M3 – Interpret the contents of a trading profit and loss account and balance sheet for a selected
company explaining how accounting ratios can be used to monitor the financial performance of an
organisation.
1. For each ratio that you calculated in P7 you must explain why the result is either good or
bad for McDonalds and why.
Current Ratio
For the current ratio I found that the ratio was 3.268. This is telling us how many assets to liabilities
McDonalds or a business has. The higher the number, the more the business owns over what they
owe. McDonalds having a current ratio of 3.268 is good because this is showing us that McDonalds
have 3.268 times more assets than liabilities. This is good for McDonalds as they would be able to
sell all of their assets and end up with an overall profit. Although the current ratio is good to use, it
includes the stock/inventory which could throw off the ratio slightly which is why the Acid test Ratio
is useful.
Acid Test Ratio
I had got the result of 3.234 for the Acid Test Ratio. The Acid Test Ratio is like the current ratio but it
excludes the stock/inventory from the current assets. The stock/inventory is the short term assets
that the business will possess. For example, for McDonalds the stock is the food, for a clothes shop it
is the clothes. The assets that the Acid Test Ratio uses are the long term assets such as buildings and
equipment. I believe this would be a better ratio to compare towards previous years or other
companies because if this ratio increase over the years, then this would be evidence that the
company is growing.
Gross Profit Margin
The result that I had got for the Gross Profit Margin was 38.52%. This is showing us that before tax
that out of every pound made, 38.52 pence of it is profit. This is a good percentage and it is quite a
high percentage which is good for McDonalds but this is before they are taxed and before some of
their expenses. This means that this percentage isn’t how much McDonalds actually profits. The Net
Profit Margin is more reliable in terms of actual profit made after tax and expenses.
Net Profit Margin
For the Net Profit Margin the percentage that I had received was 17.82%. This is a good percentage
because it is showing that out of every pound spent at McDonalds, 17.82 pence is profit after tax
and expenses. This is a good percentage for McDonalds as it shows they are controlling their prices
as well as they are able to choose what they can charge for their products and the price of them.
company explaining how accounting ratios can be used to monitor the financial performance of an
organisation.
1. For each ratio that you calculated in P7 you must explain why the result is either good or
bad for McDonalds and why.
Current Ratio
For the current ratio I found that the ratio was 3.268. This is telling us how many assets to liabilities
McDonalds or a business has. The higher the number, the more the business owns over what they
owe. McDonalds having a current ratio of 3.268 is good because this is showing us that McDonalds
have 3.268 times more assets than liabilities. This is good for McDonalds as they would be able to
sell all of their assets and end up with an overall profit. Although the current ratio is good to use, it
includes the stock/inventory which could throw off the ratio slightly which is why the Acid test Ratio
is useful.
Acid Test Ratio
I had got the result of 3.234 for the Acid Test Ratio. The Acid Test Ratio is like the current ratio but it
excludes the stock/inventory from the current assets. The stock/inventory is the short term assets
that the business will possess. For example, for McDonalds the stock is the food, for a clothes shop it
is the clothes. The assets that the Acid Test Ratio uses are the long term assets such as buildings and
equipment. I believe this would be a better ratio to compare towards previous years or other
companies because if this ratio increase over the years, then this would be evidence that the
company is growing.
Gross Profit Margin
The result that I had got for the Gross Profit Margin was 38.52%. This is showing us that before tax
that out of every pound made, 38.52 pence of it is profit. This is a good percentage and it is quite a
high percentage which is good for McDonalds but this is before they are taxed and before some of
their expenses. This means that this percentage isn’t how much McDonalds actually profits. The Net
Profit Margin is more reliable in terms of actual profit made after tax and expenses.
Net Profit Margin
For the Net Profit Margin the percentage that I had received was 17.82%. This is a good percentage
because it is showing that out of every pound spent at McDonalds, 17.82 pence is profit after tax
and expenses. This is a good percentage for McDonalds as it shows they are controlling their prices
as well as they are able to choose what they can charge for their products and the price of them.
