1. HIGHER LEVEL ASSESSING A BUSINESS

2. Overview Who is interested in the accounts of a business? Profitability ratios Liquidity ratios Activity ratios Dividend policy How to structure your answer

3. Interested Parties 1. Management – performance of a company from one year to the next 2. Revenue Commissioners – calculating tax based on profits made 3. Bank – repayments of loans and overdrafts 4. Creditors – can you make repayments for goods bought on credit 5. Employees – can their wages be paid, job security 6. Investors – is it a good company to invest in

4. Profitability Gross Profit %/Gross Margin Gross Profit x 100 % Sales1 Net Profit %/Net Margin Net Profit x 100 % Sales 1 Return on Capital Employed/Return on Investment Net Profit x 100 % Capital Employed1

5. Liquidity Current Ratio/Working Capital Ratio Current Assets : Current Liabilities Ideal 2:1 Acid Test Ratio/Quick Asset Ratio Current Assets – Closing Stock : Current Liabilities Ideal 1:1

6. Activity Rate of Stock Turnover Cost of Sales= x times Average Stock Period of credit given to debtors Debtors x 365 = x days Credit Sales Period of credit received from creditors Creditors x 365= x days Credit Purchases

7. SOLVENCY Total Assets are greater than Total Liabilities DIVIDEND POLICY Dividend Paid x 100 % Issued Share Capital 1 DIVIDEND Dividend is a percentage of profits which are given to shareholders. The percentages is decided by the board of directors each year.

8. Layout of solutions 1. State the formula 2. Show the workings for the two years 3. Show the correct unit with each answer e.g. ratio, %, times 4. In your evaluation, outline the difference between the two years performance. 5. For Liquidity ratios, outline the IDEALS 1. Working capital ratio2:1 2. Acid-test ratio1:1