![Obj.9 Analysing Profit Results
• The Trading, Profit & Loss a/c should be
examine to make meaningful deductions
concerning the business.
•
• The following ratios can be used -:
– Stock turn [rate of stock turnover]
– Gross profit percentage
– Net profit percentage](https://image.slidesharecdn.com/analysisinterpretationoffinancialstatements-121122212711-phpapp01/85/Analysis-interpretation-of-financial-statements-2-320.jpg)
![The Acid Test Ratio
• The acid test ratio is a measure of liquidity (how
quickly cash can be obtained to settle debts or pay
expenses)
• The acid test ratio seeks to match those cash or near
cash assets with those debts which have to be paid
with the next 12 months. [current assets less stock]
• The acid test ratio formula is -:
current assets - stock
current liabilities
• An acceptable acid test ratio should be 1:1 or better](https://image.slidesharecdn.com/analysisinterpretationoffinancialstatements-121122212711-phpapp01/85/Analysis-interpretation-of-financial-statements-7-320.jpg)
Analysis & interpretation of financial statements
- 1. ANALYSIS & INTERPRETATION OF FINANCIAL STATEMENTS
- 2. Obj.9 Analysing Profit Results • The Trading, Profit & Loss a/c should be examine to make meaningful deductions concerning the business. • • The following ratios can be used -: – Stock turn [rate of stock turnover] – Gross profit percentage – Net profit percentage
- 3. Stock turn • The stock turn ratio tells us how many times during the year stocks had to be replenished. Using the formula cost of sales / average stock Where average stock is -: • (opening stock + closing stock)/ 2 and • cost of sales = cost of goods sold • 365/stock turn = number of days stock was held before it was sold.
- 4. Gross/Net profit percentages • Gross/Net profit percentages tell us what portion of the sales for the period resulted in a profit. • Increased sales does not always mean an increase in profits. • Gross profit percentage (GPP) gross profit x 100 sales • Net profit percentage (NPP) net profit x 100 sales
- 5. Obj.12 Analysing the Balance Sheet • The Balance Sheet should be examined to make meaningful deductions about the business’ financial status as at a given point in time. • The following ratios can be used -: • Current ratio • Acid test ratio • Return on investment
- 6. The Current Ratio • The current ratio is a measure of liquidity (how quickly cash can be obtained to settle debts or pay expenses) • The current ratio seeks to match those assets that can be easily converted to cash with those debts which have to be paid with the next 12 months. • The current ratio formula is -: current assets current liabilities • An acceptable current ratio should be 1.5:1 or better
- 7. The Acid Test Ratio • The acid test ratio is a measure of liquidity (how quickly cash can be obtained to settle debts or pay expenses) • The acid test ratio seeks to match those cash or near cash assets with those debts which have to be paid with the next 12 months. [current assets less stock] • The acid test ratio formula is -: current assets - stock current liabilities • An acceptable acid test ratio should be 1:1 or better
- 8. The Rate of Return On Investment • The rate of return on investment is a measure of the profit (returns) the owner gained from putting his capital into the business. • The rate of return on investment identifies the percentage of profits gained from the capital which had to be used during that year. • The rate of return on investment formula is -: net profits x 100 capital employed • An acceptable rate of return should be 20% or better
- 9. Obj.10 & 11 Working Capital • Working capital is the amount of resources used to keep the business operational (on a day to day basis). • Working capital is like a current asset – since it value changes continually (from day to day). • Working capital is a quick reference to the level of liquidity in a business. • Working capital can be calculated as -: • current assets – current liabilities • Where current liabilities are debts due within 1 year
- 10. Mark-up & Margin • Mark-up is – The profit described as a percentage/fraction of the cost price. profit –= Cost price • Margin is – The profit described as a percentage/fraction of the selling price. profit – = selling price • Note: if a/b is the mark-up then a/b+a is the margin • Also: cost price + profit = selling price