# Unit 3 Accounting Ratio Analysis

Powerful Essays
1704 Words
Grammar
Plagiarism
Writing
Score
Unit 3 Accounting Ratio Analysis
Analysis and explain trends of the accounting ratios you have calculated in P3 (M2)

Profitability
Profitability ratios measure the profit of the firm in relation to another by comparing profit with sales. Profitability ratios figures shows how profitable a business is and it’s another great way to analyse the company’s overall performance compare to other businesses. If the company is making more profit shows that they are performing well and are good at managing their cost.

These are 3 different ratios under profitability ratios:

1.) Gross profit percentage of sale
This ratio measures the percentage of Gross profit on sales.
Gross profit margin = (Gross profit / Sales) * 100

2006 2007
22% 15%

The Gross profit margin for the ECO
Also, acid test ration for ECO PLC for year 2007 is 0.6:1 which means that they are only have £0.60 every £1 liability. Acid test ratio is more dependable by the business because it does not include stock. The ideal position for acid test ratio is 1.5: 1. The business is far away from the ideal position which suggests that the business may not have sufficient funds to cover their liabilities and may become insolvent in the near future. Moreover, the table show that the acid test ratio has decrease from year 2006 to 2007 which shows that the business is not solvent to pay any short term debts on time (insolvent) as they do not have enough assets to pay for their …show more content…
(P5)
What is Budget?
Budget is forecast or estimate of what a business is going to earn or spend for the future. Budget can helps business manage its cost effectively because if business fails to do so then this may affect profit being damaged and makes business unable to pay their expenses and debt on time.

How budget can be used to control, set targets and control the business?
Control
Budget are mainly prepared the business to control the activities of the business. For example, business owners are able to use master budget which enables business to manage their financial activity in the business. Master budgets combines information about business financial activity like their sales, production cost and income which enables business see their overall performance by looking at their financial activity. For example, they are able to control any financial activity which can affect overall expenses like an increase in cost in supplies but not enough units of sales being sold therefore they have to find a plan to decrease their expenses.
Set

## You May Also Find These Documents Helpful

• Better Essays

A budget, as defined by Hilton (2009 pg 348), is a detailed plan, expressed in quantitative terms that specifies how resources will be acquired and used during a specific period of time. A budget is a financial document utilized to project future income and expenses. A budget is based on how much you make in income and what your monthly expenses are. Budgets evaluate performances while the plan is what is going to happen or refine what you want to accomplish by thinking ahead. The purpose of having a budget is it improves efficiency, assigns responsibility, provides direction, and helps businesses plans and control finances. Managers use the budget as a benchmark against which to compare the results to of actual operations.…

• 1914 Words
• 8 Pages
Better Essays
• Satisfactory Essays

Profitability Ratios shows how profitable a business is in terms of measuring it overall performance. This ration helps to examine the overall profits made by the firm over the financial year, and helps us indicate whether the firm is…

• 692 Words
• 3 Pages
Satisfactory Essays
• Good Essays

A budget is a plan expressed quantitatively in detail. This detailed plan spells out how the company will acquire resources as well as how the resources will be allocated for a specific time. The budget is used for projecting future income and expenses. The purpose of a budget is the assist the company in providing a methodology in determining what direction to go, to improve efficiency, delegate responsibility and provide a means of controlling the finances of the company. In some cases, managers use budgets to determine how to set targets and standards for employees.…

• 1502 Words
• 7 Pages
Good Essays
• Good Essays

The profitability ratios for this business analyse how profitable they will be after all the ratios are worked out. The gross profit margin shows that the business is selling most of their stock and receiving quite a lot of gross profit. The ratio gives a high percentage therefore the profitability of the business is better and there is more gross profit available to meet expenses as there is lower cost of sales.…

• 922 Words
• 4 Pages
Good Essays
• Better Essays

A budget is an instrument used to help managers ensure that the resources used effectively and proficiently toward the goals of an organization. A budget projection can be made on a yearly base depending on previous year or existing one. They can further be broken down quarterly or monthly depending on it use. Generating a budget is complex undertaking, and for a budget to be effective the organization ought to follow it strictly. However, no matter how closely a business follows their guidelines there will always be some form of variances. The organization should expect a few variances and be able to work these discrepancies in any budget constraints.…

• 1318 Words
• 6 Pages
Better Essays
• Satisfactory Essays

You will have 10 minutes to read the paper. You must not write in your question booklet or use a calculator during…

• 3409 Words
• 14 Pages
Satisfactory Essays
• Good Essays

A budget is an documented summary of likely income and expenses for a given period. It is important because it helps a business you determine whether they have the money to spend on certain things or not, and if they need to spend more in certain areas. It is created using a spreadsheet, and it provides a concrete, organized, and easily understood breakdown of how much inflows and outflows of money that is going through the business. It’s an helpful tool to help you prioritize your spending and manage your money.…

• 1009 Words
• 3 Pages
Good Essays
• Satisfactory Essays

Which users may be interested in each type of ratio? Huffman Trucking are mainly suppliers, other trader creditors and staff such as:…

• 374 Words
• 2 Pages
Satisfactory Essays
• Good Essays

A budget is a financial plan which is expressed in real numbers, typically in monetary units, which set the expectations for the expenses the company will incur to reach its goals, and management objectives. A good budget uses forecasts to determine what amounts should be used to reach desired efficiency and profitability. Budgets can be used to determine whether a not a process is working effectively, whether or not changes in operations need to be made in order to reach goals, and can help solve problems before they occur and help make changes when necessary.…

• 3575 Words
• 15 Pages
Good Essays
• Good Essays

The profitability ratios measure a company’s operating success for a specific period of time. Most investors and bankers are going to be interested in the profitability of a company. The data for asset turnover indicates how much profit a company is making based on the usage of the available assets. The data for the profit margin indicates how much of the company’s sales resulted in net income for the business.…

• 385 Words
• 2 Pages
Good Essays
• Good Essays

A budget plan is the most effective way to keep the business and its finances on track. It gives you the opportunity to review the business’ performance and any factors that are affecting or may affect your business. Also to manage your money more effectively, allocate appropriate resources, monitor performance, meet planned objectives and plan for the future.…

• 663 Words
• 3 Pages
Good Essays
• Satisfactory Essays

The unit is divided into two parts. In the first part, Assignment 1, you developed an understanding of the accounting processes necessary to provide accurate and relevant financial information. The second part of the unit (Assignments 2, 3 and 4) cover the practical aspect of carrying out those accounting activities.…

• 539 Words
• 3 Pages
Satisfactory Essays
• Good Essays

A budget is how a business manages their money by predicting the amount the company is going to spend. The two types of budgeting our:…

• 1190 Words
• 5 Pages
Good Essays
• Good Essays

Budgeting is the foundation of running a successful business. A budget is simply a plan for your future income and expenditures that you can use as a guideline for spending and saving. In order to create good budget is by planning and communication. Shim, Siegel, and Shim, (2012) stated that the budgeting process requires good, timely communication. Everyone involved much be communicated the expectations of the budget.…

• 473 Words
• 2 Pages
Good Essays
• Good Essays

Stakeholders use profitability ratios to pick up understanding on the adequacy or sufficiency of an organization 's profits. Loaning organizations and investors will utilize profitability ratios to help focus the conceivable financial related profits for the investment into that particular organization.…

• 659 Words
• 2 Pages
Good Essays