A document outlining the purpose of accounts and an analysis of them.

1. Unit 5 P4/P5/M2/D2
Lewis Appleton 1 Mr McColgan
Purpose of accounts (P4)
There are many different accounts that a business needs to use for many reasons, the accounts can help
improve predictions of future business operations but they are also needed for legal reasons in some cases.
Accounts are important as they are needed to see how the business is doing, if they were not aware of their
profit/loss then they may not know if they are slowly being pulled in to a debt spiral. There are two main
accounts used by businesses;
Trading,Profitand Loss
The purpose of the profit and loss account is to show how well the business is doing and simply whether it is
making a profit or losing money, it shows where the income and expenditure is and how much it is. The account
is usually carried out over a year and the advantage of it is that it can be compared to previous years to see
progress. The disadvantage for Ania is that the business is only one year old and therefore it cannot actually be
compared with previous years. However because each month is recorded it is still visible how much progress
has been made in different lengths of time; quarterly, monthly, half-yearly. It may be difficult however to take
the time to note down every single thing purchased with the business money and received but it is worth the
time because of the insight provided. As well as this the account is also needed for legal reasons if the company
is a private limited company which Ania is thinking of becoming.
Financial Data on Polish Fine Foods for the year ending
31/12/11
£ £
Capital £ 20,000
Sales £ 145,400
Opening Stock £ 5,250
Closing Stock £ 8,500
Purchases £ 102,750
Rent and Rates £ 10,800
Wages for part time staff £ 9,000
Advertising £ 4,200
Insurance £ 980
Depreciation £ 1,500
Loan Interest £ 1,720
Electricity £ 1,200
Telephone £ 600
Motoring £ 1,400
Drawings £ 10,000
Equipment £ 15,000
Van £ 8,000
Debtors £ 18,000
Bank Account £ 2,000
Creditor £ 17,000
Loan from parents £ 10,000

2. Unit 5 P4/P5/M2/D2
Lewis Appleton 2 Mr McColgan
BalanceSheet
The purpose of a balance sheet is to show the businesses current net worth, this is usually made at the end of
the financial year which ends in April. The balance sheet is used to show the value of the business and it
contains the assets and liabilities. The sheet is a summary of Fixed Assets, Current Assets, and Current
Liabilities. The Fixed Assets are the things owned by the business which are kept within the business for a long
time; these include things such as equipment, fittings and vehicles. Current Assets are those that are kept for a
short time such as stock. The current liabilities are what the business owes such as short term loans and
overdrafts as well as creditors. The result of a balance sheet should always mean that the net assets are the
same as the capital. For the balance sheet to be made the net profit has to be found from the profit and loss
account first.
Accounts Explained
Gross profit and Net profit are important in accounting, the gross profit is the money left over from sales but
before expenses, net profit is after any other incomes and expenses. It is also important to know the costs of
goods section and the overheads section of accounts and what they mean.
Gross profit
The gross profit is calculated using the sales and the cost of goods sold. The sales are calculated from how
much they have made from selling their products and services to the customers. The sales that they have made
are recorded as a value then the cost of the goods sold is taken away from this to see how much profit they
have made with the products being originally bought to the price sold for. This is called the gross profit. Gross
profit in simple terms is the surplus that is calculated from the sales costs being deducted from the sales
amount.
Gross profit = sales turnover – cost of goods sold
Net profit
In a profit and loss account the expenses are subtracted from the gross profit which then adds up to make the
net profit before taxation. The expenses is everything the business has had to pay out for over the years, this
includes rent, wages, bills, advertising space, distribution of their business awareness. The total expenses are
taken away from the gross profit, which is the cost of the sales taken away from the sales amount. This then
adds up to the net profit before tax, this is the overall profit they have made before the taxes have been
applied.
Net profit = gross profit – expenses + other revenue income

3. Unit 5 P4/P5/M2/D2
Lewis Appleton 3 Mr McColgan
Overhead section
The cost of goodssold involves the stock that the business first starts with, purchases that are made
throughout the year and the valuation of the closing stock. The opening stock is what has already been
purchased and sold, the purchases are the same. Therefore the opening stock is added to the purchases as it is
what they no longer have. The closing stock is what they currently have so that is why it is taken away from the
other two. The cost of goods sold does not include any expenses or the sales, just the stock and the purchases.
Once the cost of goods sold has been calculated it is taken away from the sales to find the gross profit. The way
this works is that the cost of goods sold is the stock that has been purchased – the stock leftover and when
taken away from the sales the only components of the sum are what has been bought and what has been sold.
Cost of goods sold = opening stock + purchases – closing stock
Trading Profit and Loss Account
£ £
Sales £ 145,400
Opening Stock £ 5,250
Purchases £ 102,750
Closing Stock £ 8,500
Costs of goodssold £ 99,500
Gross Profit £ 45,900
Expenses £ 31,400
Rent and Rates £ 10,800
Wages for part time staff £ 9,000
Advertising £ 4,200
Insurance £ 980
Depreciation £ 1,500
Loan Interest £ 1,720
Electricity £ 1,200
Telephone £ 600
Motoring £ 1,400
Net Profit £ 14,500

4. Unit 5 P4/P5/M2/D2
Lewis Appleton 4 Mr McColgan
Balance Sheet
£ £
Fixed Assets
Equipment £ 15,000
Vans £ 8,000
Current Assets
Stock £ 8,500
Debtors £ 18,000
Bank Account £ 2,000
Current Liabilities
Trade Credits £ 17,000
Working Capital £ 11,500
Net Assets £ 34,500
Financed by:
Capital £ 20,000
Net Profit £ 14,500
Total £ 34,500
Drawings £ 10,000
£ 24,500
Long Term Liabilities
Loan from parents £ 10,000
Capital £ 34,500

5. Unit 5 P4/P5/M2/D2
Lewis Appleton 5 Mr McColgan
P5
Ratio Competitor Polish Fine Foods Comments
Gross Profit
Percentage
25.4% 45,900/145,400
= 0.31568…
X 100 = 31.568
= 31.57%
For Ania it is good that the percentage is higher as it
means that a higher percentage is leftover from sales
and therefore more money.
Net Profit
Percentage
14.2% 14,500/145,400
= 0.09972…
X 100 = 9.972
= 9.97%
Ania has a lower percentage than the competitor which
is a disadvantage, this means that less money from the
sales ends up becoming net profit. This can be
compared monthly or yearly so that Ania can try to
improve it.
ROCE 35% 14,500/34,500
= 0.42028
X 100 = 42.028
= 42.03%
The good thing for Ania is that she has a higher ROCE
meaning more profits from the investments, in this
case the investments being from Ania and the amount
received.
Current Ratio 2.1:1 28,500/17,000
=1.67647
= 1.68:1
The current ratio is good in a way to be lower than the
competitor. If it was too high then it may mean that the
assets are not being used efficiently. Ania should try to
get a ratio of 2:1 as this indicates a strong financial
position.
Acid Test
Ratio
1.3:1 28,500 – 5,250
= 23,250
23,250/17,000
= 1.36764
= 1.37:1
As the ratio is higher than the competitor this means
that Ania would have less trouble repaying all the
current liabilities if they were to come immediate than
the competitor. Ania should attempt to higher this as
she is close to 1:1 which is only considered safe. As
well as with the current ratio if it is too high the assets
are not being used efficiently.
Debtors
Payment
Period
32 days 18,000/145,400
= 0.12379…
X 365 = 45.185
= 45 days
Ania is at a disadvantage here as it takes longer for
her debtors to pay, this means the money is less
available; she should try to lower this as she will have
the money sooner. A good period to try and achieve
should be 30 days. The competitor is close to this.
Creditors
Payment
Period
30 days 17,000/145,400
= 0.11691…
X 365 = 42.675
= 43 days
This is both good and bad for Ania, first of all it means
she can have the money for longer before paying but if
she was to have a smaller period her creditors may
decide to give her discounts. So although she would
repay sooner she could repay less which results in an
advantage. She should aim to lower this to 30 days or
she could leave it as it is.
Stock
Turnover
ITR =
Inventory
turnover ratio
37 days 5,250 + 8,500 = 13,750
13,750/2 = 6,875
99,500/6,875
=14.4727
=14.47 (ITR)
6,875/99,500
= 0.06909
X 365 = 25.219
= 25.22 days
Ania has a better stock turnover than her competitor
meaning her products sell faster; this is good because
it means she is running efficiently but the competitor
could be selling something different. For example the
competitor may sell food that lasts longer so it is
unaffected.

6. Unit 5 P4/P5/M2/D2
Lewis Appleton 6 Mr McColgan
Financial performance analysis (M2)
- Polish Fine Foods
So far Ania has been running a very effective business; the fact that the business established only a year ago
means that she has done well. The accounts show that the business has a net profit of 14500 which is fairly
high and there were other expenses made before that was calculated such as the 8000 van, the 15000
equipment, and the 10000 drawings. The van and equipment are also things that can be resold even after
depreciation. Currently if she was to become a private limited company she may have some difficulty and much
dedication will have to be made. There are positives about becoming a private limited company such as having
limited liability; this means that if the business was to become insolvent all shareholders including Ania they are
not responsible for debt unless they have unpaid shares. So the company becomes insolvent and not the owner
or shareholders. Another good thing is that many suppliers will be more likely to trade with private limited
companies and therefore Ania may be able to receive cheaper, larger, or faster deals. There are also other
advantages of becoming a private limited company such as having shareholders, this means that money can be
invested into the business and this would allow Ania to make larger bulk purchases which means lower costs of
supplies.
There are also many difficulties with becoming a private limited company, the company must first of all be
registered with Companies House, relevant documents and articles must be sent. Annual accounts have to be
submitted which means Ania will either have to find someone to carry out her accounts or carry them out
firsthand. Ania will need to need to decide whether it is worth becoming a private limited company at this
point. There are certain benefits such as corporation tax instead of national insurance. Ania can use accounts to
her advantage by comparing them with her competitors, which are companies within the same industry. Ania
has a larger Gross Profit Percentage than her competitors which is something people could be attracted to but
this isn’t very reliable as there is only a year worth of figures. Ania should try to maintain and if possible better
this percentage.
Ania is at a disadvantage to her competitors because she has a lower net profit percentage, this may mean
that her competitors are getting better deals from their suppliers or reduce the amount that they spend on
running the business, for example; cheaper vehicles, rent, and wages. Although this may be a bad thing for the
competitors as it could mean their staff are not as effective, the buildings not as big and the vehicles not as fuel
efficient. One thing that Ania could do to better this is to keep her store open for longer and if the demand is
high enough then it could be a good idea to open 24 hours a day, she can also introduce other methods of
purchasing such as online deliveries and promotional offers to increase the demands. Ania could also try is to
raise the price on her products, if they are popular enough then customers are not likely to avoid purchasing as
long as the products are good enough value for money. This may mean fewer sales but would mean more
money and as the supplies stay the same price they will be making higher profit.
Ania hasa fairly high return on capital employed meaning that she is gaining more revenue from her
investments, because of this Ania could actually invest the business’s profits back into the business as this
would mean she would still get the high return. As she has a net profit of 14500,if 10000 of that was to be
reinvested into things such as advertising, better equipment, fresher or bulk supplies and vehicle improvements
she could expect to receive a good return from doing this. If Ania was to sell her products online then it may
mean that she would not need as much staff and therefore she would be able to reduce the wage amounts. She
could reduce her costs in many ways. One of these ways is to plan ahead, by planning what costs will be spent
on Ania can negotiate in advance.

7. Unit 5 P4/P5/M2/D2
Lewis Appleton 7 Mr McColgan
Ania hasa current ratio much lower than her competitor which can be a disadvantage however this is actually
in a way a good thing. The reason for this is that it means she may be using her resources more efficiently than
her competitor, however as it is lower than 2:1 it could be difficult for her to immediately pay a creditor.
Currently this ratio is not too crucial to the company as it is only a year old but Ania should try in the long term
to raise the ratio to 2:1. Having higher may mean she is not running efficiently, having lower means more
things will have to be sold to cover the costs. The Acid Test Ratio is similar except the stock value is taken away.
There is a reason behind this as the stock takes longer to sell, as we can see from the stock turnover ratio it
takes 25 dayson average to sell the stock whereas withdrawing money from a bank account does not take so
long. Ania hasa higher ratio than her competitor which is good but it is still low. She could cover liabilities if she
needed to without selling stock but it would mean selling her other assets, she should try to achieve a 2:1 ratio
so that she would only have to sell half and therefore it would not have a crucial impact on operations. The
reason that the competitor has a lower Acid Test Ratio is because they have more stock, most likely because
they are a larger company.
Ania hasa long debtor’s payment period which is a limitation for her, this means that it is taking longer for her
to receive the money and it is higher than her competitor. This would have a bad effect on the company if Ania
needed to immediately pay off her liabilities as she would not be able to get the money from the debtors,
therefore she would have to sell other assets to cover the costs. Ania should try to negotiate with the customers
to reduce the period to pay and if she cannot do this she could think of cancelling the agreements. The reason
for this is that if customers are not willing to pay in a reasonable amount of time then they are not the best
customers to have agreements with. Ania could encourage this in a number of ways, previous longer paying
customers could be offered discounts for their co-operation, Ania could also an automatic system that send
reminders to the debtors when they need to pay, if they do not pay then Ania could give them a small period of
time added on and if they do not pay then Ania could contact debt collection agencies. Ania should attempt to
reduce the time to 30 days, one of the reasons why is that if liabilities need to be paid off it is likely a period of a
month or three months will be given to receive the money and therefore the money is available to be given. The
creditor payment period works in the opposite way, Ania could try to reduce the time to 30 days, although this
means she pays out quicker she may be offered discounts and special offers as a result. Of course the
advantage of the time being higher is that she has longer to pay the money however if the creditor feels that
they are not being paid quick enough then they may not supply Ania which could result in having to change to
more expensive suppliers. The competitor has the ideal creditor payment period which is an advantageto them
as they are awarded with cheaper discounts. Ania should try to reduce this over time to 30 days, by doing this
there is another advantage created. Ania would be paid from her debtors and have to pay her creditors at the
same time. Although this could be annoying to collect and pay on the same time it would mean the money is
available on the same day and this would prevent Ania from spending the debtor’s money on other
expenditures by mistake.
The stock turnover is much lower for Ania than her competitor which provides a good advantage, not only is
Ania able to sell her products cheaper but this is also something that potential investors would be looking for.
The stock turnover ratio shows that Ania is running her business more efficiently than her competitor and if she
can lower both the debtor and creditor payment periods to 30 days then it will show that the business is
efficient and this is likely to be noticed. Ania’s competitor is most likely selling foods that are not fresh which
means they are therefore able to wait longer to sell and there is also the likelihood that the competitor sells
larger amounts of items which could explain the large difference in percentage. Ania doesn’t need to work too
hard on improving this unless she is selling more fresher foods but she could use in-store promotions such as
large purchase discounts to achieve selling her products faster. An example of one of the possible discounts
could be save 10% on every purchase over £50.This would therefore encourage customers to buy more just so
they could save more.

8. Unit 5 P4/P5/M2/D2
Lewis Appleton 8 Mr McColgan
Financial performance evaluation (D2)
- Polish Fine Foods
Overall it is clear that for the first year of business Ania has done extremely well as she has had a decent
amount of sales and the ratios calculated for the business show that Ania is operating well. There are still
things that can be improved such as running costs, supply costs and the debtor/creditor payment periods but
this is just a small part. The good thing is that Ania does not have many liabilities and therefore she does not
have much money to pay. Her only liability is trade credits which mean she gets the money then pays later. This
means she only has one thing to pay so therefore she isn’t sending multiple payments off to multiple lenders.
The trade credits can be anything from 7-120 days but Ania has more likely had a trade credit period of 1-3
months, this allows the debtors money to be received in time. Ania should think of investing more money into
the business as there is a high return rate and it is likely to pay off but there may not be much she can do as the
sales figures show there is already a decent demand for the products. By using ratios to analyze the
performance Ania is clearly able to see important figures such as how difficult or how easy it would be to repay
liabilities if they were immediately demanded, how much return is received from investments, and how much
profit is made as a percentage. This gives a valuable insight as this can be compared with competitors, both
large and small companies and therefore it can be shown that a competitor, even though they may have sales
in the millions or billions may not actually be as effective as Ania’s business when it comes to ratios.
At this time Polish Fine Foods should not become a private limited company, my reasoning for this is that Ania
only has one year’s figures and there is currently no pattern to predict next year’s figures. It is unknown
whether the business will improve or have difficulties and for that reason Ania should wait at least another
year before reconsidering. There would be too much added trouble at this time as there are more precautions
to be taken and more dedication required. Having another year’s figures allows a good comparison and Ania
can then also compare to the same competitor to see how well they have improved. In the next year Ania could
become bigger and try to become a bigger and more popular company. Then when Ania becomes a private
limited company she would be to afford things such as legal costs, she would also be able to have her accounts
made as these are legally required, any shareholders also have to receive shares of the profits which currently
in the first year, a small profit has been made. Both lawyers and accountants will need to be involved meaning
Ania would need money.
Overall Ania should either wait for one year, compare her accounts and if improved become a private limited
company or wait three years for a better analysis, or take a risk. It is more advisable to wait at least 3 years so
a cause and effect of profits and losses can be established.
Advantages
Businesses such as Ania’s have many advantages when it comes to using just ratio analysis, the first being that
the financial statements are simplified to the specific important information and this actually gives a crucial
insight into how the business is doing. Another advantage being that this is a powerful thing to use when
comparing companies of different size as size does not become as important as the ratios are about efficiency
and therefore it is possible to compare the efficiency of businesses even if they are different sizes. Another good
thing is that the ratios can be compared within the same business in a trend formation such as reviewing the

9. Unit 5 P4/P5/M2/D2
Lewis Appleton 9 Mr McColgan
ratios monthly to see whether it hasincreased or decreased. Finally all of the important information is broken
down into the important bits and in a simple form, rather than having to read a full financial statement it could
be easier to just look at the few numbers. It is possible to see the relationship between certain figures shown
which is a crucial part of the ratios, for example the amount of assets compared to liabilities, these can then be
analyzed to see what would possibly happen in certain scenarios. Finally it is possible to predict future ratios
after finding how to improve them and establishing a cause and effect.
Disadvantages
Despite how useful ratio analysis is, there are also limitations that are included. First of all there are different
companies that do not operate in the same industry so therefore the environmental conditions that they are in
such as the area and market structure are different. Therefore comparing to a company within a different
sector could contain information that is misleading. In accounting the information is usually affected by
estimations and predictions, there are therefore different accounts given from different accountants which end
up giving different results. Therefore competitors are likely to have different results even if they are in the same
industry and when compared the ratio analysis may not be as accurate. Finally the ratio analysis focuses on the
information that has been received from the past which could be considered outdated as there is a larger
concern for present and future information. Before comparisons are made it is possible that prices of supplies
or fuel can change at any time and therefore this does not make the ratios definite even if a certain amount of
supplies is to be bought. Ratio analysis also ignores qualitative factors such as the quality of products or the
relationship between the business and debtors/creditors. For example some debtors may be more willing to
pay off quicker or not want to pay for longer which is not taken into account. Finally there are not any standard
ratio’s that are universally accepted terminology for comparison purposes and therefore they are not used as
much.