• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Accounting Ratios. By using ratios Hills System ltd can monitor their businesss performance. The more they know about their Business performance, the easier it will be for them to make decisions about how to manage and grow their business

Extracts from this document...


Accounting Ratios What is a Balance sheet? It is a financial statement that summarizes a company's assets, liabilities and owner's capital at a specific point in time. Balance sheet The Purpose of a "Balance Sheet" Balance sheet answers all questions regarding the financial condition and are extensively referred and analyzed by banks and investors . Uses of the Balance Sheet * To determine how much the business is worth. * Comparisons of balance sheets over time show trends in financial strength and structure. * To support loan requests. * To provide information for estate planning. * To help analyze the business' ability to bear risk. * To provide year end values for increased assets and liabilities which are needed in measuring business profitability It is mainly used to identify business problems : * liquidity problems - Company's ability / inability to meet financial obligations. * Working capital- How strong a company is to meet its short term liabilities. Profit and Loss Account What is a Profit and Loss Account? The Profit and Loss Account is a report that shows theor loss of a business over a given period of time, which is normally a year. ...read more.


Current assets In Hill systems ltd the current assets are : * Stock * Debtors * Bank/Cash * Creditors Fixed assets In Hill systems ltd the fixed assets are : * Land and premises * Fixtures and fittings * Motor vehicles Land and premises This is the money paid for the land the business is using and the amount of premises they have scattered. They paid �1105,000 in 2007 and �1366,000 in 2008. Fixtures and fittings These are lighting, electricity and telephones costs. They're needed in a business for the business to be ran. They paid �115,000 in 2007 and �258,000 in 2008 for these. Net assets employed Shows how much the business's assets are worth. This is found out by using this equation: Fixed assets + current assets net. They net assets employed is �2228,000 in 2007 and �2508,000 in 2008. Working capital This is amount of money available for the day to day running of the business. The working capital in 2007 is �863,000 and �744,000 in 2008. "Stock+ debtors+ bank/cash - creditors = Working Capital" Owners capital This is the money invested in the business by the owners. They invested �1300,000 in, in 2007 and �1618,000 in, in 2008. ...read more.


There are two types of liquidity ratio: Current Ratio The current ratio measures the ratio of current assets to current liabilities. A current asset is an asset that can be quickly turned into cash, such as motor vehicles. A current liability is a debt that a business will be paying within the next year. This ratio shows the ability of the company to pay off its debts over the next year. A ratio of; shows you have twice as many current assets as current liabilities. Formula: Current ratio formula : Current Assets / Current Liabilities Acid Test The acid test ratio, like the current ratio, measures the ability of your company to pay off its debt. The difference is that motor vehicle is not included as a current asset. Because turning your motor vehicle into cash is contingent on sales, the quick ratio shows the company's ability to pay its debts if they were not able to sell the motor vehicle. Acid Test ratio formula : Current Assets - Stock Current Liabilities There are there main accounting ratios. These are Liquidity, Profitability and Performance ratios. These are used to monitor the business, whether its going swiftly or unstable. They make it easy to identify financial issues before its too late for the business to act on the issues. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Accounting & Financial Management section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Accounting & Financial Management essays

  1. Evaluate the adequacy of accounting ratios as a means of monitoring business health in ...

    Utilisation ratio: Profitability ratio is mainly used because it shows the business how effective the capital employed has been used to generate the sales revenue. Some businesses do not think of using such ratio because the businesses are medium based company which owns a warehouse and are working from there.

  2. A2 Business CourseWork

    These will be in a variety of areas for a variety of reasons. These reasons may be for business gain (i.e. profit), to increase customer satisfaction (i.e. products) or to look good in the public light (i.e. charitable fundraisers or trying to become more environmentally friendly.)

  1. Accounting case study. I am writing this report to explain the contents thats on ...

    Expenses These are what the business has to pay out for. Things that come under expenses are things like: Administration * Rent & Rates (�6000) * Wages & Salaries (�3920) * Telephone & Postage (�190) * Motor Expenses (�1500) * Advertising (�1500)

  2. Free essay

    `Accounting as a discipline has no theory`. Critically evaluate this statement and provide examples ...

    Ssap2 was then replaced by the ASB financial reporting standard 18 (FRS18) in 2000. FRS18 identifies two accounting concepts that it describes as being part of the bedrock of accounting and playing a pervasive role in financial statements. These comprise of the going concern assumption and the accruals concept.

  1. Profitability and Liquidity

    available as cash and other assets that could be converted into cash within a year. Current assets will be use up in production and include stock and cash. The stock; for my business the main stock is T-shirts; this will include a range of colours and sizes, and creative-flex (this is the printing ink)

  2. You need to make judgement on each ratio- does it show the business is ...

    This is very bad. They can make it better by reducing the expenses like they could spend less on the furniture. They could look for a building where they can pay less rent. * Return on capital employed (ROCE): this is calculated using the following formula: Net profit before interest and tax * 100=

  1. Use accounting data and statistical information to measure business performance

    It is highly important for Mr Jones? business to constantly monitor these costs to ensure it is aiming at efficiency and cost-effectiveness of production. The retail price index (RPI) and the consumer price index (CPI) are both measures of the price of goods and services in the UK.

  2. Ratio Analysis. I am going to illustrate the financial state of Chester Private ...

    This means that the amount of money that the business had left over after deducting expenditure has decreased. So, for every £1 the business has 17p left (2006)/8p left (2007) after deducting all of its expenses. The owners should think about moving into cheaper premises in order to increase the rate of the net profit.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work