Sample Accounting Report Writing
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PART A: Calculation of Ratios Ratio Formula 2003 2004 2005 Gross Profit Margin 36800 92000 × 100% 40.0% 44100 98000 × 100% 45.0% 39950 94000 × 100% 42.5% Expense Ratio x 100% 32000 92000 × 100% 34.8% 34000 98000 × 100% 34.7% 35000 94000 × 100% 37.2% Net Profit Margin x 100% 4800 92000 × 100% 5.2% 10100 98000 × 100% 10.3% 4950 94000 × 100% 5.3% Return on Equity x 100% 4800 117000 × 100% 4.1% 10100 120500 × 100% 8.4% 4950 121500 × 100% 4.1% Return on Total Assets Net + Interest profit expense Total Assets × 100% × 100% 4.7% × 100% 7.7% × 100% 4.1% (A) Profitability (B) Financial Stability (i) Liquidity Year Working Capital Ratio Quick Assets Ratio 2003 2.75 : 1 1 : 1 2004 4.33 : 1 2 : 1 2005 2.6 : 1 1 : 1 Year Debt / Equity Ratio Total Debt / Total Assets 2003 34.19% 25.47% 2004 27.42% 21.52% 2005 30.25% 23.23% (ii) Solvency (C) Management Effectiveness and Procedures Year Times Interest Earned Debtors' Turnover Stock Turnover 2003 2.92 times 1.84 times 3.94 times 19.8 days 2004 6.05 times 12.25 times 3.85 times 29.8 days 2005 4.3 times 11.75 times 3.38 times 31.1 days PART B: Analysis of Ratios 1.0 Introduction This report has been prepared for Barnaby Trading regarding the business performance analysis for 3 consecutive years from 2003 to 2005. It has been prepared after analyzing the balance sheet and income statement of all three years. Ratios have been derived from these statements in relation to the profitability, financial stability, management effectiveness and procedures of the business. These ratios are helpful as it summarize large quantity of data and accounting users to make qualitative judgment about a business financial performance. Using the ratios, we will be able to evaluate how profitable is the business, is the business capable to finance its purchases and expenses, how is the assets being used to generate revenue to the business and much more.
They also indicate the amount of investment the business have. There are 2 indicators for solvency that are Debt/Owner Equity Ratio and Debt/Assets Ratio. 3.2.1 Debt/Owner Equity Ratio The debt/ owner's equity ratio indicates the degree of financial leverage that you're using to enhance your return. The formula is as shown below: Debt/Owner Equity Ratio = __Liabilities_ x 100% Owner Equity The debt /owner's equity ratio has decrease from 34.19% in 2003 to 27.42% in 2004. This is caused by the reduced loan from National Bank, which is a liability. As liabilities lowers, the debt/owner equity ratio drops. The decrease is also due to an increase of owner equity as a result of increase in capital by the owner. The decrease in Debt /owner's equity ratio shows that the business is less geared and more reliant to internal funds. Debt/ owner's equity ratio of the business gearing level is ideal as it has not exceeded 100% and more reliant to internal funds. The debt/ owner's equity has increased from 27.42% in 2004 to 30.25% in 2005 is caused by increase in creditors. Therefore, this has increase liabilities. This shows that the business is more geared and indicates a greater reliance to external sources for funds. Yet, the increase in debt/owner's equity ratio indicates that the business is still maintained at satisfactory level as it does not exceed 100%. 3.2.2 Debt/Assets Ratio The debt/assets ratio has indicates the percentage of assets or funds provided by external sources. The business would try to maintain the ratio below 50%, which indicates the business is more reliant to internal funds to finance the business. The formula is as shown below: Total Debt/ Total Assets = Total Liabilities x 100% Total Assets The debt/assets ratio has decrease from 25.47% in 2003 to 21.52% in 2004, largely because of reduction of loan from National Bank and creditors, both contributed to the reduction in liabilities.
To do so, the business needs to look at the types of stock held and the demand for each of them. This system can help to reduce the costs of goods sold expense by cutting stock to a minimum, increase the stock turnover rate and improve the cash flow of the business. Other than that, to increase stock turnover, the business should rotate the stock so that older stock is brought to the front. The method used is first in, first out system. It can ensure that perishable stock is used efficiently so that it does not deteriorate. Moreover, careful selection of the type of stock displayed is also important. The business needs to consider the seasonal nature, cost and complementary items of the stock in order to meet the demand of customers. In addition, the sales policy also plays a crucial role in improving the performance of the business in terms of stock turnover. It has a strong influence on stock levels and should be managed with a view not just to achieve maximum sales. It can be directed towards a higher turnover of goods, selling goods bought at bargain prices faster and clearing slow moving items. As a result, cash flow and liquidity can be protected. Lastly, the business can incorporate forecasting and inventory performance into the firm's continuous improvement program, and measure, report, and review results against goals to be met. It is essential for the business to have a good stock management as in having a high stock turnover rate because the quicker the stock is turned into cash, the better the cash flow which will result in a better performance of the business. However, the longer the stock is held by the business, the longer the cash is held up in the form of an alternative asset and thus the greater the problem associated with liquidity. Hence, the business should have an overall stock policy that is appropriate to enable the business to function at maximum volume with minimum financial investment in stock. (4047 words) 6.
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