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Interpret the contents of a trading and profit and loss account and balance sheet for a selected company, explaining how accounting ratios can be used to monitor the financial performance

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Introduction

M3 and D2: Interpret the contents of a trading and profit and loss account and balance sheet for a selected company, explaining how accounting ratios can be used to monitor the financial performance of the organisation. Profit and loss account and balance sheet for Tesco for 2001 and 2002. Consolidated Profit & Loss Account for the year ended 2002 2001 Weeks 52 52 Currency £ million £ million Turnover 23653.0 20988.0 Cost of sales -21866.0 -19400.0 Gross Profit 1787.0 1588.0 Operating Expenses -465.0 -422.0 Operating Profit 1322.0 1166.0 Other costs/income 32.0 13.0 Profit before interest and taxation 1354.0 1179.0 Net interest receivable (payable) -153.0 -125.0 Profit on ordinary activities before taxation 1201.0 1054.0 Tax on profit on ordinary activities -371.0 -333.0 Profit on ordinary activities after taxation 830.0 721.0 Equity minority interests 0.0 1.0 Profit for the financial period 830.0 722.0 Dividends -390.0 -340.0 Retained profit 440.0 382.0 Consolidated Balance Sheet Fixed assets Intangible Assets 154.0 154.0 Tangible Assets 11032.0 9580.0 Investments 317.0 304.0 Total Fixed Assets 11503.0 10038.0 Current assets Stock 929.0 838.0 Debtors due within one year 454.0 322.0 Short-term investments 225.0 255.0 Cash at bank and in hand 445.0 279.0 Total Current Assets 2053.0 1694.0 Creditors: Amounts falling due within one year -4809.0 -4389.0 Net Current Assets (liabilities) ...read more.

Middle

Net profit * 100=net profit percentage Turnover This will show us the profit Tesco has made before tax has been taken off. This calculation shows how well Tesco manages its other expenses, especially when it is compared to the gross profit percentage. We will find out that if Tesco has a high gross profit percentage but a low net profit percentage, its operating costs(day-to-day running costs such as wages, rent and insurance) are too high, as they are taking out too much profit from the business. Turn on capital employed (ROCE) This is the final calculation Tesco will use to judge profitability. It is worked out by considering the net profit as a percentage of the capital employed by that business. The reason this ratio is useful is because it shows the amount of money an investor is receiving back on their capital as a percentage. Net profit before interest and tax *100=ROCE% Capital employed (including shareholder funds) Tesco will calculate its debtor?s collection period which looks at the link between the number of debtors and how long on average it takes the business to collect its debts. ...read more.

Conclusion

Ratios are based on financial statements which are summaries of the accounting records. Through the summarization some important information may be left out which could have been of relevance to the users of accounts. The ratios are based on the summarized year end information which may not be a true reflection of the overall year?s results. This means that Tesco can lose information that could have been very important for the business. This can lead them to loss. Interpretation of ratios is important for the businesses specially a large organization like Tesco. It is difficult to generalize about whether a particular ratio is ?good? or ?bad?. For example a high current ratio may indicate a strong liquidity position, which is good or excessive cash which is bad. Similarly Noncurrent assets turnover ratio may denote either a firm that uses its assets efficiently or one that is undercapitalized and cannot afford to buy enough assets. Any of this information does not help Tesco monitor the state of Tesco. Like asset turnover and current ratio or any of the percentages do not benefit Tesco anyhow. They do give a clue about the state of Tesco but they do not exactly tell Tesco about the state of Tesco. It does not exactly monitor the state of Tesco. ...read more.

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