Accounting Page 313.  Why?  To measure the success of a business  To assess performance  To get loans from banks  To plan ahead.

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Presentation transcript:

Accounting Page 313

 Why?  To measure the success of a business  To assess performance  To get loans from banks  To plan ahead

 Profit is what remains from revenue once costs have been deducted

 Gross profit = Revenue or Sales – cost of goods sold  Cost of goods sold= cost of manufacturing or purchasing the products that have been sold.

 Net Profit = Gross profit – ( expenses + overheads)  Net profit is a far more important measurement than gross profit because it included expenses.

 Profit may be deemed not quality if it is a one off circumstance.

 1. Gross Profit : Cost of sales = opening stock + purchases – closing stock  2. Operating Profit or Net Profit  3. Profit before taxation ( minus financing costs)  4. Profit after tax

 Distributed Profit: used to pay shareholders in the form of dividends  Retained Profit: re invest in the business

 Assets:  Fixed Assets: Assets that have a long term function and can be used repeatedly. The business keeps these for 1 year or more.  Current Assets: These assets will be turned in cash before the next balance sheet.

 Owners Capital: money invested into the business which is called capital or share capital for Ltd.  Long term liabilities: paid back after at least 1 year  Current Liabilities: paid back within 1 year.

 Net current assets = current assets – current liabilities  Capital = assets – liabilities  Nets assets = total assets – total liabilities

 Profitability Ratios  Gross profit Margin= Gross profit / Revenue x 100  Net Profit Margin= Net profit / revenue x 100  Higher the margin the better.  Increase sales revenue while keeping cost of sales the same  Reduce the cost of sales

 ROCE = Operating profit / Capital employed x 100  It shows how efficiently the business makes a profit from the funds invested in the business.  Higher the better but remember to look at current interest rate and see whether the business has a higher ROCE than saving in a bank.

 Current ratio = Current assets – current liabilities  Ideal level is 1.5: 1  If for example it is low the business needs to get more money. Increase share capital get a loan  Asset Test ratio = Current assets – stock / current liabilities  Ideal situation is 1:1

 Formula to calculate gross margin ratio:  Gross Profit Margin Ratio = gross profit / sales.  Gross margin ratio definition and explanation:  Gross profit margin ratio is also called gross margin ratio.  To calculate gross profit subtract cost of sales (variable costs) from sales. (i.e. gross profit = sales - cost of sales)  A low gross profit margin ratio (or gross margin ratio) indicates that low amount of earnings, required to pay fixed costs and profits, are generated from revenues.  A low gross profit margin ratio (or gross margin ratio) indicates that the business is unable to control its production costs.  The gross profit margin ratio (or gross margin ratio) provides clues to the company's pricing, cost structure and production efficiency.  The gross profit margin ratio (or gross margin ratio) is a good ratio to benchmark against competitors.