Unit 2 Business Betc Essays

899 Words May 14th, 2012 4 Pages
P7 Illustrate the financial state of a given business using ratios

I have been asked to illustrate the financial state of a given business using ratios, to do this I will use accounting ratios to show the financial state of Porcella.
One of the ways a business can measure how it is doing is through ratio analysis. Ratios can help Porcella to see how it is doing now and how it compares to last year or the year before and against competitors. For these ratios to be useful, they should be compared over time to see if there are any trends and also compared between businesses within the same industry (competitors). I shall be using the following ratios Solvency Ratios, Acid Test Ratios, Profitability Ratios, Net profit Ratios, Efficiency
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Net profit
This calculation takes the idea of profitability one stage further by actually considering the profit as a percentage of turnover after all the other expenses have been taken out. This ratio is similar to the gross profit margin but looks at net profit as a percentage of turnovers.

Net profit % = net profit ÷ turnover x 100
E.g. from the snapshot of Porcella business account:
N.P%=N.P/TO*100
=11,600/64,000*100
=18.12
=18%
This ratio provides a good measure of performance, but if the percentage is declining, it makes it difficult to correct.

Efficiency
Stock turnover
This ratio looks at how quickly you turn over stock into sales, and is another good measure of efficiency:

Stock turnover = cost of goods sold ÷ stock value
E.g. from the above account
Where first we need to calculate the average stock= opening stock + closing stock/by two
=4,000+5,000/2
=4500
So;
T.TO=C.G.S/S.V
=31,000/4500
=6.8
=7%

After I conducted this ratio it suggests that the business is efficient in holding the minimum stock used within the business, this is

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