business

SUBSIDIARY DIPLOMA BUSINESS

UNIT 5: Business Accounting
10 Credits

Name.....................................

Accounting Ratios
Unit 5
BTEC SUBSIDIARY
DIPLOMA IN BUSINESS

Objectives for today
Describe what accounting ratios are
Explain who uses them and why
List and explain the key accounting ratios
You will need:
A calculator a copy of Surridge Meats Balance Sheet
A copy of Days Paints P&L Sheet

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Accounting Ratios:
What are they?
A method of interpreting the information provided on the Balance Sheet and Profit & Loss sheet. Management need to measure the results of their actions – versus last year, budget & similar organizations Accounting Ratios: Surridge Meats
1. Current Ratios (Solvency
Current Assets / Current Liabilities
= 75,120 / 44,400
Current Ratio = 1.7 : 1
This ratio tells us that it has more assets than liabilities, for every £1.70 that it owns, it owes £1. This is acceptable.

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Accounting Ratios: Surridge Meats
2. Acid Test Ratios (Solvency)
(Current Assets – stock) / Current Liabilities
= (75,120 – 20,000) /44,400
Acid test ratio is 1.24 : 1
This is a tougher measure of a firms liquidity and is a preferred measure by the banks. The asset figure does not include the stock. For every
£1.24 that the firm owns it owes just £1…again acceptable. Accounting Ratios: Day’s Paints
3. Gross Profit % of Sales Ratios
(Profitability)
Gross Profit / Sales
= 232,500 / 472,500 (2010)
=200,000/450,000 (2009)
= 49.2% (2010)
= 44.4% (2009)
This means for every £ made in sales….the profit is 49.2p. It is useful having a few years accounts so that you can spot the trends.

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Accounting Ratios: Day’s Paints
4. Net Profit % Sales Ratios (Profitability)
Net Profit / Sales
= 92,500 / 472,500
= 19.5% (2010)
= 11.1% (2009)
This means that for every £1 sales made
19.5p is made in profit after all the expenses have been deducted.

Accounting Ratios:Surridge Meats
5. ROCE ( Return on