Ratio analysis Accounting Help

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Ratio analysis Accounting Help

  1. 1. Who is interested in company’s Annual Accounts?Who? Why? What do they want to know?1) Shareholders2) ?3) ?Name 10 altogether!
  2. 2. Profitability Ratios
  3. 3. Cost of SalesSales Overheads Gross Profit Net Profit
  4. 4. Sales = £1000C.O.S. Sales = COS + O’Heads£400 + N. ProfitOverheads G. Profit = O’Heads£300 + N. ProfitNet Profit£300
  5. 5. Sales = £225m C.O.S. £153mGross Profit Gross Profit %£72m 72 x 100 = 32% 225
  6. 6. Sales = £225mC.O.S.£153mOverheads£59m Net Profit %Net Profit 13 x 100 = 5.8%£13m 225
  7. 7. Sales = £225mC.O.S.£153mOverheads Expenses/Sales %£59m 59 x 100 = 26.2% 225Net Profit£13m
  8. 8. NoteGP% = NP% + Expenses/Sales%32% = 26.2% + 5.8%Bigger Expenses means smaller NPGP% indicates how well COS being controlledNP% indicates how well Expenses being controlled
  9. 9. 3. Minimise! 4. Minimise!  Keen purchasing Efficiency  Efficient production (people)  Economy of Scale (procedures) Sales Cost of Sales Overheads Gross Profit Net Profit2. Maximise!(Good marketing) 1. Ultimate objective is to maximise!
  10. 10. 25% SELLING MARK PRICE UP £1-25 MARGIN 20%COST(to us)£1-00 Mark Up = “Gross Profit” as a % of Cost Margin = “Gross Profit” as a % of Selling Price
  11. 11. Answering Ratio Questions in exam1) Write formula2) Do calculation3) Is bigger or smaller better?(If you are comparing ratios…)4) Which ratio is better? Last year’s ratio or this year’s? Company A or company B?5) What may have caused ratio to be good or bad?6) How to improve a poor ratio?7) Can’t make final judgment if industry norms unknown

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