Unit 2
P7/M3
P7 - Illustrate the financial state of a given business.
M3 - Interpret the contents of a trading and profit and loss account and balance sheet for a
selected company explaining how accounting ratios can be used to monitor the financial
performance of the organisation.
P7: In this task I will use accounting ratios to show the financial state of a given business. The
business that I have been given is Domestic Dog homes that supply bedding for animals. I will be
looking at a total of 8 ratios.
M3: With the calculated results for the 8 ratios, I will be interpreting them and explaining what the
ratio shows as well as the solvency, profitability and performance of Domestic Dogs Homes.
Ratios are used to help analyse the financial information shown in profit and loss account and
balance sheets. The ratios I will be calculating will be used to determine the following three;
Solvency
Profitability
Performance
Solvency
Ratios allow a business to determine solvency, this means it allows the owners to determine if the
business has enough capital to meet its liabilities. Current ratios are calculated in order to show us
how many assets a business owns in compared to their liabilities.
The following formula is used to calculate current ratios.
Current Ratios = Current Assets / Current Liabilities
The following is the calculation to work out Domestic Dog Homes current ratio:
2010 Current ratio = 2.9 : 1 = 10,600/3,600
M3 - A ratio of 1:1 means the business would struggle to pay off all the liabilities, whereas a ratio of
2:1 would imply that businesses have twice as much assets as liabilities.
Acid Test Ratios are calculated as it takes away the option for a business to sell its stock to meet its
liabilities, therefore a more accurate ratio is produced. The acid test ratio formula shows us how the
business can pay its liabilities without selling stock.
The following formula is used to calculate Acid Test Ratios,
Acid Test Ratios = (Current Assets – stock)/Current Liabilities
The following is the calculation to work out Domestic Dog Homes Acid Test Ratio:
2010 Acid Ratio = 1.5 : 1 = (10600-5000)/3600
M3 :A ratio which is above 1 is crucial in order to show that the business can pay its liabilities, a ratio
above 2 is very good as the business can pay it off with ease.
P7/M3
P7 - Illustrate the financial state of a given business.
M3 - Interpret the contents of a trading and profit and loss account and balance sheet for a
selected company explaining how accounting ratios can be used to monitor the financial
performance of the organisation.
P7: In this task I will use accounting ratios to show the financial state of a given business. The
business that I have been given is Domestic Dog homes that supply bedding for animals. I will be
looking at a total of 8 ratios.
M3: With the calculated results for the 8 ratios, I will be interpreting them and explaining what the
ratio shows as well as the solvency, profitability and performance of Domestic Dogs Homes.
Ratios are used to help analyse the financial information shown in profit and loss account and
balance sheets. The ratios I will be calculating will be used to determine the following three;
Solvency
Profitability
Performance
Solvency
Ratios allow a business to determine solvency, this means it allows the owners to determine if the
business has enough capital to meet its liabilities. Current ratios are calculated in order to show us
how many assets a business owns in compared to their liabilities.
The following formula is used to calculate current ratios.
Current Ratios = Current Assets / Current Liabilities
The following is the calculation to work out Domestic Dog Homes current ratio:
2010 Current ratio = 2.9 : 1 = 10,600/3,600
M3 - A ratio of 1:1 means the business would struggle to pay off all the liabilities, whereas a ratio of
2:1 would imply that businesses have twice as much assets as liabilities.
Acid Test Ratios are calculated as it takes away the option for a business to sell its stock to meet its
liabilities, therefore a more accurate ratio is produced. The acid test ratio formula shows us how the
business can pay its liabilities without selling stock.
The following formula is used to calculate Acid Test Ratios,
Acid Test Ratios = (Current Assets – stock)/Current Liabilities
The following is the calculation to work out Domestic Dog Homes Acid Test Ratio:
2010 Acid Ratio = 1.5 : 1 = (10600-5000)/3600
M3 :A ratio which is above 1 is crucial in order to show that the business can pay its liabilities, a ratio
above 2 is very good as the business can pay it off with ease.
