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AS and A Level: Accounting & Financial Management
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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
-2756.0 -2695.0 Total assets less current liabilities 8747.0 7343.0 Creditors: Amounts falling due after more than one year -2741.0 -1927.0 Provisions for liabilities and charges -440.0 -402.0 Net assets 5566.0 5014.0 Capital and reserves Called-up share capital 350.0 347.0 Share premium 2004.0 1870.0 Other reserves 40.0 40.0 Profit and loss account 3136.0 2721.0 Equity shareholders' funds 5530.0 4978.0 Minority interests 36.0 36.0 Total capital employed 5566.0 5014.0 Weighted average number of shares in issue in the period 6994279711 6932225203 Accounting ratios: Current ratio: Current assets = 2053.0 Current liabilities -2756.0 This shows how Tesco finds out the current ratio using the current assets and current liabilities.
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The owner of tesco can use his savings and start up the business. * Capital from profits: Once a business is operating it may be able to invest the money that it makes as profits back in the business. This means that even greater profits may be made in the future. The amount of profit to invest back in the business or in new business which will depend on how much profit the owner(s) want to keep for themselves against how much they want the business to expand. For some businesses it is not possible to use capital from profits for example, if they are a charity or non-profit organisation.
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Tesco is comfortable with city earnings for the current year but is ?cutting its cloth? to adapt to tougher trading conditions, which Mr Black added. The supermarket, which was unavailable for comment, is reportedly driving harder bargains with the supply chain and is looking to cut wages and distribution costs. The inflation pressures of previous months are cooling down, prompting the company to re-address terms with suppliers. ?Market conditions are toughening, we sense, for the supply chain,? Mr Black states.
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Explain the difference between capital income, revenue income, capital expenditure and revenue expenditure.
As a sole trader business Future fashion can keep all its profits to itself. Partnership A partnership is when two or more than two people set up a business. They are then known as partners. Each partner will have to contribute towards the business, they will have to contribute towards the capital income, therefore increasing the amount of money available. Partners all share making decisions for the business and the profit. Some partnerships any loans taken out are still taken out by using their own assets which is a huge risk.
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Describe the purpose of accounting for an organisation. The organisation I have chosen is Future Fashion
The business owner must record all the money coming into the business from sales and all of the money going out such as expenses. If a business fail to do this it may find itself not chasing payments forgetting to pay bills. They may even get into serious trouble with HM Revenue and Customs which is a British government department for the collection of all types of taxes. If a business does not record its transactions correctly it cannot report its financial performance accurately and therefore tax payments may be wrong.
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Alternatively, it may try to increase sales without increasing the cost of goods sold. The gross profit made at every £1 made is 53p. It is okay, it is not that bad but the business could do better. It could be made better by looking for cheaper supplier but the quality of the product should be affected. The business has made 53p on every £1 which is good. It will affect the business in future as this good but it is not that good if the business wants to do well in future they have to deal with this by looking for cheaper suppliers or else they might face any small loss in future.
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This is considered to be good position for SIGNature to be in. Net Profit Margin Net Profit -------------- x 100 = % Sales 66660 ----------------- x 100 = 15% 444000 This show the net profit as a percentage which is essential for a business because a business needs to know if it is able to meet its expenses and the main purpose of a business is to make a profit. This show that they keep 15% of the total money that they make so it Is considered to be good for their type/standard of business.
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* Sole trader ? A sole trader is someone who own the business on their own; therefore they have to find the Capital income on their own or personal loans. Sole traders often invest their personal savings into the business or take out a bank loan an sometimes borrow from friends or family. If the business is a success other people can invest but that would not be the Capital Income because that period of time has passed when the business was in its early stages; therefore it is not Capital Income.
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Overdrafts may need to be secured against your business assets, which put them at risk if you cannot meet repayments. Negotiating terms with creditors: Creditors are people or businesses that a business owes money to, normally because goods or services have been bought on credit as opposed to cash purchases. A business with cash flow problems could try to negotiate a longer payment term with its suppliers for example, an increase from 30 days to 60 days. This would slow down the flow of cash out of the business.
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This indicator indicates the profit the company has made before the tax reduction. Using the net profit ratio it can be compared to the gross profit. If the gross profit is higher than the net profit it means that the business is spending more money on it operating costs. Calculation: The calculation shows that the net profit for SIGNature is only about 19.4% which shows the company is not making enough profits before the tax reduction. The gross profit margin is 38.3% higher than the net profit margin which clearly implies the organization is spending too much money on their operation costs.
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Each share gives the shareholder a vote on the direction of the company. Sale And Leaseback Off balance sheet financing' in which an ownersells an asset or property to a leasingfirm and, at the same time, leases it (as a lessee) on a long-term basis to retainexclusivepossession and use. Although this arrangementfreescapital tied up in a fixed asset, the original owner losesdepreciation and taxbenefits. External Sources? This is the finance that comes from outside the business. It involves the business owing money to outside individuals.
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20.0 27.1 24.3 Earnings per Share (p) 22.8 17.4 20.8 Dividend per share (p) 8.2 5.8 4.8ROCE (%) 13 12 12P/E ratio (times) 14.3 15.6 15.2 The low gearing ratio (Debt to Equity) is the strongest in the supermarket sector and means that Morrison?s could borrow money in order to expand, especially given that interest rates are currently quite low and look set to stay low for some time - Morrison?s owns about 90% of its store portfolio. ROCE is healthy, given that the opportunity cost of investing the same money in the bank is about 4% A strong dividend
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Evaluate the reliability of break-even analysis in estimating budgeted activity levels for selected organisation
The break-even analysis is based on forecasting and has a certain limitations which should be considered. It is not always possible to predict what will happen on the market. The linear relationship is based on the presumption that costs remain constant. However this is not the case in practical market situations. The business may get some discount from its suppliers. Also the business can often reduce its selling price in order to increase its sales volume and this is an efficient strategy known as a non-linear relationship. The break-even analysis is internal and it is not used to consider the things like competition or market demand which means that the business should use other analysis to watch what is happening on the market and what strategies are used by competitors.
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BUSINESS ACCOUNTING P2 - I will be explaining the difference between the capital and revenue items of expenditure and income.
£1500 Electricity bill was paid - one quarter £500 Food stuff & Containers paid £10,000 New Cutlery & Crockery brought and paid £5000 Received from customers £25,000 Received commission from other businesses £7000 Old office furniture sold £3000 Old van sold £500 Interest on bank saving account received £400 Old Computer sold £300 Capital expenditure is used to buy capital items which are assets that will stay in the business for over a period of time or more than one accounting year.
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Mr Jones? business will also need to take account of internal and external factors, which could possibly influence the sales figures and use all the information to plan for the future sales. Previous year?s data regarding profit can be used initially to determine current performance because businesses will want to know whether or not the business have performed well over the year with regard to the profit it has made. Production costs are direct costs of producing the goods a firm sells for Mr Jones this would include the cost of materials used, the direct labour and any direct expenses.
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All costs, which manufacturer had to do, consists of the production costs. They are divided to variable and semi-variable costs. Example of variable costs labour, fuel and raw materials and an example for semi variable costs are telephone bill, Internet usage and electricity bills. Fixed cost is the cost that never changes over a period of time. And also it does not increase with the output of the firm. E.g. Rent, wages of permanent workers etc. Stepped cost is a type of fixed cost that will be fixed for a relevant range (RR)
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The higher the gross profit the better. Gross profit percentage is also sometimes called gross profit margin and the calculation shows how well the business is managing its purchases of stock. Net Profit % Net Profit / Sales x 100 = Net Profit % This is the next step from gross profit and subtracts the operating costs and tax to give the net profit, or overall profit. This ratio shows how well the business manages its other expenses, especially when it is compared to the gross profit percentage.
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To make a business more profitable fixed and variable costs should be reduced to minimum. The business would also struggle to break-even if the prices charged are higher than competitors ? it would have a negative impact on the number of sales revenue. Sales revenue is the income generated by the sale of a product of service; it is all the money that goes into the business before covering the costs. So, when the costs are under control it makes business more successful and there is more chances of a surplus budget. Surplus is a positive budget.
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Ratio Analysis. I am going to illustrate the financial state of Chester Private Hire Cars by explaining the accounting ratios and how are those used in order to monitor the financial position of the business
This would increase the rate of the gross profit without forcing the business to increase the cost of goods sold. Net profit it is amount of money the business has left over after all expenses are taken away. This calculation shows how well the business manages its other expenses. Calculation for net profit (YEAR 2006): NET PROFIT 120 X 100 = X 100 = 17.14% (17%) SALES 700 Calculation for net profit (YEAR 2007): NET PROFIT 60 X 100 = X 100 = 7.5% (8%) SALES 800 The net profit has fall over the year period of time by 9.64%.
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B, Suggest a reason for maintenance costs rising in the autumn. The rising maintenance costs of an extra £1000 per month from October to December are due to the toll on the vehicles during the busier months earlier in the year. The fact that the buses are used the most during the summer will inevitably have an impact on the maintenance costs. Another reason for this increase in maintenance expenditure towards the end of the year is the annual mandatory repairs that need to take place. It would be far wiser to carry these out at the time when the company has less demand for custom as to take a vehicle of the road at the company’s busiest period would make an obvious impact in the income for that month.
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Without records it would be very hard and time consuming for the business to know how much money they owe to other businesses, how much debtors owe to them, whether they are making a profit or a loss and if they are paying the right amount of tax. Good record keeping in your business is essential for its success, it shows how well the business is doing, whether targets are being met and whether the business is over spending anywhere.
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High Street banks increase and decrease the interest rate e.g. Lloyds TSB?s vantage rate. Examples: Abbey National Bank www.abbeynational.co.uk Alliance & Leicester www.alliance-leicester.co.uk Bank of Scotland www.bankofscotland.co.uk Barclays Bank www.barclays.co.uk Bradford & Bingley www.bbg.co.uk Bristol & West www.bristol-west.co.uk Britannia Building Society www.britannia.co.uk Clydesdale Bank www.cbonline.co.uk Cheltenham & Gloucester www.cheltglos.co.uk Co-operative Bank www.co-operativebank.co.uk Halifax www.halifax.co.uk HSBC Bank PLC www.hsbc.co.uk Lloyds TSB www.lloydstsb.co.uk National Westminster Bank (NatWest) www.natwest.co.uk Nationwide Building Society www.nationwide.co.uk Northern Bank www.nbonline.co.uk Portman www.portman.co.uk Royal Bank of Scotland www.rbs.co.uk Standard Chartered Bank www.standardchartered.co.uk Standard Life Bank www.standardlifebank.co.uk Woolwich Building Society www.woolwich.co.uk Yorkshire Building Society www.ybs.co.uk Merchant banks Merchant banks: they mostly deal in international finance, long-term loans for companies and underwriting.
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There are some problems in your cash flow forecast: 1. In some months, September, October, January, February, April and June, your outflows are greater than your inflows. It means you spend more than what you get so you get net cash flow which means you are making loss. 2. From August to Jan, the out flow is approximately increasing in these months which mean less cash is available in your business. 3. In February, April and June you have negative closing balance which means you need to use overdraft.
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We have to learn how to use the credit card wisely in order to prevent debt crisis. Many people cannot see themselves managing their life without a credit card because of its many advantages. First of all, credit card is convenient and provides security as we walk outside. For example, if someone wants to buy one million dollars of house, he or she can pay down-payment with credit card instead of carrying a huge amount of money for it and then being robbed on the way to the real state office. On the other hand, if someone stole your credit card, you can just call the credit card company to cancel it out.
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For Dolores boutique to make a positive closing balance they need to increase their sales or decreases their costs. For Dolores boutique to avoid a negative cash flow they need to cut down on their expenditures. For example they can spend less money on wages; rather than spending £7600 they can decrease that number and spend around £5500 on wages. And also increase their rental price to £650 from £250. August In August Dolores boutique made the least amount of sales. They made £21420 of sales in august this is significantly lower than other months e.g. £10000 lower. This is probably because the customers where on holiday and Dolores boutique didn’t have a lot of customers.
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