Accounting and Finance

Includes-

5 Business Ratios

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Profitability 1- Gross Profit Percentage

Gross Profit
--------------
x 100
Sales

Shows Gross Profit made from Sales.

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Profitability 2- Net Profit Percentage

Net Profit
------------
x 100
Sales

Shows Net Profit made from Sales.

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Profitability 3- ROCE

Return on Capital Employed

Net Profit
--------------------
x 100
Capital Employed

Capital Employed- Finance put in.

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Liquidity 1- Current Ratio

Liquidity- shows how liquid a business is. Can you cover your debts?

Current Ration (Short Term Debts)


Current Assets (The ones you OWN)
--------------------------------------- (No x100)
Current Liabilities (Ones you OWE)

The ideal ratio is 2:1

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Liquidity 2- Acid Test Ratio

Current Assets - Stock
--------------------------
Current Liabilities

Ideal Ratio is 1:1

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How to Answer the Question

1. Read the question carefully
Decide whether you need to use Profitability or Liquidity Ratios
Performance = Both Profitability and Liquidity

2. Using a margin, jot down words you could use

3. Look at the financial data to see what ratios you should use.

4. Produce a table of ratios and answers.

E.g.

2009 2008

Gross Profit Percentage

Net Profit Percentage

ROCE

5. Double Check Answers

6. Work out the percentage differences between Sales Revenue, Gross Profit and Net Profit (these aren't the 5 ratios, they just help :D)

7. Comment on what has happened to the ratios (over the two years), a) How they have changed, and b) Why do you think this is so.

8. Make a judgement on whether you think the profitability/liquidity of the business has improved, with reasons why.

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How to answer the question in minute note form.

1. Read Carefully.

2. Ratios could use.

3. Ratios should use.

4. Table of ratios.

5. Double Check

6. Percentage Difference. SR, GP & NP

7. What has happenned and why.

8. Has the Prof/Liq. improved?

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