unit 2 p5 p7 and m3

Financial statements allow a business to measure their financial resources and stability. PLC (public limited companies) must publish their accounts so that investors can see how the business is doing. The 2 man final statements are; profit and loss, balance sheet. A profit and loss sheet shows you how much a business has made at the end of a financial year. This is useful for example, if you wanted to lend money the bank will look at this and determine whether or not its worth the investment and if yours good at making profit and not spending too much or going overdraft. Smaller businesses e.g. sole traders, LTDS find it useful when they want to see how much profit they have made at the end of the year and this helps them plan finances and budget settings. A profit and loss has a lot of features that are included within it and they have purposes. Sales and cost of sales is one feature and this is the amount of money generated by the sales and the cost of sales is the cost of marketing the goods or buying them. Its purpose on the profit and loss sheet is so that you can see where the money is coming in or out of the business and to understand how the business is performing. Next is usually gross profit which is the sales revenue minused by the cost of goods sold. The purpose of gross profit is so you can see how much profit has been made after all the costs are deducted and it indicates how a product is performing. Net profit is the gross profit minused by the expenses. Examples of this is rent, advertising etc. this is to see the final profit when all costs have been deducted and to also see how successful a profit is. Expenses is another feature on the sheet which is the overheads and expenses which are basically necessity costs, examples of this is wages, staff, advertising, salaries etc. This is shown on the sheet to see how the business is operating and if it is efficient or working in the best possible way. 

On a balance sheet, it has a separate set of features which are different to the features on a profit and loss sheet. A balance sheet gives a business a snippet of the businesses assets, abilities and equity. By producing a balance sheet it is important because it shows the businesses finance and where they are getting their money from. It also shows investors how much the business is worth based on their assets. The first feature is fixed asset which is assets that are owned or expected t be kept by the business for 1 year or more and this is on the sheet to see where money is being invested. Secondly, current assets can be converted into cash more quickly and are only kept for a short period of time, usually under a year. An example of a current asset is stock which is used up under a year an then you rebut more stock. Its purpose is to show where finances are available. Current liabilities are amounts due to be paid to creditors within twelve months and it shows where expenses are. Liabilities mean responsibilities that a business has. Moreover, long term liabilities are liabilities with a future benefit over a year and they are shown on the balance sheet representing the sources of funds. Share capital is the amount of money invested into a company by shareholders and its purpose is to show how much capital was raised or invested in the business. Lastly, reserves are the profits that have been kept for a particular purpose which is shown on a balance sheet to see the purchase of fixed assets, legal settlements, and pay bonuses. it is back-up money incase something in the business goes wrong it is there to use in an emergency.

P7 and M3

A ratio analysis is an explanation of financial information to satisfy the needs of various interested parties. Stakeholders in the business, internally and externally seek information to find out the fundamental questions. There are different categories of a ratio analysis to help us understand more about financial accounts. One of them is liquidity/solvency which is the ability of the firm to pay its way. Another one is profitability which is how effective the firm is at generating profits given sales and or its capital assets. Also, financial/performance is the rate at which a business sells its stock and the efficiency with which it uses it assets. 

Liquidity/solvency ratios show the cash levels of a business and the ability to turn other assets into cash to pay off liabilities and other current obligations. Liquidity is not only a measure of how much cash a business has but it is also measured of how easy it will be for a business to raise enough cash or convert assets into cash. The ratios that are included are current ratios and acid test ratios. Current rates are worked out by dividing the current assets from the current liabilities and this will work out the liquidity and efficient ratio that measures a firm’s ability to pay off its short term liabilities with its current assets. If this rate is too high then this means a business has too much stock and if the ratio is too low this means the business is not able to pay it back. Acid test ratios are worked out by minusing the stock from current assets then dividing that by the current liabilities. By doing this you will get the liquidity rate that measures the ability of a business to pay its current liabilities when they become due with only quick assets. Quick assets are current assets that can be converted into cash within 90 days or in a short period of time.

Profitability ratios compare income statement accounts and categories to show a businesses ability to generate profits form its operating actions. It focuses mainly on a businesses return on investment in inventory and other assets. These ratios basically show how well a business can achieve profits from their operations. Profitability ratios include; gross profit margin, net profit margin and return on capital employed and these are all percentages. Gross profit margin is worked out from dividing the gross profit by the sales revenue then timesing this number by 100 to get a percentage. This percentage will help a business to understand how much profit they are making from buying and selling goods. The higher the percentage the better because the business can assess the impact of its sales and how much it costs to generate. Net profit margin is worked out by dividing the net profit from sales revenue then timesing this by 100 which provides a much more accurate reading of how much profit a business has made as its takes away all of the costs and not just those we had in the buying and selling of out goods. Lastly return on capital employed is worked out by dividing the operating profit (which can be found in the profit and loss sheet) from the capital employed (which is found on the balance sheet)then timesing this number by 100 which gives you a percentage that looks at how much money you have invested in the business. Once again the higher percentage, the better!! Operating profit only covers the gross profit minus direct expenses for the business while net profit includes all gains and loses by the business including tax payments.

Financial ratios look at how the business is performing financially. it is usually relationships determined from a businesses financial information and used for comparison purposes. Financial ratios include gross profit margin, net profit margin and return on capital employed. To work out the asset turnover you divide the sales by the net assets then times that number by 100 to get a ratio. This rain measures the businesses ability to generate sales from its assets by comparing net sales with average total assets. The ratio shows how efficiently a business can use its assets to generate sales. To work out the stock turnover you would divide the cost of sales by the stock then times this by 100 to get a ratio also. The stock turnover tells you the rate at which a businesses stock has turned over. Lastly, debtors collection period is worked out by dividing the debtors by the credit sale then timesing this by 100 and this tells us how long it takes the business to recover its debts. This can be skewed by the degree of credit facility a firm offers, therefore the shorter the number the better it is.

In my opinion I personally feel that you, the branch manager of the bank SHOULD or SHOULDN'T recommend making the loan to the business. This is because there are a lot of factors to look at before you should decide on whether or not to give a loan to a business. The business is 

Solvency ratio

	EQUATION	WORKING	RATIO	EXPLANATION
Current ratio	Current assets Current liabilities	32836 32451	1.01:1
Acid test ratio	Current assets-stocks Current liabilities	32836-1354 32451	0.97:1

	EQUATION	WORKING	RATIO
Gross profit margin	Gross profit Sales revenue x 100	256250 290000 x 100	88.36%
Net profit margin	Net profit (before tax) Sales x 100	207874 290000 x 100	71.68%
Return on capital employed	Operation profit Capital employed x 100	207874 112735 x 100	184.39%

Efficiency ratios

	EQUATION	WORKING	RATIO
Asset turnover	Revenue Net assets	290,000 145186 x 100	199.74%
Stock turnover	Cost of sales Average stock held	33750 2155 x 100	1566.1%
Debtors collection period	Trade debtors Revenue x 365	2123 256250 x 365	3.02 days