Lesson plan 17

 Module: Finance

 Topic: Financial Ratio Analysis

 Year: 11

 Period: one hour

 Ability: mixed



 Aim:...
Assessing a business
                           profitability




                                            Profit & los...
How to use ratios in the exam




                                   Comparing
                                     ratios...
For example, at the end of 2002, Roberts Ltd’s gross profit was £1000 and its sales
revenue was £10,000, therefore its % g...
Scenario 1

James Woods sells quality dinning table furniture. At the end of 2002 the gross profit
James Wood business was...
Scenario 2
If James Woods’ other expenses in 2002 were as follows:

Wages £2000
Heating and lighting £1000
Transportation ...
Phase 4                                               Home work/conclusion
and end                                      5 ...
Capital/ assets employed

Cost of Stock

Current assets

Current liabilities

Working capital

Dividends

Retained profit
...
Answer Sheet

Information figure/ratio    I belong to …………….
Sales revenue            Profit and loss account (trading
   ...
Activity


Scenario 1




James Woods sells quality dinning table furniture. At the end
of 2002 the gross profit for James...
10. Come up with suggestions to improve % gross profit or gross profit margin.
        For few minutes students are going ...
Scenario 2




If James Woods’ other expenses in 2002 were as follows:

Wages £2000
Heating and lighting £1000
Transportat...
Strategies to improve % net   Reasons
               profit




H. Seliet                                  13
Year 11 less...
H. Seliet             14
Year 11 lesson plan
21st Nov 2003
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  1. 1. Lesson plan 17 Module: Finance Topic: Financial Ratio Analysis Year: 11 Period: one hour Ability: mixed Aim: help students to understand how profitability ratio analysis helps to assess business profitability. Objectives of the lesson: to understand the meaning of % net profit; to understand the meaning of % of gross profit; to learn how to calculate ratios; to understand how businesses can improve their profitability; to analyse and investigate business actions used to improve their profitability; to appreciate the interdependence of different functional areas in a business. Phase 1 Introduction 5-7 minutes 1. State clearly the objectives of the lesson. 2. Link the new topic to students’ prior learning about how businesses are structured and its functional areas. Phase 2 Development 45-50 minutes Stage 1 how to use ratios 5 minutes The profitability ratio diagram H. Seliet 1 Year 11 lesson plan 21st Nov 2003
  2. 2. Assessing a business profitability Profit & loss Trading account account Gross profit Net profit % gross % net profit profit H. Seliet 2 Year 11 lesson plan 21st Nov 2003
  3. 3. How to use ratios in the exam Comparing ratios Interpreting ratios Calculating ratios Obtaining data –which account? Stage 2 obtaining the data – which account? Activity “Where do I belong?” 7-10 minutes First, individually students are going to carry out this activity, and then have it discussed with by whole class. Stage 3 calculations of ratios % Gross profit and % net profit 1. % Gross profit Remember Sales Revenue – Cost of Sales = Gross profit/loss 1. Look closely at the following formula Gross profit -------------------------- X100 =Gross profit margin Sales revenue/turnover H. Seliet 3 Year 11 lesson plan 21st Nov 2003
  4. 4. For example, at the end of 2002, Roberts Ltd’s gross profit was £1000 and its sales revenue was £10,000, therefore its % gross profit is 10%. The higher this ratio is the better it is. 2. % Net profit Remember Gross profit – other expenses + other sources of income = net profit Look closely at the following formula Net profit -------------------------- X100 = Net profit margin Sales revenue/turnover For example, if Roberts Ltd net profit at the end of 2002 was £500 and its sales revenue was £10,000, then its % net profit is 5%. Stage 4 Interpretations of ratios In the above example Robert Ltd’s % gross profit and % net profit were 10% and 5%, which indicate that the business profitability is poor/low. The higher the ratios are the better the business profitability position. Stage 5 comparisons of ratios Look at Roberts Ltd’s % gross profit and % net profit over a period of time. Year 1998 1999 2000 2001 2002 % gross 45% 35% 25% 15% 10% profit % net profit 30% 20% 15% 10% 5% Comparison means working out a trend over a period of time. Stage 6 Suggestions to improve gross profit margin (reflection) H. Seliet 4 Year 11 lesson plan 21st Nov 2003
  5. 5. Scenario 1 James Woods sells quality dinning table furniture. At the end of 2002 the gross profit James Wood business was £10,000, and the total sales revenue was £100,000. 3. Work out James Woods’ Gross Profit Margin at the end of the year. 4. Suggest how James could improve his percentage gross profit. 5. Choose the right strategies from the ones below and explain your reasons in the table below.  Improve James Woods’ Advertising Strategy  Use less heating  Launch a new marketing campaign  Move to a cheaper location  Reduce cost of sales  Improve the quality of furniture.  Buy cheaper raw materials  Employ less workforce  Use better below the line promotion  Use better technology  Reduce wastages in raw materials  Increase the selling price 6. Students are going to be encouraged to come up with suggestions to improve % gross profit or gross profit margin. For a few minutes students are going to work individually to suggest ways to improve James Woods’ gross profit margin. This will be followed by a whole group discussion. Strategies to improve % gross Reasons profit H. Seliet 5 Year 11 lesson plan 21st Nov 2003
  6. 6. Scenario 2 If James Woods’ other expenses in 2002 were as follows: Wages £2000 Heating and lighting £1000 Transportation £500 Advertising £500 Depreciation £300 Bad debts £700 Insurance £500 Rent £ 2500 1. Work out James Woods’ Net Profit Margin at the end of the year. 2. Compare James’s % net profit with his percentage gross profit. 3. Suggest how James could improve his percentage net profit. 4. Choose the right strategies from the ones above and explain your reasons in the table below. Strategies to improve % net Reasons profit H. Seliet 6 Year 11 lesson plan 21st Nov 2003
  7. 7. Phase 4 Home work/conclusion and end 5 minutes Where Do I belong? Fill in the empty gaps in the table below. Information figure/ratio I belong to ……………. Sales revenue Gross profit Net profit Operating profit Net profit margin Gross profit margin H. Seliet 7 Year 11 lesson plan 21st Nov 2003
  8. 8. Capital/ assets employed Cost of Stock Current assets Current liabilities Working capital Dividends Retained profit Depreciation Wages Bad debts Tax H. Seliet 8 Year 11 lesson plan 21st Nov 2003
  9. 9. Answer Sheet Information figure/ratio I belong to ……………. Sales revenue Profit and loss account (trading account) Gross profit Profit and loss account (trading account) Net profit Profit and loss account Operating profit Profit and loss account Net profit margin Profit and loss account Gross profit margin Profit and loss account (trading account) Capital/ assets employed Balance sheet (long term liabilities) Stock Profit and loss account (trading account) Balance sheet. Current assets Balance sheet Current liabilities Balance sheet Working capital Balance sheet Dividends Profit and loss Balance sheet (liabilities) Retained profit Profit and loss and balance sheet Depreciation Profit and loss account Wages Profit and loss account Bad debts Profit and loss account Tax Profit and loss account H. Seliet 9 Year 11 lesson plan 21st Nov 2003
  10. 10. Activity Scenario 1 James Woods sells quality dinning table furniture. At the end of 2002 the gross profit for James Woods’ business was £10,000, and the total sales revenue was £100,000. 7. Work out James Woods’ Gross Profit Margin at the end of the year. 8. Suggest how James could improve his percentage gross profit. 9. Choose the right strategies from the ones below and explain your reasons in the table below.  Improve James Woods’ Advertising Strategy  Use less heating  Launch a new marketing campaign  Move to a cheaper location  Reduce cost of sales  Improve the quality of furniture  Buy cheaper raw materials  Employ less workforce  Use better below the line promotion  Use better technology  Reduce wastages in raw materials  Increase the selling price H. Seliet 10 Year 11 lesson plan 21st Nov 2003
  11. 11. 10. Come up with suggestions to improve % gross profit or gross profit margin. For few minutes students are going to work individually to suggest ways to improve James Wood gross profit margin. This will be followed by a whole group discussion. Strategies to improve % gross Reasons profit H. Seliet 11 Year 11 lesson plan 21st Nov 2003
  12. 12. Scenario 2 If James Woods’ other expenses in 2002 were as follows: Wages £2000 Heating and lighting £1000 Transportation £500 Advertising £500 Depreciation £300 Bad debts £700 Insurance £500 Rent £ 2500 5. Work out James Woods’ Net Profit Margin at the end of the year. 6. Compare James % net profit with his percentage gross profit. 7. Suggest how James could improve his percentage net profit. 8. Choose the right strategies from the ones above and explain your reasons in the attached table. H. Seliet 12 Year 11 lesson plan 21st Nov 2003
  13. 13. Strategies to improve % net Reasons profit H. Seliet 13 Year 11 lesson plan 21st Nov 2003
  14. 14. H. Seliet 14 Year 11 lesson plan 21st Nov 2003

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