• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Interpret the contents of a trading and profit and loss account of a food retailer.

Extracts from this document...

Introduction

Transfer-Encoding: chunked I am going to examine the financial statements of Alpha Ltd, a food retailer. I will be using ratios to measure solvency, profitability and efficiency of the company. Finally, I will analyse and interpret reasons for the performance of Alfa Ltd. Solvency ratio Solvency ratios measures the ability of Alpha Ltd to settle their short term debts. These ratios allow managers and other interested parties to monitor Alpha Ltd.’s cash position. 1. Current ratio measures the ability of Alpha Ltd. to meet its liabilities or debts over the next year or more. Formula: Current ratio = Current Assets Current Liabilities = £75000 £50000 = 1.5:1 Alpha Ltd.’s current ratio of 1.5:1 is very close to a representative current ratio of 1.6:1. This means that Alpha Ltd. are now in a position to settle their debts on time. This puts Alpha Ltd. in a positive position. Alpha Ltd. can improve their current ratio by raising more cash through the sale of fixed assets or the negotiation of long-term loans. ...read more.

Middle

are able to convert their stock into sales 15.5 times a year or every 23.55 days. This means that Alpha Ltd. are working efficiently; as a food retailer, they are able to sell their stock quickly before perishable items are no longer in date. They can improve their stock turnover ratio by holding lower levels of stock or to achieve higher sales without increasing stock levels. 1. Debtors’ collection period calculates the time typically taken by a business to collect the money that it is owned. Formula: Debtors’ collection period = Debtors X 365 Turnover = £5000 £1200000 = £1825000 £1200000 = 1.52 days Alpha Ltd. are able to gain their cash within 1.52 days which means they are running their business efficiently. They are able to gain from their debtors’ quickly because the majority of their customers pay by cash. Alpha Ltd. can improve their debtors’ collection period by reducing the credit period on offer to customers or by insisting on cash payment. ...read more.

Conclusion

= Operating Profit X 100 Capital Employed = 150000 X 100 275000 = 15000000 275000 = 54.55% Alpha Ltd.’s return on capital employed is 54.55% which is exceptional because a typical Ratio is between 20-30%. They have used the money very efficiently to generate profits. To improve their ROCE by increasing its operating profit without raising further capital or by reducing the amount of capital employed, for instance, paying off a long term debt. In conclusion, Alpha Ltd. have done very well. They are able to settle their debts on time, and also can settle these debts despite selling their stock. In addition, Alpha Ltd. are using their assets very efficiently to generate sales, are able to convert their stock into sales 15.5 times a year or every 23.55 days and are able to gain their cash within 1.52 days from their debtors. Lastly, for every £1 of sales they make a gross profit of 22.5p, every £1 of sales they make a net profit of 8.33p and their return on capital employed is 54.55% which means they have used the money very efficiently to generate profits. Reference – A2 business studies by Malcom Surridge and Andrew Gillespie Unit 2 M3 ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Accounting & Financial Management section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Accounting & Financial Management essays

  1. A2 Business CourseWork

    It is therefore crucial that you offer a reasonable price that will attract customers, but also ensure that the product is viable selling it at a given price with given level of customers. The idea is that you either sell at a high level of profit, but expect fewer customers or a lower level profit but more customers.

  2. Accounting case study. I am writing this report to explain the contents thats on ...

    * Motor Expenses (�1500) * Advertising (�1500) * Sundries (�240) Depreciation * Buildings (�0) * Equipment (�2325) * Motor Vehicles (�600) = �16275 Net profit This is the amount of money that the business has made after all the expenses have been taken away. The way to calculate net profit is: gross profit - all other costs.

  1. Profit and Loss Account

    get a week which is 462, which I then multiplied by four to get the amount of sales I will get a month which is 1848 and then finally, I multiplied this number by twelve to get the amount of sales I will generate for the year which comes to 22,176.

  2. Assignment 4: ethical issues. The community. P4 and M3

    ASA body ensures that advertisements are suitable for the consumers to watch. They set regulations for the advertisement agencies to follow in order to give the consumers a clear idea of what the business is trying to show. They also help businesses such as Primark to build a good relationship

  1. Define the terms used in a trading and profit and loss account and balance ...

    Profit before tax - company's profits before the company has to pay corporate income tax.

  2. There are many reasons why the use of ratio analysis will benefit Alpha Ltd

    Finally, Competitors will look at the ratios to see how the business are doing and they will draw up comparison to try to compete to get better profits. There are five types of ratio analysis that Alpha Ltd can use to measure their financial performance.

  1. Interpret the contents of a trading and profit and loss account and balance sheet ...

    well a business can meet its liabilities without having to sell stock. Profitability: Ratios can show how profitable a business really is, either as a snapshot or overtime. The three ways to find so out are: * Gross profit percentage * Net profit percentage * Return on capital employed (ROCE).

  2. Sources Of Finance and Profit and Loss Accounts.

    This document is a snapshot of the affairs of the business at a point in time. Here is an example of a balance sheet: Profit and loss account of Hill Systems Ltd for the year ending 31st December 2007 and 2008 2007 The Opening stock of Hill System Ltd at

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work