Shows a summary of cash inflows and outflows

Do you remember this?

Year 11

Users of Users of Financial Financial

Info.Info.

CompetitorsCompetitors – all – all limited companies limited companies must publish their must publish their

accountsaccounts

Inland RevenueInland Revenue

WorkersWorkers

InvestorsInvestors

Lenders of Lenders of money money e.g. e.g.

banksbanks

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.

The trading account shows the difference between the cost of goods sold and the sales revenue.

The difference is known as gross profit.

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.

SalesLess cost of sales= Gross profitLess expenses= Net profit

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

Pete’s takings are as follows;

6,000 x pizzas at £7 each.

10,000 x chips at £1.50 each

8,000 x garlic bread at £4 each

What is his sales figure?

42,000

15,000

32,000

£89,000

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?

£6,000

£2,800

£1,200

£ 600

TOTAL = £10,600

Pete’s purchases are as follows;

Prepared dough 2,000 packets at £3 each

Frozen chips 280 boxes at £10 each

Toppings and tomato base £1200

Sundries £600

What is Pete’s gross profit?

Gross profit = sales – COGS

89,000 – 10,600 = £78,400.

What else will we have to take off Pete’s profit figure?

Overheads / expenses – the general costs of running the business.

For example.....

Pete’s expenses are as follows;

Wages £10,000

Rent £12,000

Advertising £ 2,500

Insurance £ 1,000

Vehicle £ 5,000

Telephone £ 3,000

Utilities £ 5,000

TOTAL EXPENSES ?

£38,500

So, what is Pete’s net profit?

Net profit = GP – expenses

NP = 78,400 – 38,500 = £39,900

Cost of goods sold is also stated as cost of sale

Sales

Profit and Loss Account for Pete's Pizza Parlour 2010

  $ $Sales   89,000Cost of Goods Sold   10,600Gross Profit   78,400Less Expenses    Wages 10,000  Rent 12,000  Advertising 2,500  Insurance 1,000  Vehicles 5,000  Telephone 3,000  Utilities 5,000 38,500Net Profit   39,900

Mr Reading's Burger Bar    £OOO £OOO    

Sales (Turnover)   300   Cost of Sales            Opening Stock 40       Purchases 120         160                  Less Closing Stock 30           130   Gross Profit     170   Less expenses      Wages   50     Insurance   2     Rates   11     Rent   30     Telephone   11     Advertising   4     Depreciation   5     IT   3     Light and heat 2           118   Net Profit     52   

Mr Reading's Burger Bar Plc      2007     2008    £OOO £OOO   £OOO £OOO             Sales (Turnover)   300     350

Cost of Sales              Opening Stock 40     30    Purchases 120     145      160     175  

 Less Closing Stock 30     35  

      130     140Gross Profit     170     210

          mbnjLess expenses        

      118     135Net Profit     52     75

             Corporation Tax   12     17Profit After Tax   40     58

Divends paid     15     20Retained profit carried forward   25     28

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.

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.

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.

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).

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

Balance Sheet - Mr Reading's Burger Bar Ltd - 31st March 2005             Fixed Assets          

 Property       80  Machinery       40  Vehicles       30 

          150 Current Assets            Stock     5     Debtors     12     Cash     3           20                Current Liabilities          Creditors   14       Unpaid Tax   1             15                Net Current Assets (Working Capital)     5 Net Assets         155              Financed by:          Shareholder's Funds            Share Capital      80   Retained Profit      50 Long Term Liabilities            Bank Loan       20   Debentures     5   Capital Employed     155 

These two figures must balance

These two figures must balance

What it’s doing with its money

What it’s doing with its money

Where its got it money from

Where its got it money from

Capital Capital EmployedEmployed

Net Net AssetsAssets

They must always They must always balancebalance

=

Balance Sheet - Mr Reading's Burger Bar Ltd - 31st March 2005

                          

Fixed Assets           Property       80  Machinery       40  Vehicles       30 

          150 

The business has The business has bought some fixed bought some fixed

assetsassets

The business has The business has bought some fixed bought some fixed

assetsassets

Fixed Assets will last for Fixed Assets will last for MORE THAN ONE YEAR MORE THAN ONE YEAR – –

they will have they will have depreciateddepreciated but we don’t need to worry but we don’t need to worry

about this here…..about this here…..

Fixed Assets will last for Fixed Assets will last for MORE THAN ONE YEAR MORE THAN ONE YEAR – –

they will have they will have depreciateddepreciated but we don’t need to worry but we don’t need to worry

about this here…..about this here…..

Current Assets         

  Stock    5   

  Debtors    12   

  Cash    3   

       20   

Current Assets last for a Current Assets last for a FEW MONTHSFEW MONTHS

Current Assets last for a Current Assets last for a FEW MONTHSFEW MONTHS

Liquidity Liquidity of assets of assets increasesincreases

Liquidity Liquidity of assets of assets increasesincreases

Raw Raw materials materials or finished or finished products it products it hasn’t soldhasn’t sold

Raw Raw materials materials or finished or finished products it products it hasn’t soldhasn’t sold

People People who owe who owe

the the business business e.g. trade e.g. trade

creditcredit

People People who owe who owe

the the business business e.g. trade e.g. trade

creditcredit

The most The most liquid – liquid –

money the money the firm hasn’t firm hasn’t

spentspent

The most The most liquid – liquid –

money the money the firm hasn’t firm hasn’t

spentspent

Current Liabilities      

  Creditors   14     Unpaid Tax   1           15 

They They have to have to be be paid paid within within one year one year of the of the date of date of the the Balance Balance SheetSheet

They They have to have to be be paid paid within within one year one year of the of the date of date of the the Balance Balance SheetSheetThe opposite The opposite

to debtors – to debtors – the business the business owesowes them. them. This is This is money owed money owed to suppliersto suppliers

The opposite The opposite to debtors – to debtors – the business the business owesowes them. them. This is This is money owed money owed to suppliersto suppliers

Fixed Assets         Property       80 Machinery       40 Vehicles       30

          150Current Assets        

  Stock     5   Debtors     12   Cash     3         20            

Current Liabilities        Creditors   14     Unpaid Tax   1           15            Net Current Assets (Working Cpaital)     5Net Assets         155

Net Current Net Current Assets Assets = = Current Current Assets – Assets – Current Current LiabilitiesLiabilities

Net Current Net Current Assets Assets = = Current Current Assets – Assets – Current Current LiabilitiesLiabilities

-+ It’s also It’s also

called called working working capital capital – – does the does the business business have have enough enough capital to capital to pay off its pay off its short-term short-term debts?debts?

It’s also It’s also called called working working capital capital – – does the does the business business have have enough enough capital to capital to pay off its pay off its short-term short-term debts?debts?

Net Current Assets + Fixed Assets = Net Current Assets + Fixed Assets = Net Net AssetsAssets. This is the net worth of the . This is the net worth of the business – everything its spent its cash on!business – everything its spent its cash on!

Net Current Assets + Fixed Assets = Net Current Assets + Fixed Assets = Net Net AssetsAssets. This is the net worth of the . This is the net worth of the business – everything its spent its cash on!business – everything its spent its cash on!

           

Financed by:        Shareholder's 

Funds          Share Capital      80  Retained Profit      50

Long Term Liabilities        

 Bank Loan       20

  Debentures     5  Capital Employed     155

Capital Employed is what you Capital Employed is what you get when you add get when you add shareholders funds and long shareholders funds and long term liabilities. term liabilities. It must equal It must equal Net Assets!Net Assets!

Capital Employed is what you Capital Employed is what you get when you add get when you add shareholders funds and long shareholders funds and long term liabilities. term liabilities. It must equal It must equal Net Assets!Net Assets!

Money put Money put into into

business business from share from share

issueissue

Money put Money put into into

business business from share from share

issueissueAll the profit All the profit retained for retained for

future future investmentinvestment

All the profit All the profit retained for retained for

future future investmentinvestment

Money that Money that is borrowed is borrowed from other from other people – people –

debts that debts that take over a take over a year to payyear to pay

Money that Money that is borrowed is borrowed from other from other people – people –

debts that debts that take over a take over a year to payyear to pay

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.

There are many ratios that can be calculated from a set of accounts. These ratios are used to compare performance and liquidity.

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.

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.

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.

Liquidity Ratios calculate how quickly the business can pay back its short term debts.

Current Ratio= Current Assets Current Liabilities

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.

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.

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

In pairs can you go through the ratio case study of Frank Frankfurters

Then

Page 105-124

You need to work through this in your own time