period measured.d) Balance Sheet The balance sheet represents the financial position of a business showing the assets and liabilities of the company and the money that is used to run the business. Of the four basic financial statements (Trial Balance, Trading Account, Profit and Loss Account, Balance Sheet) the balance sheet is the only statement which applies to a single point in time of a business calendar year.
A standard balance sheet has three parts: assets, liabilities and equity. The maincategories of assets are usually listed first and typically in order of liquidity. Assetsare followed by the liabilities. The difference between the assets and the liabilities isknown as equity or the net assets or the net worth or capital of the company.iii) Layout and calculation of significant valuesa) Trial Balance The columns are separated by two sides: the credit (Cr.) side and the debit (Dr) side. The credit side represents all incomes and liabilities and the debit sides all the expenses or assets. Values are calculated as DR=Expense + Assets and CR= Liabilities + Income. When the values in each column are calculated both values have to be the same.b) Trading Account A column representing the company sales, the discount received and sales returns. This is calculated as Sales – sales returns + discount received. In the same column we calculate also the COGS which are the opening stock – closing stock + purchases – purchases returns. The final account for the trading account will be Sales – COGS = Gross Profit.c) Profit and Loss Account It carries on the trading account represented by a column with all the company expenses. All the expenses values are added with each other. Then the final account for Profit and Loss account will be Gross Profit – Expenses = Net Profit.d) Balance Sheet
A column containing Fixed Assets, Current Assets, Current Liabilities, Long Term Liabilities and Capital Account. It’s calculated as Current Assets - Current Liabilities = Working Capital. Then Working Capital – Long term liabilities + Fixed Assets = Net Assets. The value of Net assets has to be equal to the value of Capital Account. The Capital Account is calculated with Capital + Profit = Capital Account.iv) iv) Net Assets and the Capital section on the Balance Sheet The balance sheet is given its name simply because it must balance. The amount the asset section and the amount of your liability section, plus the capital should be the same number. If it doesn’t balance, it is needed to determine where the calculation is incorrect. Net Assets is automatically calculated by subtracting Liabilities from Assets. Net Assets is equal to Capital Account. Total assets are always equal to liabilities and capital, so total assets less liabilities will always be the same as capital.Question C Gross Profit MarginGross Profit Margin = Gross Profit x Net Sales (sales income - sales 100 return)Gross Profit Margin= 279250 365900 = 76.31%
The calculation above tells us how many of the sales in terms of currency are profit:Gross margin is just the percentage of the selling price that is profit. In this case 76.31% ofthe price is profit. Net Profit MarginNet Profit Margin = Net Profit x Net Sales (sales income - sales 100 return)Net Profit Margin = 189700 365900 = 51.84%The net profit show the final profit of the company but the gross is related to the product onits own.To calculate it we need to find the net profit as a percentage of the revenue.
Current RatioCurrent Ratio= Current Assets Current Liabilities (creditors due within 1year)Current Ratio= 20850 7200 = 2.89The current Ratio compares the company’s current assets to its current liabilities.A higher current ratio (above 1) means that the company is more likely to meet its liabilitieswhich fall due in the next year. Acid RatioAcid Test Ratio = Current Assets less Inventories (Stock) Current Liabilities (creditors due within 1year) (20850-Acid Test Ratio = 12000) 7200
= 1.22 Acid Ratio measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities. The higher the ratio the greater the companys liquidity (ability in paying using cash or liquid assets). Return on Capital EmployedROCE= 189700 Capital EmployedROCE= 189700 251550+20850- 7200= 0.71Capital Employed = fixed assets + current assets -current liabilities Return on capital employed (ROCE) is the rate of return a business is making on the total capital employed in the business. The resulting ratio above represents the efficiency with which capital is being utilized to generate revenue.