Taha, Marumbo, Lisa

Accounting

Part AComment upon the

financial performance and position of each business and compare the two. In your appraisal and evaluation you are expected to use relevant ratios.

Identify who (other than the owner) would have an interest in the financial performance of the businesses and explain why they would be interested.

Topic

Part B

Taha• Introducti

on• Part B

Lisa• Profitability

ratios

Marumbo• Liquidity

ratios

Taha • Conclusio

n

Outline

Assessing business performance trends from

year to year. For Example: Net Profit Margin,

Gross Profit Margin.

Comparing business with rival businesses.

Helps firm obtain loan.

Uses of Ratios

Identify who would have an interest in the financial performance of the businesses and explain why they would be interested.Taha

Suppliers.

Manager.

Bank Manager.

Shareholders.

Investors.

Who would have an interest in the financial performance of the business. (Stakeholders)

Profitability ratiosLisa

Gross profit margin is a measure of the

profitability of the business after all direct

costs associated.

The higher, the better.

Formula:

Gross profit margin= Gross profit / Sales ×

100%

Gross profit margin

Hove Outdoor Pursuits

156738 ×100%397389=39.42%

283,689 x100%669,430=42.5%

Gross profit margin

Brighton Sport

Hove Outdoor Pursuits

Brighton Sport

37 38 39 40 41 42 43

Gross profit margin

A measure of the proportion of sales represented by over heads of business.

Formula:Overheads= Overheads / Sales × 100%

HOP-- rent

Overhead/turnover

68,384 × 100%397389= 17.2 %

66,084 × 100%669,430= 9.9 %

Overhead/turnover

Hove Outdoor Pursuits Brighton Sport

Hove Outdoor Pursuits

Brighton Sport

0 2 4 6 8 10 12 14 16 18

Overhead/turnover

The operating profit margin is a type of profitability ratio

known as a margin ratio.

The information with which to calculate the operating

profit margin comes from a company's income statement

Keeping control over fixed costs is important – could be

easy to overlook for example the amount of waste -

paper, stationery, lighting, heating, water, etc.

Formula:

Operating Profit Margin = Net profit / Sales Revenue

×100%

Operating profit margin

Hove Outdoor Pursuits

885,13 × 100%397,389= 22.3 %

217,972 × 100%669,430= 32.6 %

Operating profit margin

Brighton Sport

Hove Outdoor Pursuits

Brighton Sport

0 5 10 15 20 25 30 35

Operating profit margin

A measure of how effectively the business uses its net assets to generate profit.

The higher, the better.

Formula: Return on capital employed= Net Profit (before finance costs)/ Capital × 100%

Brighton sport- mortgage

Return on capital employed

Hove Outdoor Pursuits

885,13 × 100%99,703= 88.8%

217,972 × 100%246,930= 88.3%

Return on capital employed

Brighton Sport

Hove Outdoor Pursuits

Brighton Sport

88 88.1 88.2 88.3 88.4 88.5 88.6 88.7 88.8

Return on capital employed

Liquidity RatiosMarumbo

Current ratio =Current assets Current liabilities

A measure of a business’s ability to meet its

short term obligations/payments as they

fall due

Current ratio

Hove Outdoor Pursuits

977,65 × 100%280,06= 3.49%

143,645 × 100%34,630=4.15%

Current ratio

Brighton Sports

Hove Outdoor Pursuits

Brighton Sports

3 3.2 3.4 3.6 3.8 4 4.2

Current ratio

Quick ratio (Acid test)= Current assets less Inventory Current liabilities

A more stringent measure of a business’s

ability to meet its short term

obligations/payments as they fall due

Quick ratio (Acid test)

Hove Outdoor Pursuits

384,15 × 100%280,06=1.37

670,75 × 100%346,30= 1.94

Quick ratio

Brighton Sports

Hove Outdoor Pursuits

Brighton Sports

0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2

Quick ratio

Inventory (stock) turnover = Average stock x 365 Cost of salesOR Cost of sales Average stock

A measure of how effectively a business manages its stock

Average stock = Opening stock + Closing stock 2

Inventory (stock) turnover

Hove Outdoor Pursuits

554,65 x365 239,967 =84.4  

741,12 x365 383,839 =70.5

Inventory turnover

Brighton Sports

Hove Outdoor Pursuits

Brighton Sports

60 65 70 75 80 85

Inventory turnover

Debtor collection period =

Accounts receivable x 365

Credit sales

A measure of how effective a business is in

collecting its debts

Debtor collection period

Hove Outdoor Pursuits

36115 x365397389=33.2

43680 x365669430=23.8

Debtor collection period

Brighton Sports

Hove Outdoor Pursuits

Brighton Sports

0 5 10 15 20 25 30 35

Debtor collection period

Creditor payment period= Accounts payable x 365 Credit purchases

A measure of how quickly a business pays

its suppliers

Creditor payment period

Hove Outdoor Pursuits

18786 x365248650= 27.6

32,654 x365386348= 30.8

Creditor payment period

Brighton Sports

Hove Outdoor Pursuits

Brighton Sports

26 27 28 29 30 31

Creditor payment period

ConclusionTaha

Glautier, M. and Morris, D. (2011)Accounting theory and practice. Sussex Library. available from:http://prism.talis.com/sussex-ac/items/1047850?query=accounting&resultsUri=items%3Fquery%3Daccounting

Wood, F. and Sangster, A. (2008)Business accounting. Essex: Pearson Education Limited. Eleven Edition

Reference

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