Business Accounting

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Unit 5
Business Accounting
P5
Introduction
In this assignment I will be using the profit and loss accounts and balance sheet for SIGNature's business to work out the Profitability, Liquidity and Efficiency Ratios. Profitability
Gross profit Percentage sales
Gross Profit Sales Turnover ×100
244200 444000 ×100=53%
Net Profit Percentage
Net ProfitSales turnover×100
73960444000×100=16.66%
Return on Capital Employed (ROCE)
Net Profit before interest and taxCapital Employed×100
73960149160×100=49.58%

Liquidity
Current Ratio
Current AssetsCurrent Liabilities
7016026000=2.69

Acid Test Ratio/ Liquidity Ratio
Current Assets-stockCurrent liabilties
70160-24420026000=1.75

Efficiency
Debtors payment period
CreditorsCredit Purchases×365
41000444000×365=33.7 (34 days)
Credit payment period
CreditorsCredit Purchases×365
15500199800×365=28.3 (28 Days)
Rate of stock turnover
Average stockCost of goods sold× 365
12000244200×365=17.93 (18 Days)

M2
Introduction
I will now explain what each of these ratio's mean to Sharma and Ryan, and how it effects their business's overall financial performance. Profitability
Gross profit Percentage sales
Gross Profit Sales Turnover ×100
244200 444000 ×100=53%
The percentage of gross profit is a percentage to find out how much profit is made from every £1 to the cost of goods. In the case of SIGNature's business every £1 they make in profit 53p is profit and 47p is cost of sales. The factors that effect this percentage is the sales and most importantly the cost of making those sales, if the cost of making the sales is greater than the sales than the business isn't making any profit. Net Profit Percentage

Net ProfitSales turnover×100
73960444000×100=16.66%
The net profit ratio is referred to as the net profit margin, its shows for every £1 made in sales how much is left as net profit after all expenses have been deducted. The net profit percentage for SIGNature's business is 16.66% that's 17pence if you round it up. The business is spending too much on expenses and need to cut down in order for this net profit to increase. Return on Capital Employed (ROCE)

Net Profit before interest and taxCapital Employed×100
73960149160×100=49.58%
The Return on Capital Employed shows the capital that the owners invests in the business and the percentage of the investment is profit. Every £1 that is made it shows the percentage of the is profit. The ROCE for SIGNature's is 49.58% rounded up to 50%. Every £1 the business made from the owners investment 50pence is profit which is good for the business because the investors are getting it back slowly because half it is making profit. Liquidity

Current Ratio
Current AssetsCurrent Liabilities
7016026000=2.69
The Current ratio shows the amount of current assets in relation to current liabilities which is expressed in a ratio. In the case of SIGNature's business the Current ratio is 2.69, which means that for every £1 the business owes in current liabilities it owns £2.69 in current assets. Therefore the business has sufficient liquidity to meet its short term debts. Acid Test Ratio/ Liquidity Ratio

Current Assets-stockCurrent liabilties
70160-24420026000=1.75
The acid test is a harsher measure for a firms liquidity. Similar to the Current ratio it shows the amount of current assets in relation to the current liabilities however the acid test includes the stock too. SIGNature's business acid test ratio is 1.75, this means that for every £1 the business owes in short term debts its has £1.75 in liquid assets. This figure shows the business can pay off it short term debts.

Efficiency
Debtors payment period
CreditorsCredit Purchases×365
41000444000×365=33.7 (34 days)
The debtors payment period measures how long it takes for a the debtors of the business to pay the business back. SIGNature's business only takes 34 days which is a month and a few days which is good for the business because the cash flow will be...
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