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# Profit and Loss, Balance Sheets and RATIO ANALYSIS

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YOU NEED TO KNOW THIS

Make sure you do!! Especially ratios. You will be tested on this

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### Profit and Loss, Balance Sheets and RATIO ANALYSIS

1. 1.  Shows a summary of cash inflows and outflows Do you remember this?
2. 2. Year 11
3. 3. Investors Workers Lenders of money e.g. banks Inland Revenue Users of Financial Info. Competitors – all limited companies must publish their accounts
4. 4.  Shows the flow of sales and costs over a period of time, usually a year, and the level of profits or losses made as a result of trading.
5. 5.  The trading account shows the difference between the cost of goods sold and the sales revenue.  The difference is known as gross profit.
6. 6.  The profit and loss account begins with the gross profit from the trading account.  Any other income is added to the gross profit. Then all other expenses (overheads) are subtracted, to give net Profit.
7. 7.  Sales  Less cost of sales  = Gross profit  Less expenses  = Net profit
8. 8. Pete runs a takeaway pizza parlour in Mexborough. He has been trading for 12 months and is drawing up his profit and loss account. How will he work out how much money he has taken over the 12 months? Sales = price x number sold
9. 9. Pete’s takings are as follows; 6,000 x pizzas at £7 each. 42,000 10,000 x chips at £1.50 each 15,000 8,000 x garlic bread at £4 each 32,000 What is his sales figure? £89,000
10. 10. Next we need to work out how much it has cost him to buy his raw materials to make these goods. Cost of goods sold = opening stock + purchases – closing stock Has Pete any opening stock?
11. 11. Pete’s purchases are as follows; Prepared dough 2,000 packets £6,000 at £3 each Frozen chips 280 boxes at £10 £2,800 each Toppings and tomato base £1200 £1,200 £ 600 Sundries £600 TOTAL = £10,600
12. 12. What is Pete’s gross profit? Gross profit = sales – COGS 89,000 – 10,600 = £78,400.
13. 13. What else will we have to take off Pete’s profit figure? Overheads / expenses – the general costs of running the business. For example.....
14. 14. Pete’s expenses are as follows; Wages £10,000 Telephone £ 3,000 Rent £12,000 Utilities £ 5,000 Advertising £ 2,500 TOTAL EXPENSES ? Insurance £ 1,000 Vehicle £ 5,000 £38,500
15. 15. So, what is Pete’s net profit? Net profit = GP – expenses NP = 78,400 – 38,500 = £39,900
16. 16. Cost of goods sold is also stated as cost of sale Sales
17. 17. Profit and Loss Account for Pete's Pizza Parlour 2010   Sales Cost of Goods Sold Gross Profit Less Expenses Wages Rent Advertising Insurance Vehicles Telephone Utilities Net Profit \$         10,000 12,000 2,500 1,000 5,000 3,000 5,000   \$ 89,000 10,600 78,400               38,500 39,900
18. 18.   Sales (Turnover) Cost of Sales             Gross Profit Less expenses Wages Insurance Rates Rent Telephone Advertising Depreciation IT Light and heat   Net Profit   Mr Reading's Burger Bar £OOO   Opening Stock Purchases     Less Closing Stock             40  120  160    30                            £OOO 50  2  11  30  11  4  5  3  2          300              130  170                      118  52
19. 19. Mr Reading's Burger Bar Plc       2007     £OOO £OOO         Sales (Turnover)   300 Cost of Sales         Opening Stock 40     Purchases 120       160     Less Closing Stock 30         130 Gross Profit     170       Less expenses         118 Net Profit     52         Corporation Tax   12 Profit After Tax   40 Divends paid     15 Retained profit carried forward   25                   £OOO       30 145 175 2008 £OOO   350                                 35                         140 210 mbnj   135 75   17 58 20 28
20. 20.  The Balance Sheet shows the value of a business’s assets and liabilities at a particular time.  This lets managers/owners know how much their business is worth.  Before we can complete a balance sheet you must know some key terms.
21. 21.  Assets:- Are items of value which is owned by the business.  Assets are broken down into two categories.  Fixed Assets:- Are likely to be kept by the business for more than one year. EG. Premises, vehicles, equipment.
22. 22.  Current Assets:- Are assets that are held for a short period of time. E.G. Cash, Stock, Debtors (people who owe you money)  Liabilities:- Are items owed by the business. Again liabilities are broken down into to kinds.
23. 23.  Long-Term Liabilities:- Anything that business has to pay back after one year. E.G Loans  Current Liabilities:- Are amounts owed by the business which have to be paid within one year. E.G Overdraft, Creditors (people you owe money to).
24. 24.  If the value of assets are greater than liabilities, then the business is said to be wealthy. Business’s would like to see this increase every year.  To calculate the Owner’s Wealth (Shareholders fund) we use this equation. Total Assets-Total liabilities=Owner’s Wealth
25. 25.   Fixed Assets    Property  Machinery  Vehicles                             Current Assets   Stock   Debtors   Cash         Current Liabilities   Creditors     Unpaid Tax               Net Current Assets (Working Capital) Net Assets           Financed by:   Shareholder's Funds     Share Capital   Retained Profit Long Term Liabilities     Bank Loan     Debentures   Capital Employed                                         These two These two   figur es figures   must must   balance balance                         14  1                                5  12  3  20          15                80  40  30  150                        5  155         80   50    20  5  155  What it’s What it’s doing with doing with its money its money Whereeits Wher its got it got it money money fr om from
26. 26. Capital Employed = Net Assets They must always balance
27. 27. Balance Sheet - Mr Reading's Burger Bar Ltd - 31st March 2005 The business has          The business has     bought some fixed          boughtassets fixed   assets   some Fixed Assets           Property      80   Machinery       40   Vehicles      30           150  Fixed Assets will last for Fixed Assets will last for MORE THAN ONE YEAR – MORE THAN ONE YEAR – they will have depreciated but they will have depreciated but we don’t need to worry about we don’t need to worry about this here….. this here…..
28. 28. Current Assets last for a Current Assets last for a FEW MONTHS FEW MONTHS Current Assets            Stock    5    Debtors    12      Cash    3           20    Liquidity Liquidity of assets of assets   increases increases The most The most liquid – liquid – money the money the firm hasn’t firm hasn’t spent spent Raw Raw materials or materials or finished finished products it products it hasn’t sold hasn’t sold People who People who owe the owe the business business e.g. trade e.g. trade credit credit
29. 29. Current Liabilities             Creditors   Unpaid Tax         14    1    15  The opposite The opposite to debtors – to debtors – the business the business owes them. owes them. This is money This is money owed to owed to suppliers They have They have to be paid to be paid within one within one year of year of the date the date of the of the Balance Balance Sheet Sheet
30. 30. Fixed Assets                                         Net Current Net Current Assets = Assets = Current Current Assets – Assets –   Current Current 5  Liabilities 12  Liabilities 3  It’s also It’s also 20  called called     working working     capital – does capital – does 14    the business the business 1      15  have enough have enough       capital to capital to     5 pay off its pay off its     155 short-term short-term Net Current Assets + Fixed Assets = Net debts? .. Net Current Assets + Fixed Assets = Net Assets Assets debts? This is the net worth of the business – everything This is the net worth of the business – everything its spent its cash on! its spent its cash on!  Property    Machinery    Vehicles         Current Assets     Stock     Debtors     Cash               Current Liabilities   Creditors     Unpaid Tax               Net Current Assets (Working Cpaital) Net Assets     - 80 40 30 150 +
31. 31.                 Financed by:   Shareholder's    Funds Share Capital Retained Profit Long Term    Liabilities Bank  Loan   Debentures Capital Employed                      80      50               20 5 155 Capital Employed is what you get Capital Employed is what you get when you add shareholders funds when you add shareholders funds and long term liabilities. It must and long term liabilities. It must equal Net Assets! equal Net Assets! Money put into Money put into business from business from share issue share issue All the profit All the profit retained for retained for future future investment investment Money that is Money that is borrowed from borrowed from other people – other people – debts that debts that take over a take over a year to pay year to pay
32. 32.  For stakeholders it is very important to analyse the final published accounts of companies.  They could tell us of the performance of the company and the financial strength of the company.
33. 33.  There are many ratios that can be calculated from a set of accounts. These ratios are used to compare performance and liquidity.
34. 34. Gross Profit Margin %=Gross Profit X100 Sales Turnover This shows how much gross profit the company is making for every pound. An increase will mean that prices have increased or the cost of goods have been reduced.
35. 35. N.P Margin= Net Profit X100 Sales Turnover This will be lower than the G.P margin because other expenses would have been deducted. The higher the result the better.
36. 36. ROCE(%)= Net Profit X100 Capital Employed The higher the figure the more efficient the business is running. It means the business is making higher profits for each dollar invested in the business.
37. 37.  Liquidity Ratios calculate how quickly the business can pay back its short term debts. Current Ratio= Current Assets Current Liabilities
38. 38. A safe current ratio should be between 1.5-2. Anything less than one means that the business will struggle to pay off its debt.  This ratio is good but it forgets that not all current assets such as stock can be sold straight away.
39. 39. Acid Test Ratio= Current Assets-Stock Current Liabilities Anything below 1 is a worry for the business as that means it currently can not pay off it’s debts. If it is too high it suggests the business has too much money not being used correctly.
40. 40.  Ratios are only good when you are comparing them to previous year or similar businesses together.  It is important to remember that ratios: -Are based on past results -May be out of date (businesses change) -Different companies may value assets differently
41. 41.  In pairs can you go through the ratio case study of Frank Frankfurters  Then  Page  You 105-124 need to work through this in your