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Assessment and interpretation of accounts (Who is interested in Final…
Assessment and interpretation of accounts
Who is interested in Final Accounts
Shareholders
how profitable, profits increase / decreasing, good return on money invested, how much authorised share capital issued
Banks and financial institutions
credit rating, level of debt, liquidity, true value of fixed assets
Revenue Commissioners
paying correct level of corp tax, paying VAT, liable to pay capital gains, complying with tax laws
Creditors
credit rating, speed of creditor payments
Employees and trade union
ability to pay wages, management of pension funds, security of employment
limitations of final accounts
t + p + l a/c only for a period of time
balance sheet only gives info on moment in time
doesn't give information on market they operate in
no info on industrial relations within business
do not show how profitable company is compared to others
Liquidity and Solvency
ability to pay debts when they become due for payment
current / working capital ratio
ratio of current assets to current liabilities, ideally 2:1 minimum 1.5:1
to see if the company can pay its day-to-day debts from current assets, liquid at minimum of 1.5:1
less than 1.5:1 said to be overtrading, money available insufficient to pay liabilites
acid test / quick ratio
ratio of total current assets less closing stock to current liabilities, minimum 1:1
particularly important for firms selling perishable goods
assets in relation to external liabilities
a company is said to be solvent when value of its total assets is greater than the value of external liabilities
external liabilities are current and long term, excluding money owed to chareholders,
insolvent when total assets less than external liabilities, bankrupt and would go out of business
Profitability
examines return to business on the money available to it and the return of its sales
Gross profit percentage / margin
gross profit over net sales x 100
compared to other previous years' and similar firms
could decrease if price received per unit of good sold decreased, cost of goods sold increased
Net profit percentage / margin
net profit over net sales x 100
compared to other previous years' and similar firms
fall in percentage due to , gross profit percentage decreased no change in overhead costs, gross profit percentage remained unchanged while overhead costs increased
Return on capital employed
net profit over capital employed x 100
net profit expressed as a percentage of capital employed
compared to rate of interest from financial institution for a deposit of 1.2 million and return earned by other firms
return on shareholders' funds
net profit over shareholders' funds x 100
shareholders' funds = issued share capital + closing p + l reserve
interest of potential and existing shareholders, compare rates with financial institutes and othercompanies
Dividend Policy
dividends usually expressed as percentage of the issue share capital
buy shares for following reasons
to receive annual income from the dividend, interested in dividend percentage
to make a capital gain
dividend paid over issued share capital x 100
compare with financial institutes and other firms, some will invest with a low percentage as they want the company to be better in teh future
Efficiency
Rate of Stock Turnover
average stock is opening + closing stock divided by 2
cost of goods sold over average stock = times turned over per year
firms that sell perishable goods should have a high rate of stock turnover
Rate of stock turnover is the number of times in a year the firm sells its average stock, annual turnover annual sales
Important that some firms have small gross profit mark-ups supermarket, other have big like jewellers
Gross Profit mark-up
gross profit over cost of goods sold x 100
gross profit mark-up is the gross profit expresed as a percentage of the cost of goods sold
used to show efficiency of managers in controlling the cost of sales