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Analysis of Financial Statements for Business Y and Z

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Introduction

Name: Hassan Ahmed Unit: 2 Task: 8 Analysis of Financial Statements for Business Y and Z Y Z £ £ £ £ Sales 250,000 160,000 Less cost of sales Opening stock 90,000 30,000 Add Purchases 210,000 120,000 300,000 150,000 Less Closing Stock 110,000 50,000 190,000 100,000 Gross profit 60,000 60,000 Less expenses Wages 14,000 10,000 Salaries 10,000 10,000 General expenses 11,000 8,000 35000 28,000 Net profit 25,000 32,000 Retained profit at the beginning 15,000 8,000 40,000 40,000 Less appropriations General reserve 2,000 2,000 Dividend 25,000 20,000 27,000 22,000 Retained profit at the end 13,000 18,000 Business Y&Z Balance sheet as at December 2010 Y Z Fixed assets Equipment 12,000 3,000 Motor Lorries 18,000 13,000 30,000 16,000 Current Assets Stock 110,000 50,000 Debtors 62,500 20,000 Bank 7,500 10,000 180,000 80,000 Less Current Liabilities Creditors 90,000 16,000 Net working Capital 90,000 64,000 Net Total Assets 120,000 80,000 Financed By: Issued Share capital 100,000 50,000 Reserves General Reserve 7,000 12,000 Profit and loss 13,000 18,000 20,000 30,000 120,000 80,000 Solvency Current ratio The current ratio is An indication of a company's ability to meet short-term debt commitment; the higher the ratio, the more liquid the company is. Current ratio = Current assets Current liabilities This ratio shows how many assets a business has compared to liabilities. Business Y 180,000 90,000 = 2:1 Ratio For business Y this ratio indicates that current assets are twice as large as current liabilities. ...read more.

Middle

Net profit percentage This calculation takes the idea of profitability on stage further by actually considering the profit as a percentage of turnover after all the other expenses have been taken out. This shows the profit that the business has made before tax has been taken off. This also shows how well the business manages its other expenses especially when it is compared to the gross profit percentage. If a business has a high gross profit but a low net profit percentage, its day to day running costs such as wages, rent and insurance is too high, as they are taking too much profit from the business. Net profit X100 Turnover Business Y 25,000 X100 = 10% 250,000 This shows that business Y is not managing its operating costs (day to day running costs) as well as it should and should think about saving in some area such a rent, wages and insurance because they are taking too much money from the profits and cutting down on some operating costs it could increase the profit. Business Z 32,000 X100 = 21.3% 150,000 This shows that business X is not managing its operating costs (day to day running costs) as well as it should but it doing a better job than business Y because the net profit percentage is higher. They should also think about cutting down on operating costs in order to keep costs down and increase profit. ...read more.

Conclusion

The fewer the number of days means the business has better credit control, because it collects what is owed more quickly. Debtors X 365 = Debtors? collection period Credit sales Business Y 62500 X 365 =91.25 days 2500 This shows that business Y is not in a ideal position because it will have to wait 91 days, the problem of waiting 91 days to collect debts is that it increases the risk of not being paid and could end up losing the business money. The ideal time it takes it receive debts is on month and business Y is three times that amount. Business Z 20,000 X 365 =45.6 days 160,000 Business Z is a better position than business Y because it takes them 45 days to collect their debts which are just over the required amount of 30 days, which means the risk of not being paid is less than business Y. Asset turnover By using Asset turnover, the business is able to work out how many pounds it earns for every pound invested, this is a good indication for investors and shareholders for the business. Sales = asset turnover Total assets Business Y 250,000 = 1.39 180,000 Business Z 160,000 = 2 80,000 This calculation shows business Y is getting 1.39 pounds on every pound it invests in which is not as high as business Z. whereas business Y is making 2 pound on every pound it invest which means that is the better business to invest in. investors will look at this type of information to see where to invest in. ...read more.

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