• 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. A2 Business CourseWork

    Maximising sales: The aspect most closely linked to increasing profit will be the level of sales that go through a business, it is therefore imperative to maximise sales to become more profitable. In a company the size of Tesco increasing level of sales could literally make millions of pounds of difference in revenue.

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

    Small businesses mainly try its business on low standard budgets this is because they know that what they sell is profitable or not. and usually do not care for profit ratios. They will start producing more products in quantity if they know that there is a demand for it and they don't really worry about the profit ratios.

  1. Btec Business Level 3 Year 1 - Introduction to Accounting

    Heating and lighting - The bills of gas and electricity should be paid to the company supplying the service. Insurance - promise of repayment in the case of loss; paid to people or companies so concerned about hazards that they have made prepayments to an insurance company Administration costs -These includes items such as telephone bills, postage, printing and stationery.

  2. Profit and Loss Account

    I can do things such as turn lights and heating off when not in use and also I could unplug equipments when they are not being used for example the smoothie mixer. Total expenses is calculated by adding up every figure in the expenses column and it shows that the total cost of the expenses I used for the year.

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

    Efficiency ratios- how fast they can get the money from customers, how long they take to pay creditors and how fast they can sell their stock 5. Gearing- which measure who really owns the business Liquidity ratios: Liquidity ratios are the ratios that measure the ability of a company to meet its short term debt obligations.

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

    ROCE (Return on Capital Employed) is the last calculation I am going to use in order to judge profitability of the business. This calculation shows the amount of money an investor has received back on their capital. Calculation for ROCE (YEAR 2006): NET PROFIT 120 X 100 = X 100 = 77.41% (77%)

  1. I am going to produce a report which assesses the working capital management of ...

    In this part of my work, I am going to identify and explain the key ratios, using the information I gathered from M&S annual report. Ratio is the term applied to a variety of calculations used to compare the results of a business over time or to compare the results of two or more business in the same business sector.

  2. Interpret the contents of a trading and profit and loss account and balance sheet ...

    It helps Tesco figure out the performance of their business. Acid test ratio: current assets- stock Current liabilities Acid test ratio: 2053-929 -2756.0 The acid test ratio shows the assets compared to liabilities, like current ratios but by taking out the stock figure from the current assets, it shows how

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