BTEC Level 3 Business
Unit 2 Assignment 5
P5, M3, D2
Financial Statements
• Financial statements allow businesses to
measure their financial resources.
• Public Limited Companies (PLCs)must publish
their accounts so investors can see how well they
are doing.
• The two main financial statements are profit and
loss accounts and balance sheets.
Profit and Loss Accounts
• This is a useful tools that shows how much has
been made at the end of the financial year.
• This account can help a bank or lender decide
whether a business is worth the investment.
• For smaller businesses like sole traders and
LTDs it is useful to see how much profit is made
at the end of the year.
Profit and Loss Accounts
• Often businesses will use projected profit and
loss accounts to help them to plan finances and
budget setting.
P5- Interpret the contents of a trading
profit and loss account.
• 1. You must describe the purpose of a profit and
loss account and each significant item this
should include;
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sales and cost of sales
gross profit
net profit
expenses – with brief descriptions of, for example,
wages, directors’ salaries, light and heat, rent and
rates and advertising.
Balance Sheets
• The balance sheet is important because it
gives a snapshot showing assets, liabilities
and equity.
• Producing a balance sheet is important as it
shows how the business is financed
• It also allows investors to see how much the
business is worth based on assets
P5 –Interpret the contents of a balance
sheet
• You need to explain the purpose of the balance
sheet and the following items that are
contained in the balance sheet
▫ fixed assets – with examples
▫ current assets – with brief descriptions of stock,
debtors, bank balance
▫ current liabilities – with brief descriptions of
creditors, bank overdraft
▫ long-term liabilities
▫ share capital
▫ reserves (retained profits).
P5- Final Task
• You now need to comment on the differences in
2006- 2007.
• Focus on; sales, gross and net profit, fixed and
current assets and retained profits for both 2006
and 2007 and make a broad judgement about
the performance of Wansbeck Motors Ltd.
M3- Basic Ratios
• One way a business can measure how it is doing
is through ratio analysis.
• Ratios can help the business to see how it is
doing now and allow it to see how it compares to
last year or the year before and against
competitors
• These ratios can be used to identify any trends
over time.
• Calculate each ratio and explain how it can be
used to measure the performance of a business
Analysing Current Ratio
• Current ratio for company x in 2013 is x:1 This means
that for every £1 of current liabilities they have £X of
current assets and they will/ will not be able to meet
their debts in the short term.
• This is an increase/decrease from 2012, when the
current ratio was x:1
• Therefore company x have become more/less solvent
than the previous year
• There are several factors that might explain this
improvement/deterioration
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Analysing Acid Test Ratio
• Acid test ratio for company xx in 2013 is x:1. This means that
for every £1 of current liabilities, they have £X of liquid
current assets and they will/will not be able to cover their
debts in the short term, without considering the least liquid
asset, stock.
• This is an increase/ decrease from 2012, when the Acid Test
Ratio was x:1
• Therefore company x have become more/less solvent than the
previous year.
• There are several factors that might explain this
improvement/deterioration
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Analysing GPM
• Gross Profit Margin for company x in 2013 is xx%. This
means that or every £1 of sales revenue earned xx pence
of it was profit, before overheads were deducted.
• This is an increase/decrease from 2012 when the Gross
Profit Margin was xx%
• Therefore the company have become more/less
profitable than the previous year.
• There are several reasons that might explain this
improvement/deterioration.
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Analysing NPM
• Net Profit Margin for company x in 2013 is xx%. This
means that or every £1 of sales revenue earned xx pence
of it was profit, after overheads were deducted.
• This is an increase/decrease from 2012 when the Net
Profit Margin was xx%
• Therefore the company have become more/less
profitable than the previous year.
• There are several reasons that might explain this
improvement/deterioration.
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Analysing ROCE
• Return on Capital Employed for company x in 2013
is xx%. This means that for every £1 of capital
invested xx pence was earned as Net Profit.
• This is an increase/decrease from 2012 when the
ROCE was xx%
• Therefore the company has become more/less
profitable than the previous year.
• There are several factors that might explain this
improvement/ deterioration.
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Analysing Stock Turnover
• Stock Turnover for company in 2013 is x times per year.
This means that on average company holds stock for x
days.
• This demonstrates greater/less efficiency from 2012
when the ST was x times per year, and on average stock
was held for x days.
• Therefore company have become more/less efficient at
turning their stock.
• There are several factors that might explain this
improvement/deterioration.
▫ Cause1
▫ Cause2
▫ Cause3
Analysing Debtors’ Collection Period
• Debtors’ Collection Period for company in 2013 is x days.
This means that it takes company x days to collect
money owed to it from goods bought on credit.
• This is an increase/decrease from 2012, when the DCP
was x days.
• Therefore company have become more/less efficient at
collecting money owed to it, than the previous year.
• There are several factors that might explain this
improvement/deterioration.
▫ Cause1
▫ Cause2
▫ Cause3
Analysing Creditors’ Payment Period
• Creditors’ Payment Period for company in 2013 is x days.
This means that it takes company x days to pay for goods
they have bought on credit.
• This is an increase/decrease from 2012, when the CPP
was x days.
• Therefore company have paid off their debts to suppliers
quicker/slower than in 2011.
• There are several factors that might explain this
improvement/deterioration.
▫ Cause1
▫ Cause2
▫ Cause3
D2- ratio limitations
• Produce a power point which shows the benefits
and drawbacks of using financial accounting
ratios. Use the links below:
• http://accountingexplained.com/financial/ratio
s/advantages-limitations
• http://bizfinance.about.com/od/financialratios/
tp/limitations-financial-ratio-analysis.htm
• http://www.ehow.com/info_12001670_advanta
ges-disadvantages-financial-ratio-analysis.html