analysis of account

​Analysis of accounts

Today's objectives:
- students know how to interpret financial performance of a business
- how and who are the users might use the information in the published accounts

Accounting cycle:

The sequence of accounting procedures used to record, classify, and summarize accounting

information in financial reports at regular intervals is often termed the accounting cycle.

-Each types of report have their own focus:

- cashflow analysis: Focus on cash/liquidity
- income statement: focus on profit/ loss.
- balance sheet/ income statement: Focus on asset ,liabilities,

​Profitability is different to profit, it is the measurement of:
- the value of sales achieved
- The capital invested in the business.

• Non current assets are a company's long-term investments that are not easily converted to cash or are not expected to become cash within an accounting year.

• Current assets are the resources that a business owns and expects to use or sell within a year

• Equity is the amount of money that a company's owner has put into business.

​financial statement/ published account of limited company are made available for all those interested in the performance of the business.

​This is very importance concept: The ability of a business to pay back its short term debts.
If the company cannot pay the supplier and pay the bills it is called illiquid.

​Why and how accounts are used:

- Managers: to help them keep control the performance accounts and making decision.
- Shareholder/potential investors: They want to know how big is the profit of a company, they also will check the liquidity of the company
- Creditors: The financial position will indicate the total value and
- Bank: they will check the company accounts before lending money
government: Tax office will check the profit that the company make
- Trade union: they will assess whether the company is secure or not.
- Other company: sneak peak of their competitors

​Limitation of using published accounts and ratio analysis:

• Managers will only have access to use published accpunt required by law

• Ratio analysis is based on past data, it will not indicate the how a business eill perform in the future

• Accounting data will be affected by inflation and it will be missleading

• Different companies will have different accounting system and method, make the comparison dificult.

Multiple Choice

How to calculate Net Proft Margin?

• Total revenue - cost of sales

• Operating profit/ Sales Revenue (%)

• Net profit/ sales revenue (%)

• Operating profit - Finance and tax

Multiple Choice

Gross profit margin : rising from 2017-20% to 2018-24%; what is the analysis for this?

• the business is successful at converting sales into profit

• the business is less successful at converting sales into profit

• the business is not successful at converting sales into profit

• the sales is increased but the overhead cost is high

Multiple Choice

Net profit could be improved by?

• Increasing overheads / expenses

• Decreasing overheads / expenses

• Increasing fixed costs

• Decreasing cost of sales.

Multiple Choice

How to calculate Gross Profit Margin?

• Net profit / sales x 100

• Sales - closing stock

• Operating profit / sales x 100

• Gross profit / sales x 100

Multiple Choice

Which of the following could improve your liquidity?

• Offer debtors (trades receivable) early payment discounts.

• Change to expensive supplier.

• Use normal price

• Use a loan

Multiple Choice

A current assets is ?

• Something of value you use long term

• Something you have to pay back in < 12 months.

• Cash or something that can turn into cash in < 12 months.

• Fixed + current assets

Multiple Choice

A non current assets is ?

• Something of value you can use for long term and it is not easy to convert into cash

• Something you have to pay back in < 12 months.

• something that can turn into cash in < 12 months.

• Fixed + current assets

Multiple Choice

Iliquidity is the ability to?

• cannot capable to paid it short term debt

• can pay your short term liabilities

• Calculate operating profit margin

• Identify your current assets.

Multiple Choice

What does Return on Capital Employed (ROCE) measure?

• Effectiveness of staff

• Effectiveness of meeting short term liabilities

• Effectiveness of generating a profit from capital

• Effectiveness of generating profit from sales