5.5 – Analysis of Accounts
Cards (11)
- Capital employed: this is shareholders' equity plus non-current liabilities and is the total long-term and permanent capital invested in a business
- Liquidity: the ability of a business to pay back its short-term debts
- Profitability: the measurement of the profit made relative to either that value of sales achieved or the capital invested in the business
- Illiquid: assets are not easily convertible into cash
- (from the income statement and balance sheet)Return on capital employed = (net profit /capital employed) x 100%
- compare with previous years or other companies to see if business more efficient or not
- shows profit earned from capital used in business
- (using the income statement)Net profit margin % = (net profit / revenue) × 100
- if (N)PM increases then gross profit was higher or expenses lower
- compare with previous years or other companies
- (from the balance sheet)Acid test ratio = (current assets - inventories current) / current liabilities
- similar to current ratio but can be slightly <1 and still be able to repay current liabilities as they fall due
- (from the balance sheet)Current ratio = current assets / current liabilities
- result of 1+ business has sufficient current assets to pay off current liabilities
- if <1 then illiquid
- >2 too much working capital
- Uses and users of accounts:
- Manager: take better decisions, controlling the operations of a business
- Shareholders, creditors, government : check on company performance
- Lender: decide whether or not to give the loan
- Other companies: use comparing performance
- Limitations of accounts:
- not full details of accounts for external users
- ratios based on past data
- accounting data over time affected by inflation
- different accounting methods used by different companies
- (from the income statement)Gross profit margin % = (gross profit / revenue) × 100
- if GPM increases then either prices were increased or cost of goods are cheaper
- compare with previous years or other companies