5. Shows
the flow of sales and costs over
a period of time, usually a year, and the
level of profits or losses made as a
result of trading.
6. The
trading account shows the
difference between the cost of goods
sold and the sales revenue.
The
difference is known as gross profit.
7. The
profit and loss account begins with
the gross profit from the trading
account.
Any
other income is added to the gross
profit. Then all other expenses
(overheads) are subtracted, to give net
Profit.
9. Pete runs a takeaway pizza parlour in
Mexborough. He has been trading for 12
months and is drawing up his profit and loss
account.
How will he work out how much money he
has taken over the 12 months?
Sales = price x number sold
10. Pete’s takings are as follows;
6,000 x pizzas at £7 each.
42,000
10,000 x chips at £1.50 each
15,000
8,000 x garlic bread at £4 each 32,000
What is his sales figure?
£89,000
11. Next we need to work out how much it
has cost him to buy his raw materials to
make these goods.
Cost of goods sold = opening stock +
purchases – closing stock
Has Pete any opening stock?
12. Pete’s purchases are as
follows;
Prepared dough 2,000 packets £6,000
at £3 each
Frozen chips 280 boxes at £10
£2,800
each
Toppings and tomato base
£1200
£1,200
£ 600
Sundries £600
TOTAL = £10,600
13. What is Pete’s gross profit?
Gross profit = sales – COGS
89,000 – 10,600 = £78,400.
14. What else will we have to take off Pete’s
profit figure?
Overheads / expenses – the general costs
of running the business.
For example.....
15. Pete’s expenses are as follows;
Wages
£10,000
Telephone
£ 3,000
Rent
£12,000
Utilities
£ 5,000
Advertising
£ 2,500
TOTAL EXPENSES ?
Insurance
£ 1,000
Vehicle
£ 5,000
£38,500
16. So, what is Pete’s net profit?
Net profit = GP – expenses
NP = 78,400 – 38,500 = £39,900
17. Cost of goods sold is also stated as cost
of sale
Sales
18. Profit and Loss Account for Pete's Pizza Parlour 2010
Sales
Cost of Goods Sold
Gross Profit
Less Expenses
Wages
Rent
Advertising
Insurance
Vehicles
Telephone
Utilities
Net Profit
$
10,000
12,000
2,500
1,000
5,000
3,000
5,000
$
89,000
10,600
78,400
38,500
39,900
22. The
Balance Sheet shows the value of a
business’s assets and liabilities at a
particular time.
This
lets managers/owners know how
much their business is worth.
Before
we can complete a balance sheet
you must know some key terms.
23. Assets:-
Are items of value which is
owned by the business.
Assets
are broken down into two
categories.
Fixed
Assets:- Are likely to be kept
by the business for more than one year.
EG. Premises, vehicles, equipment.
24. Current
Assets:- Are assets that are held for
a short period of time.
E.G. Cash, Stock, Debtors (people who owe you
money)
Liabilities:-
Are items owed by the business.
Again liabilities are broken down into to kinds.
25. Long-Term
Liabilities:- Anything that
business has to pay back after one year.
E.G Loans
Current
Liabilities:- Are amounts owed
by the business which have to be paid
within one year. E.G Overdraft,
Creditors (people you owe money to).
26. If
the value of assets are greater than
liabilities, then the business is said to be
wealthy. Business’s would like to see this
increase every year.
To
calculate the Owner’s Wealth
(Shareholders fund) we use this equation.
Total Assets-Total liabilities=Owner’s Wealth
27.
Fixed Assets
Property
Machinery
Vehicles
Current Assets
Stock
Debtors
Cash
Current Liabilities
Creditors
Unpaid Tax
Net Current Assets (Working Capital)
Net Assets
Financed by:
Shareholder's Funds
Share Capital
Retained Profit
Long Term Liabilities
Bank Loan
Debentures
Capital Employed
These two
These two
figur es
figures
must
must
balance
balance
14
1
5
12
3
20
15
80
40
30
150
5
155
80
50
20
5
155
What it’s
What it’s
doing with
doing with
its money
its money
Whereeits
Wher its
got it
got it
money
money
fr om
from
29. Balance Sheet - Mr Reading's Burger Bar Ltd - 31st
March 2005
The business has
The business has
bought some fixed
boughtassets fixed
assets
some
Fixed Assets
Property
80
Machinery
40
Vehicles
30
150
Fixed Assets will last for
Fixed Assets will last for
MORE THAN ONE YEAR –
MORE THAN ONE YEAR –
they will have depreciated but
they will have depreciated but
we don’t need to worry about
we don’t need to worry about
this here…..
this here…..
30. Current Assets last for a
Current Assets last for a
FEW MONTHS
FEW MONTHS
Current Assets
Stock
5
Debtors
12
Cash
3
20
Liquidity
Liquidity
of assets
of assets
increases
increases
The most
The most
liquid –
liquid –
money the
money the
firm hasn’t
firm hasn’t
spent
spent
Raw
Raw
materials or
materials or
finished
finished
products it
products it
hasn’t sold
hasn’t sold
People who
People who
owe the
owe the
business
business
e.g. trade
e.g. trade
credit
credit
31. Current Liabilities
Creditors
Unpaid Tax
14
1
15
The opposite
The opposite
to debtors –
to debtors –
the business
the business
owes them.
owes them.
This is money
This is money
owed to
owed to
suppliers
They have
They have
to be paid
to be paid
within one
within one
year of
year of
the date
the date
of the
of the
Balance
Balance
Sheet
Sheet
32. Fixed Assets
Net Current
Net Current
Assets =
Assets =
Current
Current
Assets –
Assets –
Current
Current
5
Liabilities
12
Liabilities
3
It’s also
It’s also
20
called
called
working
working
capital – does
capital – does
14
the business
the business
1
15
have enough
have enough
capital to
capital to
5 pay off its
pay off its
155
short-term
short-term
Net Current Assets + Fixed Assets = Net debts? ..
Net Current Assets + Fixed Assets = Net Assets
Assets
debts?
This is the net worth of the business – everything
This is the net worth of the business – everything
its spent its cash on!
its spent its cash on!
Property
Machinery
Vehicles
Current Assets
Stock
Debtors
Cash
Current Liabilities
Creditors
Unpaid Tax
Net Current Assets (Working Cpaital)
Net Assets
-
80
40
30
150
+
33.
Financed by:
Shareholder's
Funds
Share Capital
Retained Profit
Long Term
Liabilities
Bank
Loan
Debentures
Capital Employed
80
50
20
5
155
Capital Employed is what you get
Capital Employed is what you get
when you add shareholders funds
when you add shareholders funds
and long term liabilities. It must
and long term liabilities. It must
equal Net Assets!
equal Net Assets!
Money put into
Money put into
business from
business from
share issue
share issue
All the profit
All the profit
retained for
retained for
future
future
investment
investment
Money that is
Money that is
borrowed from
borrowed from
other people –
other people –
debts that
debts that
take over a
take over a
year to pay
year to pay
34.
35. For
stakeholders it is very important to
analyse the final published accounts of
companies.
They
could tell us of the performance
of the company and the financial
strength of the company.
36. There
are many ratios that can be
calculated from a set of accounts.
These ratios are used to compare
performance and liquidity.
37. Gross Profit Margin %=Gross Profit X100
Sales Turnover
This shows how much gross profit the
company is making for every pound. An
increase will mean that prices have
increased or the cost of goods have been
reduced.
38. N.P Margin=
Net Profit
X100
Sales Turnover
This will be lower than the G.P margin
because other expenses would have
been deducted. The higher the result
the better.
39. ROCE(%)=
Net Profit
X100
Capital Employed
The higher the figure the more efficient
the business is running. It means the
business is making higher profits for
each dollar invested in the business.
40. Liquidity
Ratios calculate how quickly
the business can pay back its short
term debts.
Current Ratio=
Current Assets
Current Liabilities
41. A
safe current ratio should be between
1.5-2. Anything less than one means
that the business will struggle to pay
off its debt.
This
ratio is good but it forgets that
not all current assets such as stock can
be sold straight away.
42. Acid Test Ratio=
Current Assets-Stock
Current Liabilities
Anything below 1 is a worry for the business as
that means it currently can not pay off it’s
debts. If it is too high it suggests the
business has too much money not being used
correctly.
43. Ratios
are only good when you are
comparing them to previous year or similar
businesses together.
It
is important to remember that ratios:
-Are based on past results
-May be out of date (businesses change)
-Different companies may value assets
differently
44. In
pairs can you go through the ratio
case study of Frank Frankfurters
Then
Page
You
105-124
need to work through this in your