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# Accounting case study. I am writing this report to explain the contents thats on the profit and loss account and the purpose of each element. I am then going to write examples of different ratios for the business.

Extracts from this document...

Introduction

Name: Hannah Clark - Year/Group: BTEC National Diplomas in Business - Lecturer: Richard Taylor Unit 2 - Investigating business resources P5 & P5 To: Richard Taylor From: Hannah Clark Date: 24th May 2010 I am writing this report on the contents of the profit and loss account 1.0 TERMS OF REFERENCE I am writing this report to explain the contents that's on the profit and loss account and the purpose of each element. I am then going to write examples of different ratios for the business. 2.0 PROCEDURE First of all I am going to look at all of the contents on a profit and loss account, I am then going to write what they all are and what they do on the account. I am then going to write down all of the ratios that the business needs to think about. 3.0 FINDINGS Sales This is how much they sold in the year without anything getting taken off. The sales for the year were �63,850. Sales returns This is the amount paid back to the customers when items are returned. The sales return figure was �250 Net Sales (Turnover) This is the receipts for sales for the year. The net sales for the year was �63600 (63,850 - 250) Opening Stock This is the value of stocks of finished products, work in progress and raw materials that are held in the business at the beginning of the year. ...read more.

Middle

This is similar to the gross profit percentage buy it shows how much net profit is being made compared with sales. This is useful to compare the gross profit percentage with the net profit percentage because this shows how much of the gross profit is being taken up by the expenses of the business. A fall in the net profit percentage may show that expenses were increasing. NPP = �11,325/�63,600*100 = 18% Return on capital employed (ROCE). The calculation for this is net profit for year before interest and tax divided by capital employed x 100. This is a difficult ratio as the term 'capital employed' is used by different accountants. For the accounts that have been produced for you capital employed can be defined as: fixed assets plus current assets minus current liabilities. This can change though depending on the accountant so please be aware of this. The ratio shows the percentage return that the investors have received on the capital that they invested. ROCE = �11,325/ (�15,575+�8360-�1,610)*100= 51%. Liquidity. These have two ratios to measure how easily the debts can be paid in the business. Current ratio. The calculation for this is: current assets divided by current liabilities. This shows the proportion of current assets to current liabilities. It shows how solvent the business to pay debts in the near future. A ratio of 2:1 is a good ratio, even though businesses can do well with lower ratios. ...read more.

Conclusion

The net profit has dropped significantly from 27% to 18%. This is below the average and a fall in this may show that expenses were increasing. If an investor saw the figures for the previous year's and then saw the figures for 2007 then they would probably go and invest in another business because they don't think that they will make any money from Mr Hans's business because something has gone wrong. The asset turnover is good because they are making 4 times the amount that they spend. The ROCE is 51% this shows the percentage return that the investors have received on the capital that they invested. This percentage is good because it is 14% above the average and it shows that they returning good money. They are getting 6% more than the previous year back. 5.0 RECOMMENDATIONS The rate of stock turnover is very high so I would recommend that they sell some of their stock quickly to get some money and not have so much stock sitting around for a long time. Because their net profit dropped a lot in the year it shows that their expenses may have been quite high, so I would recommend that they try and get their expenses down by putting restrictions on paper, lowering staff hours and wages, turning lights off when leaving the room, shopping around for a better deal on their telephone and internet and also see if their suppliers can lower their prices. ?? ?? ?? ?? F:\Unit 2 p5&p6.doc 1 hannah.clark01 09/06/2010 hannah.clark01 ...read more.

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