In the trading, profit and loss account for smiths the material costs are motor expenses which are E,622 while the direct expenses is Electricity which costs E,400. The purpose of the profit and loss account is to enable the manager/owner to tell whether the business is making a loss in terms of revenue. As per the trading, profit and loss account for smiths for the year ended 31st December the net profit is El 30,473. Fixed assets also known as property, plant and equipment are tangible assets held by a business for the production or supply of goods and services.
As per the balance sheet for Smiths as at the 1st January the fixed assets equal to IEEE,300. Current assets are cash and other resources that are expected to turn into cash or to be used p within one year of the balance sheet date. The current assets for Smiths as at the 1st January are EYE, 103. Working Capital is the cash available for the day to day operations of a company. For Smiths according to their balance sheet as at 1st January is IEEE. Net Worth is total assets minus total liabilities so it is used when talking about the value of a company.
The Net Worth for Smiths according to the balance sheet at the 1st January it is E 167,683. The Gross Profit for smiths according to the Trading Profit and Loss account is GIG 86,325 which is the proportion of money left over from revenues after accounting for the cost of goods sold. The Net Profit for Smiths according to the Trading Profit and Loss account for the Year Ended 31 SST December is E 130,473 which is the profit remaining after deductions such as Tax. The Trading Profit and Loss account shows that Smiths is Viable as they are making a net profit of El 30,473.
Task 2 – Smiths Current Ratio 43, Current Ratio-current Assets/Current Liabilities The Current Ratio for Smiths shows that the assets can cover its liabilities once. It shows how many assets a business has compared to liabilities. Acid Test Ratio Acid Test Ratio=Current Assets-Stock/Current Liabilities The Acid test for smiths shows that the business has to sell its stock to meet its liabilities. It measures how well the business can meet its liabilities without selling stock. Gross Profit Percentage The Gross Profit margin is 84% so app in every pound is profit.
This is good for the business as they are making more profit. It is measuring how much money it costs to generate those sales. Net Profit Percentage Net profit/sales Net Profit is profit generated from all activities including sales of assets. It takes into account the fixed costs and the variable costs. It shows they are making refit after tax. Return on Capital Employed Net Profit/Capital Employed* 100% more profit after tax. Return on Capital Employed Net profit/capital employed*l Return on Capital Employed measures how much money an investor is receiving back on their capital as a percentage.
As the investors are receiving 78% on their capital they are receiving more money. Rate of Stock Turnover 36, times Cost of sales/bag stock?stock turnover (no of times) The rate of stock turnover shows how efficient smiths is as the faster the stock is turned over the more likely the business is to be efficient. Debtor Collection erred 4 days Debtors/Credit Sales*365 Debtor’s collection period shows the link between the number of debtors and how long on average it takes the business to collect debts. Asset Turnover Sales/Total assets=asset turnover This means for every El of assets Smiths was able to generate El of sales.
Sales/fixed assets and sales/current assets The asset based ratio analysis shows how well smiths are making use of their assets in comparison to what industry smiths is in. Task 3 -MM Ratios Ratio for Mr. Jones’ Business Ratio for Smiths 3. 01:1 Acid Test 2. 01:1 1 to 1 Gross Profit Percentage 97. 0% 84% Net Profit Percentage 32. 03% 58% Return on Capital Employed 35. 04% 78% Stock Turnover 35 times per year 17 times per year Debtor Collection Period 14 days Asset Turnover 1 . 02:1 The Current Ratio for Jones is 3. 1 : 1 shows that Mr. Jones’ business has 3 times more assets than liabilities so they have a lot of money left over. This shows it is bad for the business as the money should be used within the business such as reinvesting the money back into the business to improve it. However for Smiths the current ratio is 1:1 this is bad for the business as they may find it difficult to ay it suppliers as the current assets equal the current liabilities so there is no money left over. The Acid Test Ratio for Jones is 2. 01:1 shows that Mr. Jones’ business shows that he can meet his liabilities twice before selling stock.
Whereas for Smiths the Acid Test Ratio is which shows Smiths may find it difficult for the assets to meet the liabilities as it is equal so they may have to sell stock. The Gross Profit Percentage for Jones is 97. 20% which is good for the business as they are making more profit which shows they have increased the number of sales they made. Smith’s made a gross profit percentage of 84% which is less than Jones as they make less profit maybe due to higher prices which means fewer customers for Smiths. Net Profit Percentage for Jones is 32. 3% which shows there is less profit available after tax because this is profit generated from all activities including sales of assets which takes fixed costs and variable costs into account. This shows Jones pays a high amount of tax on their profit as they make more money. However in Smith’s the net profit percentage is 58% which shows there is more profit available as the percentage of net profit is higher. The Return on Capital Employed is 35% for Jones which shows an investor that they are not making much profit as an investor is only receiving 35% on their capital.
Whereas Smiths are receiving 78% on their capital which advises investors to invest more money into Smith’s as they are receiving more return on their capital. The Stock Turnover for Jones is 35 times per year which is good for Jones as they are efficient as the faster the stock is turned over, the more efficient the business will be. This will increase productivity and reduce unit costs. It is showing that the equines has sold a lot of its stock and has replaced it-however for the Smiths the stock turnover is 17 times per year which is half of the stock turnover of Jones.
This shows their stock is not being sold as efficiently as the stock is turned over slower. It may suggest that Smiths are finding it difficult to sell their stock. The Debtor Collection Period for Jones is 14 days which is bad as it shows the link between the number of debtors and how long it takes on average for the business to collect its debts. This is linked to the efficiency of the business. As it is aging longer for Jones to collect its debts it shows that a lot of people owe Jones money.
Whereas for Smiths it takes 4 days for them to collect the debts they are owed because they might have fewer debtors so they don’t have to wait long for people to pay them. This shows their efficiency has increased due to less number of debtors. The Asset Turnover for Jones is 1. 02:1 shows that El of assets the business was able to generate El of sales. By dividing the sales by the total assets the business is able to work out how many pounds it earns according to how many pounds invested in total assets. The Asset Turnover for Smiths is .
