Unit 5: Business Accounting P5
P5
Unit – 5 (Business Accounting)
BTEC National Diploma In Business Level 3
The Date
Your Name
Your Teacher
1
,Unit 5: Business Accounting P5
Unit 5 – Business Accounting
On completion of this unit I should:
1) Understand the purpose of accounting and the categorisation of business income and
expenditure.
2) Be able to prepare a cash flow forecast.
3) Be able to prepare profit and loss accounts and balance sheet.
4) Be able to review business performance using simple ration analysis.
Task 5:
1. Perform ratio analysis to measure the profitability, liquidity and efficiency of a given
organisation.
2. Analyse the performance of a business using suitable ratios.
3. Evaluate the financial performance and position of a business using ratio analysis.
Terms of reference:
Stan Life has been in business for two years. The owner is keen to review the performance of
his business to see how well he has been doing. He knows that this can be done using Simple
Ratio analysis but he is not really sure how this is done. His friend Al Fresso has
recommended my services to him.
Ratio analysis is used to evaluate relationships among financial statement items. The ratios
are used to identify trends over time for one company or to compare two or more companies
at one point in time. Financial statement ratio analysis focuses on three key aspects of a
business: liquidity, profitability, and efficiency to evaluate its financial performance.
I will use the main efficiency, liquidity and profitability ratios to evaluate how well Stan Life
is operated throughout those two years since opened.
2
, Unit 5: Business Accounting P5
Simple Accounting Ratios
Current Ratio — current ratio is mainly used to give an idea of the company's ability
to pay back its short-term liabilities (debt and payables) with its short-term assets
(cash, inventory, receivables). The higher the current ratio, the more capable the
company is of paying its obligations. A ratio under 1 suggests that the company
would be unable to pay off its obligations if they came due at that point. Thus, this
shows the company is not in good financial health, it does not necessarily mean that it
will go bankrupt - as there are many ways to access financing - but it is definitely not
a good sign.
Acid Test — this figure shows if company is able to meet its short-term liabilities
without selling out its stock.
Gross profit — is a profitability ratio that shows the relationship between gross profit
and total net sales revenue. It is a popular tool to evaluate the operational performance
of the business. The ratio is calculated by dividing the gross profit figure by net sales.
Gross Profit Margin — gross profit margin gives a good indication of financial
health of a business. Without an adequate gross margin, a company will be unable to
pay its operating and other expenses and build for the future. In general, a company's
gross profit margin should be stable. It should not flow much from one period to
another. More efficient companies will usually show higher profit margins.
Net Profit — is a popular profitability ratio that shows relationship between net profit
after tax and net sales. It is calculated by dividing the net profit (after tax) by net sales
Net Profit Margin — this number is an indication of how effective a company is
at cost control. The higher the net profit margin is, the more effective the company is
at converting revenue into actual profit. A higher net profit margin means that a
company is more efficient at converting sales into actual profit.
Creditors Days — estimates the average time it takes a business to settle its debts
with trade suppliers. This figure gives an insight into whether a business is taking full
advantage of trade credit available to it. A business that wants to maximise its cash
flow should take as long as possible to pay its bills.
Debtors Days — is a ratio used to work out how many days on average it takes a
company to get paid for what it sells. The lower the number of debtor days, the better.
An abnormally high figure suggests inefficiency or sometimes even can predict future
bankruptcy of a company.
ROCE — (Return on Capital Employed) is a measure of the returns that a company is
realising from its capital employed. ROCE should always be higher than the rate at
which the company borrows otherwise any increase in borrowing will reduce
shareholders' earnings. For a company, the ROCE trend over the years is also an
important indicator of performance. In general, investors tend to give an advantage to
the companies with stable and rising ROCE numbers over companies where ROCE
is bounces around from one year to the next.
Stock Turnover —is the ratio of cost of sales of a business to its average stock held
during a given period of time. Stock turnover is used to measure the stock
management efficiency of a business. In general, a higher value of stock turnover
indicates better performance and lower value means inefficiency in controlling stock
levels.
Assets turnover — is a financial ratio that measures the efficiency of a company's
use of its assets in generating sales revenue or sales income to the company - the
higher the number the better.
3
P5
Unit – 5 (Business Accounting)
BTEC National Diploma In Business Level 3
The Date
Your Name
Your Teacher
1
,Unit 5: Business Accounting P5
Unit 5 – Business Accounting
On completion of this unit I should:
1) Understand the purpose of accounting and the categorisation of business income and
expenditure.
2) Be able to prepare a cash flow forecast.
3) Be able to prepare profit and loss accounts and balance sheet.
4) Be able to review business performance using simple ration analysis.
Task 5:
1. Perform ratio analysis to measure the profitability, liquidity and efficiency of a given
organisation.
2. Analyse the performance of a business using suitable ratios.
3. Evaluate the financial performance and position of a business using ratio analysis.
Terms of reference:
Stan Life has been in business for two years. The owner is keen to review the performance of
his business to see how well he has been doing. He knows that this can be done using Simple
Ratio analysis but he is not really sure how this is done. His friend Al Fresso has
recommended my services to him.
Ratio analysis is used to evaluate relationships among financial statement items. The ratios
are used to identify trends over time for one company or to compare two or more companies
at one point in time. Financial statement ratio analysis focuses on three key aspects of a
business: liquidity, profitability, and efficiency to evaluate its financial performance.
I will use the main efficiency, liquidity and profitability ratios to evaluate how well Stan Life
is operated throughout those two years since opened.
2
, Unit 5: Business Accounting P5
Simple Accounting Ratios
Current Ratio — current ratio is mainly used to give an idea of the company's ability
to pay back its short-term liabilities (debt and payables) with its short-term assets
(cash, inventory, receivables). The higher the current ratio, the more capable the
company is of paying its obligations. A ratio under 1 suggests that the company
would be unable to pay off its obligations if they came due at that point. Thus, this
shows the company is not in good financial health, it does not necessarily mean that it
will go bankrupt - as there are many ways to access financing - but it is definitely not
a good sign.
Acid Test — this figure shows if company is able to meet its short-term liabilities
without selling out its stock.
Gross profit — is a profitability ratio that shows the relationship between gross profit
and total net sales revenue. It is a popular tool to evaluate the operational performance
of the business. The ratio is calculated by dividing the gross profit figure by net sales.
Gross Profit Margin — gross profit margin gives a good indication of financial
health of a business. Without an adequate gross margin, a company will be unable to
pay its operating and other expenses and build for the future. In general, a company's
gross profit margin should be stable. It should not flow much from one period to
another. More efficient companies will usually show higher profit margins.
Net Profit — is a popular profitability ratio that shows relationship between net profit
after tax and net sales. It is calculated by dividing the net profit (after tax) by net sales
Net Profit Margin — this number is an indication of how effective a company is
at cost control. The higher the net profit margin is, the more effective the company is
at converting revenue into actual profit. A higher net profit margin means that a
company is more efficient at converting sales into actual profit.
Creditors Days — estimates the average time it takes a business to settle its debts
with trade suppliers. This figure gives an insight into whether a business is taking full
advantage of trade credit available to it. A business that wants to maximise its cash
flow should take as long as possible to pay its bills.
Debtors Days — is a ratio used to work out how many days on average it takes a
company to get paid for what it sells. The lower the number of debtor days, the better.
An abnormally high figure suggests inefficiency or sometimes even can predict future
bankruptcy of a company.
ROCE — (Return on Capital Employed) is a measure of the returns that a company is
realising from its capital employed. ROCE should always be higher than the rate at
which the company borrows otherwise any increase in borrowing will reduce
shareholders' earnings. For a company, the ROCE trend over the years is also an
important indicator of performance. In general, investors tend to give an advantage to
the companies with stable and rising ROCE numbers over companies where ROCE
is bounces around from one year to the next.
Stock Turnover —is the ratio of cost of sales of a business to its average stock held
during a given period of time. Stock turnover is used to measure the stock
management efficiency of a business. In general, a higher value of stock turnover
indicates better performance and lower value means inefficiency in controlling stock
levels.
Assets turnover — is a financial ratio that measures the efficiency of a company's
use of its assets in generating sales revenue or sales income to the company - the
higher the number the better.
3
