Introduction to accountant Essays

Introduction to accountant Essays Introduction to accountant Essay Introduction to accountant Essay Task-1 Acknowledgement: I would like to be grateful to my teacher for helping me out in this assignment. Introduction: For this assignment my aim to give advice to someone who is unsure about what is required and cannot see the purpose of maintaining accounting records. Basically, this person is one who does not understand the value of Account and its purpose. What is an accounting? An account is to be defined as the skills or practice of maintaining accounts and preparing reports. And the purpose is to aid financial control and Management of a business. Book keeping: Book keeping is the process of recording in books of account or on computers the financial effects of business transactions. In bookkeeping, an accountant keeps a comprehensive record of how much your business owes creditors and how much is owed to you. The records of these transactions also indicate how much you have invested in equipment and inventory. Why Accounting? There are many reasons to keep accounts in business, which consists these certain points: * To record * To monitor * To control * To manage * To measure * To inform The main features of Accounting * Recording Transaction * Monitoring activity and Controlling the business * Helping the management of the business * Informing the various stakeholders * Controlling the purse string * Planning for the feature * Comparing with past performance * Analysis and evaluation Recording Transaction- Recording transactions includes documenting revenues (by invoices or sales receipts), and entering purchases (in the account payable account) and expenditures (in the check register). Using Office Accounting, the small business owner can move beyond daily recording to higher level accounting tasks, such as recording sales orders, tracking prospective customers, and projecting sales opportunities and cash flow. Monitoring activity and controlling the business All business need to know how they are performing throughout the year. If sales suddenly start to fall this trend needs to be quickly identified and remedial action taken. Business will also need to track how much they are spending on running the business. If these costs are steadily raising it is likely that profits will start to fall. Helping the management of the business Management accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis in making informed business decisions that would allow them to be better equipped in their management and control functions. Analysis and evaluation It is possible to evaluate the performance of the company, make comparison with competitors and keep a record of the firms progress over periods of time. Financial Documents * An invoice- a document sent with goods sold on trade credit, informing the purchaser that the payment is due on a certain date. * A cash receipt- a proof of purchase given when something is paid in cash. * A credit note- a document issued to a purchaser when they have overpaid ,allowing credit on future payments * Proof of delivery-proof the items have been delivered and received at a certain destination. Financial transaction * Sales goods or services to customers * Debtors-customers who owe the business money for goods or services received on credits * Purchases- goods or services bought with the sole idea of resale * Creditors-the people or businesses that the business has purchased goods from on credit * Purchase of fixed assets-items that help the business to become more efficient * Expenses- items that need to be bought in order for the business to function Book of Account In order to record all of the above financial transactions a business will break its accounts books into four sections: a. The sales ledgers contains the personal accounts of all the debtors (customers) who have received or services and have yet to play for them. b. The purchase ledger contains the personal accounts of all the creditors-people the business has bought goods from and whom they will pay at a later date. c. The general ledger keeps a record of the monetary value of sales, purchases, sales returns and purchase returns. It contains the accounts which record the amount of money that has been spent on the expenses of the business. The other main account that is held within the general ledger is the cash book. This is the account that records all the money that has come in and gone out of the business. d. The journal records extraordinary items such as the start-up capital of a business and the purchase of a fixed assists. These are then posted to the general ledger in their own accounts. It is also used to record the correction of errors made in the double entry accounting. People who involved in Accounting Accountants- Accountants are responsibilities for supplying and using financial information. They are employed by businesses specialising in accountancy, or by a large firms which have their own financial department. They use the transactions recorded by these groups to produce final account. Clerks- Billing and posting clerks and machine operators, commonly called billing clerks, compile records of charges for services rendered or goods sold, calculate and record the amounts of these services and goods, and prepare invoices to be mailed to customers. Billing clerks review purchase orders, sales tickets, hospital records, or charge slips to calculate the total amount due from a customer. They must take into account any applicable discounts, special rates, or credit terms. A billing clerk for a trucking company often needs to consult a rate book to determine shipping costs of machine parts, for example. A hospitals billing clerk may need to contact an insurance company to determine what items will be reimbursed and for how much. Auditing Another function of these specialists is Auditing. Businesses which produce their own final accounts must by law have them checked for authenticity by an independent firm of accountants. This audit is performed annually. Legal Requirements Public limited companies are regulation by Companies Act 1985 and 1989 concerning the preparation and publication of financial statements. Companies are required to submit a copy of their account s annually to companies House. Companies with a turnover greater then à ¯Ã‚ ¿Ã‚ ½60,000 are also required to have their accounts independently audited. Consequences of not keeping financial records There are also negative consequences to a business if financial information to be inaccurate. These include: * Criminal action * Cash flow problems from a high fax bill or criminal action * Shareholders losing confidence and investing elsewhere * Bad public image * Change to management structure Purposes and Considerations of Ratios and Ratio Analysis:- Ratios are highly important profit tools in financial analysis that help financial analysts implement plans that improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage. Although ratios report mostly on past performances, they can be predictive too, and provide lead indications of potential problem areas. Ratio analysis is primarily used to compare a companys financial figures over a period of time, a method sometimes called trend analysis. Through trend analysis, can be identify trends, good and bad, and adjust the business practices accordingly. Can also see how ratios stack up against other businesses, both in and out of the business. Task-2 In task two my aim to explain the different between Capital expenditure and revenue expenditure; Capital income and revenue income Capital Expenditure are expenditures creating future benefits. Capital expenditure are used by a company to acquire or upgrade physical assets such as equipment, property, or industrial buildings. In accounting, a capital expenditure is added to an asset account. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset. Included in such amounts is spending on: * acquiring fixed assets bringing them into business * legal costs of buying buildings * carriage inwards on machinery bought * Any other cost needed to make a fixed asset ready for use. There two types Asset. They are: 1. Fixed asset 2. Current asset Fixed asset: Fixed assets, as opposed to current asset are those assets with a remaining useful life of over a year. Following the accruals principal, these assets are shown on the balance sheet but their value is depreciated, and treated as an expense in the P ; L account for each year of their life. There are two types of fixed assets: * Tangible fixed assets * Intangible fixed assets Tangible fixed assets include physical assets such as land and buildings and equipment. Long term financial investments are also considered tangible. Current asset: Current assets are those assets that are expected to be used (sold or consumed) within a year, unlike fixed assets. Revenue expenditure -The day-to-day running costs of a business (staff wages, purchase of trading stock, rent of business premises, and so on) are referred to as revenue expenditure * Premises cost e.g. rent, heating, and land and lighting etc. * Administrative costs e.g. telephone charges, postage, stationery, printing * Staff cost e.g. salaries, wages, training, staff insurance, pensions * Selling and distribution costs e.g. carriage on sales, marketing * Finance costs e.g. bank charges, loan and mortgage interest * Purchase of stock e.g. cash and credit transaction Capital income Any income resulting from the sale of capital investment assets. * Sole trader a person who trades by himself/herself without the use of a company structure or partners and bears alone full responsibility for the actions of the business. * Loans- A fixed sum of money borrowed from a bank for a clearly defined period of time. The loan may be repaid in one lump sum, or by instalments * Shares Shares is a term referred to the units of ownership interest provided to the stockholder or owner of a company. The term is often used in connection with the number of units issued to an owner of Common Stock or Preferred Stock. There is two types of shareholders: 1. Preference shares: Shares with a fixed dividend. The holders of preference shares are entitled to their dividend before ordinary shareholders and rank above ordinary shareholders should the company be wound up. Preference shares are share capital but not equity share capital. 2. Ordinary shares: Shares which are the risk capital of the business, also known as equity. The holders are part owners of the company and are entitled to share in any profits made. * Mortgages A contract between a borrower and a lender where the lender guarantees payments until the debt is repaid. * Partners A partnership is a type of business entity in which partners share with each other the profits or losses of the business undertaking in which all have invested Liability: An amount owed; an obligation of a company or entity that settled in the future by transfer of assets, provision of services, or assignment of future economic benefit, it is the result of a past transaction. Liabilities are reported on a balance sheet and are usually divided into two categories: Current liabilities these liabilities are reasonably expected to be liquidated within a year. They usually include payables such as wages, accounts, taxes, and accounts payables etc. Long-term liabilities these liabilities are reasonably expected not to be liquidated within a year. They usually include issued long-term bonds, notes payables, long-term leases, pension obligations, and long-term product warranties. Formula: ASSEST=CAPITAL+LIABILTIES Fixed assets + current asset Example: Assets =à ¯Ã‚ ¿Ã‚ ½ 25000 Capital=? Liabilities= à ¯Ã‚ ¿Ã‚ ½38000 Capital = Assets liabilities = à ¯Ã‚ ¿Ã‚ ½ 25000-à ¯Ã‚ ¿Ã‚ ½38000 = à ¯Ã‚ ¿Ã‚ ½212000 Revenue Income Revenue income is the income of a business which is derived from the normal trading activities of that business. Income is mainly derived from sale of the businesss product or service but other incomer can be derived from rent receivable, interest on investments etc. * Rent received: means when you rent your property and received capital for lend your property. This is one of the revenue incomes. * Commission received: commission is another type of income for selling a product. For example sale assistant selling a car, will received a percentage of actual amount of which the car sold. * Sales (cash and credit transaction): with currency sales you will received a receipt, which is a legal documents and credit sale is when you give credit to consumer. Gross profit: Gross profit is a basic measure of the profitability of the business and it shows the return a business can make from making and selling its products. Gross Profit = Revenue Cost of Goods. Net profit: Net profit is gross profit minus other, overhead costs. These costs are indirect costs of production such as bills, transportation, wages, interest payments etc. Net profit =Gross Profit Expenses Task 6 In this task my aim to explain her component parts (section) of a trading and profit and loss account and balance sheet. * Purpose and use of trading profit and loss account and balance sheet 1) Purpose and use of trading account The trading account shows the gross profit (or loss) that the company has made. Profit is the money made by the business and equals income minus expenses. 2) Profit and loss account The profit and loss account is an extension of the trading account. The profit and loss account shows the net profit (or loss) made. The Trading account and profit and loss account are often combined as one trading and profit and loss account so that both the gross and net profit can be displayed in the same set of accounts. The purpose of the profit and loss account is to: a. Show whether a business has made a PROFIT or LOSS over a financial year. b. Describe how the profit or loss arose e.g. categorizing costs between cost of sales and operating costs. 3) Purpose and use of balance sheet The Balance Sheet is a statement showing the assets, liabilities and owners capital of a business at a particular moment in time, for example the year end. The purpose of a Balance Sheet is to report the financial position of a company at a certain point in time. Balance Sheet analysis also provides management with insights into income trends, debt standing and long-term financial consistency, all of which are crucial towards planning and execution of vital business policies. Balance sheet also functions as an indicator to the amount of debt that can be lent to the organization. * The cost of goods sold section of the trading account The price of buying or making an item held for resale after being adjusted by beginning and ending inventory balances Formula: Opening Stock + Purchases + Carriage Inwards Purchases Return Closing Stock = Cost Of Sales Example: Opening stock = à ¯Ã‚ ¿Ã‚ ½8,550 Purchases = à ¯Ã‚ ¿Ã‚ ½345,700 Carriage Inwards = à ¯Ã‚ ¿Ã‚ ½328,160 Purchases return = à ¯Ã‚ ¿Ã‚ ½3,420 Closing stock = à ¯Ã‚ ¿Ã‚ ½23,850 Cost of sales =? Opening Stock + Purchases + Carriage Inwards Purchases Return Closing Stock = Cost Of Sales = à ¯Ã‚ ¿Ã‚ ½8,550 + à ¯Ã‚ ¿Ã‚ ½345,700 + à ¯Ã‚ ¿Ã‚ ½328,160 à ¯Ã‚ ¿Ã‚ ½3,420 à ¯Ã‚ ¿Ã‚ ½23,850 = à ¯Ã‚ ¿Ã‚ ½328,160 * The calculation of Gross profit Gross profit is the amount of profit available after deducting from sales the direct (variable) costs of labour and materials, plus the applicable costs of the factory overheads applied to the production of goods and services. Formula: Net Turnover Cost of Sales = Gross Profit + Commission Received + Discount Received + Rent Received * An explanation of the kinds of income such as: Discount received; rent received; commission received that should be added to gross profit Discount Received means this discount is received from your creditors or suppliers at the time of the settlement of their account Commission Received is another type of revenue income, a payment made to an intermediary, often calculated as a percentage of the value of goods or services provided. Commission is most often paid to sales staff, brokers, or agents. Rent Received means a person renting his/her property gets money from the person(s) renting the property, this could also be called revenue income. These three incomes reduce the cost of sales so, thats why they are added to Gross Profit. * The Overheads/ Expenses section in the profit and loss account Expenses mean an outgoing payment made by a business or individual. Here is a list of examples of expenses in a business: wages/ salaries, insurance, rent and rates, electricity and heating, carriage outwards, water, depreciations, telephone bills, administration cost, petrol, bad debts, discount allowed, sundry expenses, general repairs, advertising and interest on loans. * The calculation of net profit The Net Profit- This is calculated in the Profit and Loss Account and is what remains after all other costs used up in the period have been deducted from the Gross Profit. Net profit =Gross Profit Expenses Trail Balance sheet Cafà ¯Ã‚ ¿Ã‚ ½ Bleau DR CR Purchase à ¯Ã‚ ¿Ã‚ ½30,000 Sales à ¯Ã‚ ¿Ã‚ ½74,640 Salaries à ¯Ã‚ ¿Ã‚ ½25,000 Capital à ¯Ã‚ ¿Ã‚ ½55,000 Electricity and Gas à ¯Ã‚ ¿Ã‚ ½2,000 Bank Loan à ¯Ã‚ ¿Ã‚ ½5,000 Opening Stock à ¯Ã‚ ¿Ã‚ ½3,500 Creditors à ¯Ã‚ ¿Ã‚ ½3,360 Premises à ¯Ã‚ ¿Ã‚ ½42,000 Equipments à ¯Ã‚ ¿Ã‚ ½10,000 Vehicles à ¯Ã‚ ¿Ã‚ ½4,500 Debtors à ¯Ã‚ ¿Ã‚ ½2,400 Drawing à ¯Ã‚ ¿Ã‚ ½12,000 Cash/Bank à ¯Ã‚ ¿Ã‚ ½4,700 Rent or Rates à ¯Ã‚ ¿Ã‚ ½1,900 Total à ¯Ã‚ ¿Ã‚ ½138,000 Total à ¯Ã‚ ¿Ã‚ ½138,000 DR = CR Trail Balance sheet Jane Water DR CR Purchasing à ¯Ã‚ ¿Ã‚ ½322,000 Sales à ¯Ã‚ ¿Ã‚ ½375,000 Opening stock à ¯Ã‚ ¿Ã‚ ½90,000 Capital à ¯Ã‚ ¿Ã‚ ½178,000 Wages and Salaries à ¯Ã‚ ¿Ã‚ ½30,000 Creditors à ¯Ã‚ ¿Ã‚ ½7,000 Rates à ¯Ã‚ ¿Ã‚ ½6,000 Telephone à ¯Ã‚ ¿Ã‚ ½1,200 Drawings à ¯Ã‚ ¿Ã‚ ½18,000 Bank à ¯Ã‚ ¿Ã‚ ½3,000 Van à ¯Ã‚ ¿Ã‚ ½30,000 Shop fittings à ¯Ã‚ ¿Ã‚ ½50,000 Debtors à ¯Ã‚ ¿Ã‚ ½9,800 Total à ¯Ã‚ ¿Ã‚ ½560,000 Total à ¯Ã‚ ¿Ã‚ ½560,000 DR = CR Cafà ¯Ã‚ ¿Ã‚ ½ Blue Trading Profit and Loss Account year entering 31st Dec 2006 Cafà ¯Ã‚ ¿Ã‚ ½ Blue à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½Ãƒ ¯Ã‚ ¿Ã‚ ½ Sale à ¯Ã‚ ¿Ã‚ ½74,640 Less Cost of sales Opening stock à ¯Ã‚ ¿Ã‚ ½3,500 Purchases à ¯Ã‚ ¿Ã‚ ½30,000 Cost of sales à ¯Ã‚ ¿Ã‚ ½33,500 Gross Profit à ¯Ã‚ ¿Ã‚ ½41,140 Less Indirect Cost Rent or rates à ¯Ã‚ ¿Ã‚ ½1,900 Salaries à ¯Ã‚ ¿Ã‚ ½25,000 Electricity gas à ¯Ã‚ ¿Ã‚ ½2,000 à ¯Ã‚ ¿Ã‚ ½28,900 Net profits à ¯Ã‚ ¿Ã‚ ½12240 Looking at trading Profit and Loss of Cafà ¯Ã‚ ¿Ã‚ ½ Bleu, the Cafà ¯Ã‚ ¿Ã‚ ½ made Net profit which is à ¯Ã‚ ¿Ã‚ ½12240.As far as my opinion I think it is a successful business because this business made positive result so far. They could make more profit however; they may consider Salaries which is bit high. Also they may consider keeping their sales more competitive to their purchase. Jane Water Trading Profit and Loss Account year entering 31st Dec 2006 Jane Winter à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½Ãƒ ¯Ã‚ ¿Ã‚ ½ Sales à ¯Ã‚ ¿Ã‚ ½375,000 Less cost of sales Opening stock à ¯Ã‚ ¿Ã‚ ½90,000 Purchases à ¯Ã‚ ¿Ã‚ ½322,000 Cost of sales à ¯Ã‚ ¿Ã‚ ½412,000 Net Loss -à ¯Ã‚ ¿Ã‚ ½37,000 Less Indirect Cost Rate à ¯Ã‚ ¿Ã‚ ½6,000 Telephone à ¯Ã‚ ¿Ã‚ ½1,200 Wages and Salaries à ¯Ã‚ ¿Ã‚ ½30,000 à ¯Ã‚ ¿Ã‚ ½-37,200 Net Loss -à ¯Ã‚ ¿Ã‚ ½74,200 Looking at trading Profit and Loss of Jin Winter, I think it is a not a successful business because of negative result which is net Loss à ¯Ã‚ ¿Ã‚ ½-74200 so far. In my opinion if the business results continue end up with the negative result, business may shut down within days or months. Z man production Ltd Trading, Profit and Loss account for year ending 31st December 2006 à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½Ãƒ ¯Ã‚ ¿Ã‚ ½ Sale à ¯Ã‚ ¿Ã‚ ½810,000 Sales return à ¯Ã‚ ¿Ã‚ ½18,900 Net turn over à ¯Ã‚ ¿Ã‚ ½791,100 Less cost of sale Opening stock à ¯Ã‚ ¿Ã‚ ½21,800 Purchase à ¯Ã‚ ¿Ã‚ ½553,550 Carriage in à ¯Ã‚ ¿Ã‚ ½5,400 Purchase Return (-) 914650 Closing Return (-) 17560 Cost of sale à ¯Ã‚ ¿Ã‚ ½548,540 Gross profit à ¯Ã‚ ¿Ã‚ ½246,060 Commission received à ¯Ã‚ ¿Ã‚ ½3,500 Discount received à ¯Ã‚ ¿Ã‚ ½3,500 à ¯Ã‚ ¿Ã‚ ½249,560 Less expenses Wages à ¯Ã‚ ¿Ã‚ ½75,900 Rent à ¯Ã‚ ¿Ã‚ ½7,540 Sundry expenses à ¯Ã‚ ¿Ã‚ ½6,545 Electricity/gas à ¯Ã‚ ¿Ã‚ ½4,700 Vehicles à ¯Ã‚ ¿Ã‚ ½6,540 Petrol à ¯Ã‚ ¿Ã‚ ½22,455 Advertising à ¯Ã‚ ¿Ã‚ ½7,590 Discount allowed à ¯Ã‚ ¿Ã‚ ½5,410 Insurance à ¯Ã‚ ¿Ã‚ ½7,900 Equipments à ¯Ã‚ ¿Ã‚ ½5,400 Carriage out à ¯Ã‚ ¿Ã‚ ½7,580 General repair à ¯Ã‚ ¿Ã‚ ½5,400 Bad Debt à ¯Ã‚ ¿Ã‚ ½5,500 Interest on Loan à ¯Ã‚ ¿Ã‚ ½5,500 à ¯Ã‚ ¿Ã‚ ½179,360 Net Profit à ¯Ã‚ ¿Ã‚ ½70,200 Analysis of Trading, profit and loss Account of Z man Production Looking at trading, Profit and Loss of z man Production Ltd Company, its a successful company. However the company could make more profit by considering the following: Sales They could sell more by reducing their product cost or raise their product cost in certain amount. The company should beware that it may effect on customer, if they rise too much. Purchase They could consider purchasing fewer products or goods because in view of their amount of sales, purchase is higher. Petrol The Company spend far more money on petrol; however they should aim to spend less amount of money on their petrol cost to raise their profit. Wages Wages is one of the things which company could consider about it. Wages are bit higher then it should be. For example instead of à ¯Ã‚ ¿Ã‚ ½75900, if wages were à ¯Ã‚ ¿Ã‚ ½ 50000, then they could save à ¯Ã‚ ¿Ã‚ ½25000. Timberlake Wholesalers Ltd Trading, Profit and Loss account of Timberlake Wholesalers Ltd, year ending 31st Dec 2004 à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½Ãƒ ¯Ã‚ ¿Ã‚ ½ Sale à ¯Ã‚ ¿Ã‚ ½250,000 Sales return à ¯Ã‚ ¿Ã‚ ½5,400 Net turn over à ¯Ã‚ ¿Ã‚ ½244,600 Less cost of sale Opening stock à ¯Ã‚ ¿Ã‚ ½12,350 Purchase à ¯Ã‚ ¿Ã‚ ½156,000 Purchase Return (-) 7200 Closing Return (-) 16300 Cost of sale à ¯Ã‚ ¿Ã‚ ½144,850 Gross profit à ¯Ã‚ ¿Ã‚ ½99,750 Discount received à ¯Ã‚ ¿Ã‚ ½2,500 à ¯Ã‚ ¿Ã‚ ½102,250 Less expenses Salaries à ¯Ã‚ ¿Ã‚ ½46,000 Rent and Rates à ¯Ã‚ ¿Ã‚ ½2,000 Electricity/gas à ¯Ã‚ ¿Ã‚ ½3,000 Sundry expenses à ¯Ã‚ ¿Ã‚ ½4,700 Discount allowed à ¯Ã‚ ¿Ã‚ ½3,700 à ¯Ã‚ ¿Ã‚ ½59,400 Net Profit à ¯Ã‚ ¿Ã‚ ½42,850 Looking at Trading, Profit and Loss of Timberlake Wholesalers Ltd Company, its a successful company. The company made profit à ¯Ã‚ ¿Ã‚ ½42,850, which is good proves that its a fairly successful company; however if the company have five or six shareholders means every shareholder would get less profit between them, but if the company have one share holder that would be alright. They could make more profit by considering selling more product or goods and increase their products prices. By making product or goods prices high would collapse in their business, so they should beware of it. They also may beware of the competitors when they are making price high for their products or goods. For my opinion they should consider make price high because their amount of their purchases. Again looking at the companys less expenses the salaries are too high comparing to their net profit. They may consider employing less employee or less salaries to increase profit and they can cut down their electricity/gas bills apparently its bit high. The amount of rant and rates are ok because they are not elevated. Task 7 In this task my aim to explain my friends each of the element of a balance sheet: * Fixed assets * Intangible assets * Current assets * Current liabilities * Working capital * Long term liabilities * Net assets * Capital employed * A description of how to tell if the accounts balance. * Fixed assets are those that will be used within the business and have a life expectancy of more than one year. * Intangible assets is an asset that lacks physical substance and usually has a high degree of uncertainty concerning their future benefits, and they are unable to be touched (they are not physical objects). Patens, copyrights franchises, and goodwill are all examples of intangible assets. * Current assets can be turned quickly into cash and are considered to be the life blood of a business. * Current liabilities is the debts of the business which must be repaid within one year. These usually consist of creditors- suppliers that have sold goods or services to the business on credit. * Working capital is calculated by taking current liabilities away from current assets. It represents the amount of money that a business has available to spend after meeting all its immediate debts. A negative figure here could indicate that the business may be facing liquidly problems. * Long term liabilities consist of the business debts which will be paid over a period of longer than one year. They will include bank loans which have been taken out over a number of years. * Net assets are the total value of the assets less current liabilities. * Capital employed is the value of money that has been left in the business after net profit has been added and drawing deducted. The Capital employed of one the year becomes the opening capital of the next year. * A description of how to tell if the accounts balance If net assets are equal to capital employed in the end of balance sheet, then the account is balance. If not then the balance sheet would probably wrong or trading, profit and loss account which done previously, would been calculated mistakenly. à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½Ãƒ ¯Ã‚ ¿Ã‚ ½ Fixed Assets Premises 100,000 Equipment 30000 Vehicles 21500 151,500 Current Assets Cash 125 Debtors 23850 Stock 16300 40275 Less current Liabilities Bank overdraft 851 Creditors 12041 VAT 3475 16367 Net current assets 23908 Total asset less current Liabilities 175408 Creditor: Amount falling due to after One Year Long term Loan 33000 Net Assets 142408 Financed by: Capital 110000 Net Profit 42850 152850 Less Drawing 10442 Capital Employed 142408 The balance sheet of Timberlake Wholesalers For Year Ended 31st Dec 04 Balance sheet of Z man Production LTD, year ended 31st march 2003 At cost Depn 2 Date NBV à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½ Fixed Assets: Premises à ¯Ã‚ ¿Ã‚ ½100,000 à ¯Ã‚ ¿Ã‚ ½100,000 Equipment à ¯Ã‚ ¿Ã‚ ½25,000 à ¯Ã‚ ¿Ã‚ ½2,500 à ¯Ã‚ ¿Ã‚ ½22,500 Machinery à ¯Ã‚ ¿Ã‚ ½30,000 à ¯Ã‚ ¿Ã‚ ½6,000 à ¯Ã‚ ¿Ã‚ ½24,000 Vehicles à ¯Ã‚ ¿Ã‚ ½15,000 à ¯Ã‚ ¿Ã‚ ½1,500 à ¯Ã‚ ¿Ã‚ ½13,500 Fixture/Fittings à ¯Ã‚ ¿Ã‚ ½10,000 à ¯Ã‚ ¿Ã‚ ½1,000 à ¯Ã‚ ¿Ã‚ ½9,000 à ¯Ã‚ ¿Ã‚ ½169,000 Current Assets: Closing Stock à ¯Ã‚ ¿Ã‚ ½2,000 Debtors à ¯Ã‚ ¿Ã‚ ½10,000 Cash in hand à ¯Ã‚ ¿Ã‚ ½250 Bank Balance à ¯Ã‚ ¿Ã‚ ½2,000 Petty Cash à ¯Ã‚ ¿Ã‚ ½100 à ¯Ã‚ ¿Ã‚ ½14,350 Current Liabilities: Creditors à ¯Ã‚ ¿Ã‚ ½5,000 Overdraft à ¯Ã‚ ¿Ã‚ ½3,000 V.A.T à ¯Ã‚ ¿Ã‚ ½1,500 -à ¯Ã‚ ¿Ã‚ ½9,500 Net Current Assets: à ¯Ã‚ ¿Ã‚ ½4,850 Less Long-time liabilities: Bank Loan à ¯Ã‚ ¿Ã‚ ½25,000 Mortgage à ¯Ã‚ ¿Ã‚ ½10,000 -à ¯Ã‚ ¿Ã‚ ½35,000 Net Assets à ¯Ã‚ ¿Ã‚ ½138,850 Financed by: Opening Capital à ¯Ã‚ ¿Ã‚ ½144,350 Net Profit à ¯Ã‚ ¿Ã‚ ½12,000 Drawings -à ¯Ã‚ ¿Ã‚ ½18,000 Closing Capital à ¯Ã‚ ¿Ã‚ ½138,850 Balance sheet of A-Z Engineering Supplies, year ended 31st march 2003 At cost Depn 2 Date NBV à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½ Fixed Assets: Premises à ¯Ã‚ ¿Ã‚ ½50,000 Motor Vehicles à ¯Ã‚ ¿Ã‚ ½14,560 à ¯Ã‚ ¿Ã‚ ½64,560 Current Assets: Closing Stock à ¯Ã‚ ¿Ã‚ ½14,905 Debtors à ¯Ã‚ ¿Ã‚ ½6,500 petty cash à ¯Ã‚ ¿Ã‚ ½56 à ¯Ã‚ ¿Ã‚ ½21,461 Current Liabilities: Creditors à ¯Ã‚ ¿Ã‚ ½4,590 Overdraft à ¯Ã‚ ¿Ã‚ ½3,400 à ¯Ã‚ ¿Ã‚ ½7,990 Net Current Assets: à ¯Ã‚ ¿Ã‚ ½13,471 Less Long-time liabilities: Mortgage à ¯Ã‚ ¿Ã‚ ½25,000 à ¯Ã‚ ¿Ã‚ ½25,000 Net Assets à ¯Ã‚ ¿Ã‚ ½53,031 Financed by: Opening Capital à ¯Ã‚ ¿Ã‚ ½42,571 Net Profit à ¯Ã‚ ¿Ã‚ ½23,460 Drawings à ¯Ã‚ ¿Ã‚ ½13,000 Closing Capital à ¯Ã‚ ¿Ã‚ ½53,031 J.Mitchell Ltd Trading, Profit and Loss account for year ending 31st dec 2006 à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½Ãƒ ¯Ã‚ ¿Ã‚ ½ Sales return à ¯Ã‚ ¿Ã‚ ½810,000 Sales return à ¯Ã‚ ¿Ã‚ ½18,900 Net turn over à ¯Ã‚ ¿Ã‚ ½791,100 Less cost of sales Opening stock à ¯Ã‚ ¿Ã‚ ½21,800 Purchase à ¯Ã‚ ¿Ã‚ ½553,550 Carriage in à ¯Ã‚ ¿Ã‚ ½5,400 Purchase Return (-) 914650 Closing stock (-) 17560 Cost of sale à ¯Ã‚ ¿Ã‚ ½548,540 Gross profit à ¯Ã‚ ¿Ã‚ ½246,060 Commission Received à ¯Ã‚ ¿Ã‚ ½3,500 Discount Received à ¯Ã‚ ¿Ã‚ ½3,500 à ¯Ã‚ ¿Ã‚ ½253,060 Less expenses Wages à ¯Ã‚ ¿Ã‚ ½75,900 Rent à ¯Ã‚ ¿Ã‚ ½7,540 Sundry expenses à ¯Ã‚ ¿Ã‚ ½6,545 Electricity/gas à ¯Ã‚ ¿Ã‚ ½4,700 Vehicles à ¯Ã‚ ¿Ã‚ ½6,540 Petrol à ¯Ã‚ ¿Ã‚ ½22,455 Advertising à ¯Ã‚ ¿Ã‚ ½7,590 Discount allowed à ¯Ã‚ ¿Ã‚ ½5,410 Insurance à ¯Ã‚ ¿Ã‚ ½7,900 Equipments à ¯Ã‚ ¿Ã‚ ½5,400 Carriage out à ¯Ã‚ ¿Ã‚ ½7,580 General repair à ¯Ã‚ ¿Ã‚ ½5,400 Bad Debt à ¯Ã‚ ¿Ã‚ ½5,500 Interest on Loan à ¯Ã‚ ¿Ã‚ ½5,500 à ¯Ã‚ ¿Ã‚ ½179,360 Net Profit à ¯Ã‚ ¿Ã‚ ½73,700 J.Mitchell Ltd Trading, Profit and Loss account for year ending 31st dec 2007 à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½Ãƒ ¯Ã‚ ¿Ã‚ ½ Sales return à ¯Ã‚ ¿Ã‚ ½935,460 Sales return à ¯Ã‚ ¿Ã‚ ½15,490 Net turn over à ¯Ã‚ ¿Ã‚ ½919,970 Less cost of sale Opening stock à ¯Ã‚ ¿Ã‚ ½17,560 Purchase à ¯Ã‚ ¿Ã‚ ½584,650 Carriage in à ¯Ã‚ ¿Ã‚ ½3,285 Purchase Return à ¯Ã‚ ¿Ã‚ ½15,470 Closing stock à ¯Ã‚ ¿Ã‚ ½14,365 Cost of sale à ¯Ã‚ ¿Ã‚ ½575,660 Gross profit à ¯Ã‚ ¿Ã‚ ½344,310 Discount Received à ¯Ã‚ ¿Ã‚ ½1,360 rent Received à ¯Ã‚ ¿Ã‚ ½3,255 à ¯Ã‚ ¿Ã‚ ½348,925 Less expenses Wages à ¯Ã‚ ¿Ã‚ ½95,655 Rent à ¯Ã‚ ¿Ã‚ ½7,655 General repairs à ¯Ã‚ ¿Ã‚ ½6,595 Carriage out à ¯Ã‚ ¿Ã‚ ½6,420 Sundry expenses à ¯Ã‚ ¿Ã‚ ½4,350 Electricity/gas à ¯Ã‚ ¿Ã‚ ½5,125 Advertising à ¯Ã‚ ¿Ã‚ ½8,100 Petrol à ¯Ã‚ ¿Ã‚ ½25,460 Discount allowed à ¯Ã‚ ¿Ã‚ ½5,150 Insurance à ¯Ã‚ ¿Ã‚ ½7,900 Telephone à ¯Ã‚ ¿Ã‚ ½1,435 Stationary à ¯Ã‚ ¿Ã‚ ½896 Bad Debt à ¯Ã‚ ¿Ã‚ ½8,555 Interest on Loan à ¯Ã‚ ¿Ã‚ ½5,500 Vehicles à ¯Ã‚ ¿Ã‚ ½3,000 Equipment à ¯Ã‚ ¿Ã‚ ½5,400 à ¯Ã‚ ¿Ã‚ ½197,196 Net Profit à ¯Ã‚ ¿Ã‚ ½151,729 Balance sheet of J- Mitchell, year ended 31st march 2006 At cost Depn 2 Date NBV à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½ Fixed Assets: Fixtures and Fittings à ¯Ã‚ ¿Ã‚ ½25,000 à ¯Ã‚ ¿Ã‚ ½1,500 à ¯Ã‚ ¿Ã‚ ½23,500 Vehicles à ¯Ã‚ ¿Ã‚ ½65,400 à ¯Ã‚ ¿Ã‚ ½6,540 à ¯Ã‚ ¿Ã‚ ½58,860 Equipment à ¯Ã‚ ¿Ã‚ ½54,000 à ¯Ã‚ ¿Ã‚ ½5,400 à ¯Ã‚ ¿Ã‚ ½48,600 à ¯Ã‚ ¿Ã‚ ½130,960 Current Assets: Closing Stock à ¯Ã‚ ¿Ã‚ ½17,560 Debtors à ¯Ã‚ ¿Ã‚ ½22,650 Cash-in -Hand à ¯Ã‚ ¿Ã‚ ½500 Bank à ¯Ã‚ ¿Ã‚ ½3,000 à ¯Ã‚ ¿Ã‚ ½43,710 Current Liabilities: Creditors à ¯Ã‚ ¿Ã‚ ½30,000 VAT à ¯Ã‚ ¿Ã‚ ½3,000 Bank overdraft à ¯Ã‚ ¿Ã‚ ½3,000 à ¯Ã‚ ¿Ã‚ ½36,000 Net Current Assets: à ¯Ã‚ ¿Ã‚ ½7,710 Less Long term liabilities: Bank Loan à ¯Ã‚ ¿Ã‚ ½25,000 Net Assets à ¯Ã‚ ¿Ã‚ ½113,670 Financed by: Opening Capital à ¯Ã‚ ¿Ã‚ ½39,970 Net Profit à ¯Ã‚ ¿Ã‚ ½73,700 Closing Capital à ¯Ã‚ ¿Ã‚ ½113,670 Balance sheet of J- Mitchell, year ended 31st march 2007 At cost Depn 2 Date NBV à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½ Fixed Assets: Fixtures and Fittings à ¯Ã‚ ¿Ã‚ ½50,000 à ¯Ã‚ ¿Ã‚ ½3,500 à ¯Ã‚ ¿Ã‚ ½46,500 Vehicles à ¯Ã‚ ¿Ã‚ ½60,000 à ¯Ã‚ ¿Ã‚ ½13,080 à ¯Ã‚ ¿Ã‚ ½46,920 Equipment à ¯Ã‚ ¿Ã‚ ½54,914 à ¯Ã‚ ¿Ã‚ ½10,800 à ¯Ã‚ ¿Ã‚ ½44,114 Machinery à ¯Ã‚ ¿Ã‚ ½60,000 à ¯Ã‚ ¿Ã‚ ½10,000 à ¯Ã‚ ¿Ã‚ ½50,000 à ¯Ã‚ ¿Ã‚ ½187,534 Current Assets: Closing Stock à ¯Ã‚ ¿Ã‚ ½14,365 Debtors à ¯Ã‚ ¿Ã‚ ½50,000 Cash-in -Hand à ¯Ã‚ ¿Ã‚ ½32,759 Bank à ¯Ã‚ ¿Ã‚ ½41,741 à ¯Ã‚ ¿Ã‚ ½138,865 Current Liabilities: Creditors à ¯Ã‚ ¿Ã‚ ½33,000 VAT à ¯Ã‚ ¿Ã‚ ½4,000 Bank overdraft à ¯Ã‚ ¿Ã‚ ½4,000 à ¯Ã‚ ¿Ã‚ ½41,000 Net Current Assets: à ¯Ã‚ ¿Ã‚ ½97,865 Less Long term liabilities: Bank Loan à ¯Ã‚ ¿Ã‚ ½20,000 Net Assets à ¯Ã‚ ¿Ã‚ ½265,399 Financed by: Opening Capital à ¯Ã‚ ¿Ã‚ ½113,670 Net Profit à ¯Ã‚ ¿Ã‚ ½151,729 Closing Capital à ¯Ã‚ ¿Ã‚ ½265,399 Task-8 For this task I will need to have access to some past and present final accounts. As part of my report to my friend, I will need to perform ratio analysis to measure the: Profitability ratio Liquidity ratio and Efficiency of her business in order to help her understand her financial situation. J. Mitchell Ltd 2006 Profitable ratio Gross profit margin 246060 x 100 791100 x 1 24606000 791100 31.1 Profit margin 73700 x 100 791100 x 1 7370000 791100 9.3 Return on Capital Employed 73700 x 100 113670 x 1 7370000 113670 64.8 Liquidity ratio Current Assets 43,710 Current Liabilities 36,000 1.2 : 1 Current Assets Stock 43710 -17560 Current Liabilities 36000 61270 36000 1.7:1 Asset Utilisation Debtors x 365 1) Credit sales 22650 X 365 791100 8267250 791100 10 DAYS 2) Creditors x 365 Credit purchases 30000 X 365 553550 10950000 553550 20 DAYS 3) Average stock = Opening Stock + Closing Stock 2 Average stock = 21800 + 17560 2 19680 Average Stock x 365 Cost of sales 19680 x 365 548540 13 DAYS J. Mitchell Ltd 2007 Profitable ratio Gross profit margin 344310 x 100 919970 x 1 34431000 919970 37.4 Profit margin 151729 x 100 919970 x 1 15172900 919970 16.5 Return on Capital Employed 151729 x 100 265399 x 1 151729 265399 0.6 Liquidity ratio Current Assets à ¯Ã‚ ¿Ã‚ ½138,865 Current Liabilities à ¯Ã‚ ¿Ã‚ ½41,000 3.4 :1 Current Assets Stock 138865 -14365 Current Liabilities 41000 153230 36000 4.3:1 Asset Utilisation Debtors x 365 1) Credit sales 50000 X 365 919970 18250000 919970 20 DAYS 2) Creditors x 365 Credit purchases 33000 X 365 584650 12045000 584650 20 DAYS 3) Average stock = Opening Stock + Closing Stock 2 Average stock = 17560 + 14365 2 15963 Average Stock x 365 Cost of sales 15963 x 365 575660 10 DAYS Task-9 In this task I will be using suitable ratios from the previous task analysis the performance of the business which is J -Mitchell. A ratio: Is the mathematical relationship between two quantities in the form of a fraction or percentage. There also relationships that can be measured in time periods and one 2 one situations. Ratio analysis: is essentially concerned with the calculation of relationships which after proper identification and interpretation may provide information about the operations and state of affairs of a business enterprise. The analysis is used to provide indicators of past performance in terms of critical success factors of a business. This assistance in decision-making reduces reliance on guesswork and intuition and establishes a basis for sound judgement. Purposes and Considerations of Ratios and Ratio Analysis:- Ratios are highly important profit tools in financial analysis that help financial analysts implement plans that improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage. Although ratios report mostly on past performances, they can be predictive too, and provide lead indications of potential problem areas. Ratio analysis is primarily used to compare a companys financial figures over a period of time, a method sometimes called trend analysis. Through trend analysis, can be identify trends, good and bad, and adjust the business practices accordingly. Can also see how ratios stack up against other businesses, both in and out of the business. Significance of Using Ratios the significance of a ratio can only truly be appreciated when: 1. It is compared with other ratios in the same set of financial statements. 2. It is compared with the same ratio in previous financial statements (trend analysis). 3. It is compared with a standard of performance (industry average). Such a standard may be either the ratio which represents the typical performance of the trade or industry, or the ratio which represents the target set by management as desirable for the business. Profitability Ratios Closely linked with income ratios are profitability ratios, which shed light upon the overall effectiveness of management regarding the returns generated on sales and investment. Gross Profit Margin-The gross profit margin ratio tells us the profit a business makes on its cost of sales, or cost of goods sold. It is a very simple idea and it tells us how much gross profit per à ¯Ã‚ ¿Ã‚ ½1 of turnover our business is earning. Net Profit Margin- The profit margin tells you how much profit a company makes for every à ¯Ã‚ ¿Ã‚ ½1 it generates in revenue. Return on Capital Employed- ratio also indicates whether the company is earning sufficient revenues and profits in order to make the best use of its capital assets. It is expressed in the form of a percentage, and the higher the percentage, the better Liquidity Ratios While liquidity ratios are most helpful for short-term creditors/suppliers and bankers, they are also important to financial managers who must meet obligations to suppliers of credit and various government agencies. A complete liquidity ratio analysis can help uncover weaknesses in the financial position of your business. Working Capital Ratio-This ratio indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets. Assets utilisation- Assets utilisation is measured how effectively you manage and control the current aspects of your business. Stock turnover ratio the stock turnover ratio shows how many times over the business has sold the value of its stocks during the year. The result of this ratio gives the number of days that on average money is tied up in stocks. The longer this is, obviously the worse this is for the business as the money is not available to be used elsewhere. Debtors collection periods ratio- The debtors collection shows how days on average debtors take for pay for good sold to them by the business. The average collection period measures the quality of debtors since it indicates the speed of their collection. * The shorter the average collection period, the better the quality of debtors, as a short collection period implies the prompt payment by debtors. * The average collection period should be compared against the firms credit terms and policy to judge its credit and collection efficiency. * An excessively long collection period implies a very liberal and inefficient credit and collection performance. * The delay in collection of cash impairs the firms liquidity. On the other hand, too low a collection period is not necessarily favourable, rather it may indicate a very restrictive credit and collection policy which may curtail sales and hence adversely affect profit. Creditors payment periods ratio- is collection is opposite to the debtors collection. This ration shows the speed the take to pay the creditors. J-Mitchell Ltd Company Ratio Analysis year 2006 and 2007 Profitability Ratios Gross Profit Margin After looking at J-Mitchell LTD company, I can assure that the company did well good because In year 2006 the gross profit margin was 31.1% and in year 2007 the gross profit margin is 37.4%.Comparing to year 2006 and 2007, its look like company doing well because gross profit were raised in 2007 by more then 5%.Meanwhile y in year 2006 the net turnover was à ¯Ã‚ ¿Ã‚ ½791100 and in year 2007 the net turnover is à ¯Ã‚ ¿Ã‚ ½919970, which is healthy position for company. Profit Margin- looking back at j- Mitchell Ltd 2006, I can say that the company havent done well in year 2006 which is 9.3% and as well as 2007 which is 16.5% comparing to gross profit margin. Although In 2007 J- Mitchell Ltd company did well then they did in year 2006.However it could be raise more by looking back to trading, profit and loss account in year 2007.there are certain things that could be improved for example Bad Debt. To save from bad debt the company should check the reference, past bank statement before they lend money to other peoples, so it can be checked whether they can repay the money on time. Also In year 2007 J-Mitchell company had too high expenses for example petrol in year 2006 J-Mitchell they spent à ¯Ã‚ ¿Ã‚ ½22455 and in year 2007 they spent à ¯Ã‚ ¿Ã‚ ½25460.If J- Mitchell Ltd company wants improve their gross profit they may have to consider reduce their petrol expenses as well as other expenses for example-wages, bad debt etc. Overall I think in year 2007 J-Mitchell Ltd Company did well compare to year 2006 and in the future the company could be successful if they keep their expenses low for example wages, petrol, insurance etc. Return on capital employed- In 2006 J-Mitchell Ltd company were very good position which was 64.8% unlikely in year 2007 their revenue 0.6% which is not healthy for company or shareholders. This is an unusual because they havent kept good record of their transaction. I think the figure I have received are not accurate and also Ive received only two years account information. So I am not sure whether the business would do good or bad unless I have received more past accounting information. Liquidity ratio Working Capital Ratio in year 2007, the working capital ratio looks reasonable healthy; current assets are nearly three times as much as current liabilities (3.4:1), so the firm should not have too much difficulty meeting debts that need to be paid in the short times .Whereas in year 2006, the working capital ratio also looked reasonable because the current assets was nearly twice times as much as current liabilities (1.5:1).In 2007, the business has too much current assets, which is too good for company . Liquid capital ratio- the liquid capital ratio also shows a good picture. Even with stocks taken out of the current assets the firm still have sufficient liquid assets to cover its bills, so it seems to be in a liquid position. In year 2006 the liquid capital ratio was (1.7:1) and year 2007 the liquid capital ratio is (4.3:1) which healthy for company. Assets utilisation Stock turnover ratio -Looking at J-Mitchell Ltd Company 2006, every 13 days to sell stock seems not long time but this is a manufacturing company and short turnover periods are not rare. Comparing to year 2007, year 2007 was good because in year 2007 every 10 days to sell stock which is quite short time. That means if the company carry on like this they may end up with more profits. Debtors collection periods ratio Debtors collection periods of J-Mitchell LTD company is good enough however; Debtors are not taking long times to pay their bills in year 2007 then year 2006.In year 2006 debtors took 13 days to pay their bills but in year 2007 debtors took 20 days to pay their bills. Usually debtors gets 30 days to pay back but in this company debtors havent took the much long time to pay their bills. Creditors collection ratio in year 2006 and year 2007, an average of 20 days to pay bills suggests that the company has either negotiated good credit terms with suppliers or is struggling to pay bills.