Unit 3 Accounting Ratio Analysis
Analysis and explain trends of the accounting ratios you have calculated in P3 (M2)
Profitability
Profitability ratios measure the profit of the firm in relation to another by comparing profit with sales. Profitability ratios figures shows how profitable a business is and it’s another great way to analyse the company’s overall performance compare to other businesses. If the company is making more profit shows that they are performing well and are good at managing their cost.
These are 3 different ratios under profitability ratios:
1.) Gross profit percentage of sale
This ratio measures the percentage of Gross profit on sales.
Gross profit margin = (Gross profit / Sales) * 100
2006 2007
22% 15%
The Gross profit margin for the ECO …show more content…
Also, acid test ration for ECO PLC for year 2007 is 0.6:1 which means that they are only have £0.60 every £1 liability. Acid test ratio is more dependable by the business because it does not include stock. The ideal position for acid test ratio is 1.5: 1. The business is far away from the ideal position which suggests that the business may not have sufficient funds to cover their liabilities and may become insolvent in the near future. Moreover, the table show that the acid test ratio has decrease from year 2006 to 2007 which shows that the business is not solvent to pay any short term debts on time (insolvent) as they do not have enough assets to pay for their …show more content…
(P5)
What is Budget?
Budget is forecast or estimate of what a business is going to earn or spend for the future. Budget can helps business manage its cost effectively because if business fails to do so then this may affect profit being damaged and makes business unable to pay their expenses and debt on time.
How budget can be used to control, set targets and control the business?
Control
Budget are mainly prepared the business to control the activities of the business. For example, business owners are able to use master budget which enables business to manage their financial activity in the business. Master budgets combines information about business financial activity like their sales, production cost and income which enables business see their overall performance by looking at their financial activity. For example, they are able to control any financial activity which can affect overall expenses like an increase in cost in supplies but not enough units of sales being sold therefore they have to find a plan to decrease their expenses.
Set
Profitability
Profitability ratios measure the profit of the firm in relation to another by comparing profit with sales. Profitability ratios figures shows how profitable a business is and it’s another great way to analyse the company’s overall performance compare to other businesses. If the company is making more profit shows that they are performing well and are good at managing their cost.
These are 3 different ratios under profitability ratios:
1.) Gross profit percentage of sale
This ratio measures the percentage of Gross profit on sales.
Gross profit margin = (Gross profit / Sales) * 100
2006 2007
22% 15%
The Gross profit margin for the ECO …show more content…
Also, acid test ration for ECO PLC for year 2007 is 0.6:1 which means that they are only have £0.60 every £1 liability. Acid test ratio is more dependable by the business because it does not include stock. The ideal position for acid test ratio is 1.5: 1. The business is far away from the ideal position which suggests that the business may not have sufficient funds to cover their liabilities and may become insolvent in the near future. Moreover, the table show that the acid test ratio has decrease from year 2006 to 2007 which shows that the business is not solvent to pay any short term debts on time (insolvent) as they do not have enough assets to pay for their …show more content…
(P5)
What is Budget?
Budget is forecast or estimate of what a business is going to earn or spend for the future. Budget can helps business manage its cost effectively because if business fails to do so then this may affect profit being damaged and makes business unable to pay their expenses and debt on time.
How budget can be used to control, set targets and control the business?
Control
Budget are mainly prepared the business to control the activities of the business. For example, business owners are able to use master budget which enables business to manage their financial activity in the business. Master budgets combines information about business financial activity like their sales, production cost and income which enables business see their overall performance by looking at their financial activity. For example, they are able to control any financial activity which can affect overall expenses like an increase in cost in supplies but not enough units of sales being sold therefore they have to find a plan to decrease their expenses.
Set