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LC Bus Accounting
Unit 4 Accounting and Ratio Analysis
| Term | Definition |
|---|---|
| Profit and Loss Account | The Profit and Loss Account (P&L) calculates amount of the profit (or loss) that the business makes in a year. |
| The Profit and Loss Account has two parts. | The Trading Account and the Profit and Loss Account. |
| The Trading Account shows | Sales - cost of sales= gross profit |
| The profit and Loss Account shows | Gross Profit -expenses = Net Profit |
| The importance of the P&L document for managers because | If gross profit is low then price is too low/cost of raw materials (cost of prod) are too high. If the net profit is low expenses are too high and/or can it afford dividends or how much the business has to reinvest (out of profits or borrowed). |
| The Balance Sheet shows | Fixed assets, Current assets, Current liabilities, Working Capital, Long-term liabilities. |
| authorised share capital | Maximum share capital that the company can raise. |
| Issued share capital | actual amount of capital that has ben raised from selling shares. |
| Users of Financial Information | Management, Shareholders, Banks, Trade Unions, Competitors, Suppliers. |
| Fixed Assets | Consist of all the valuable items the business owns that it will continue to keep for more than one year, such as buildings, cars, computers, equipment and so on. |
| Current Assets | Comprise all valuable items the business owns that it will keep for less than one year, such as stock debtors (customers who owe the business money for goods sold to them on credit), cash and so on. |
| Current Liabilities | Include loans the business owes that have to be repaid within one year, such as bank overdrafts, creditors (suppliers the business owes for goods bought form them on credit) and so on. |
| Working Capital | Shows the cash left over in the business to pay bills that come in. It is the difference between the business's Current Assets and its Current Liabilities. |
| Financed by | Shows the amount of money invested in the business by the investors. It includes shares and loans. |
| Ordinary Share Capital | (Also called equity share capital) is the amount of money that shareholders paid into the business by way of investment. Each share owned carries one vote at company meeting and entitles the owner to a share of company profits. |
| Retained earnings | (also called reserves) show the total amount of profits previously mad by the business that have been reinvested in the business. |
| Preference Shares | The amount of money that another type of shareholder paid into the business by way of investment. This type of share does not get a vote a company meetings but, does guarantee share of profit before other shareholders. |
| Long Term Loans | Amounts of money borrowed by the business that it has more than one year to repay. |
| Importance of the Balance Sheet | Value of fixed assets tell managers the amount of security (collateral) has to offer a bank when applying for loan. Working Capital figure tells manager if the business is liquid (cash to pay bills). Finance shows if company has too many loans. |
| Ratio Analysis is | A form of Financial Statement Analysis that is used to obtain a quick indication of a firm's financial performance in several key areas. Profitability, Liquidity and Gearing (Debt/Equity Ratio). |
| Profitability Ratios | Examine whether the profit made by the business is good or bad for the size of the business. Gross Profit Margin, Net Profit Margin and Return on Investment (ROI). |
| Net Profit Margin (Percentage) | Net Profit / Sales x 100 : Ideal is as high as possible and better than last year. |
| Gross Profit Margin (Percentage) | Gross Profit / Sales x 100 : Ideal is as high as possible and better than last year. |
| Return on Investment (Capital Employed) | Net Profit / Capital Employed x 100 : Capital Employed = ordinary share capital + retained earnings/reserves + long term loans + preference shares. : Ideal is to be better then alternative investments like a bank. |
| Liquidity Ratios | Examine whether the buiness has enough cash available to pay its short-term bills (such as gas, electricity, wages and so on) when they are due to be paid. Working Capital (Current Ratio) and Acid Test ratio. |
| Working Capital (Current Ratio) | Current Assets / Current Liabilities : Ideal ratio 2:1 |
| Acid Test Ratio | (Current Assets - Closing Stock) / Current Liabilities : Ideal ratio 1:1 |
| Gearing Ratio (Debt/ Equity Ratio) | Long Term Debt (Loans) + Preference Shares / Equity (ordinary shares) + Retained Earnings (Reserves) |
Created by:
MrFromholz
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