Accounting - Understanding and using accounting information - example

Example

For example, let us select the profit to sales ratio. In a hypothetical

example, net profit to sales may fall in the budgeted year.

This may be due to a fall in profit or a rise in sales and reasons may

include:

* an increase in the unit cost of items sold

* reduced prices; for example, discounting

* increased operating expenses

* an increase in competition

The Profit and Loss statement may be broken up to show both a vertical and

horizontal analysis. For instance, the revenue section may be presented as

follows:

Table 1

2000

Actual 2000

2000

Actual 2000

2000

Budget 2000

$

%

$

%

$

%

REVENUE

Cash sales

367 125

78.09

351 450

76.83

366 000

76.57

100

95.73

99.69

Credit sales

103 000

21.91

106 000

23.17

112 000

23.43

100

102.91

108.74

Total revenue

470 125

100.00

457 445

100.00

478 000

100.00

100

97.30

101.68

This process may be repeated for the entire Profit and Loss statement.

Several other graphs and tables may be presented to complete the

identification task. Profitability ratios may be shown as:

Table 2

2000

2001

MAGNITUDE AND DIRECTION

Fav/

Unfav 2002

MAGNITUDE AND DIRECTION

Fav/

Unfav

NP/OE ROI

80.2%

40.9%

Decrease by 49%

Unfav

45.9%

Increase by 12.2%

Fav

GP/sales

NP/sales

Legend

NP/OE

= Net profit to owner's equity ROI

GP/sales

= Gross profit to sales

GP/sales

= Net profit to sales

It is important to note that the percentage change is not arrived at by

direct deduction alone. For NP/owner's equity the percentage in 2000 is

80.2% and in 2001,40.9%. Many students then deduct 40.9% from 80.2% and say

that this ratio has decreased by 39.3%. However, the 39.3% must then be

divided by 80.2% to find the actual percent change.

Having completed the table above, you should then show this data in a line

graph for each profitability measure

Suppose the issue is liquidity. Once again Table 1 would be repeated, this

time selecting ratios relevant to liquidity.

The ratios to select include:

* working capital

* quick asset ratio

* creditors turnover

* debtors turnover

* stock turnover

* bank balance ( not a ratio but could be plotted)

These figures can then be converted into line graphs. Remember to

correctly label all graphs.

Relevant reasons have to be given for changes to liquidity.

Reasons for deterioration of liquidity include:

* deterioration in cash cycle such as slow paying debtors, slow

moving stock items

* buying of non-current assets for cash

* excessive cash drawings

* loan repayments

* specific costs such as unexpected legal expenses

* new and increased expenses without commensurate selling price increases

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I don't get it...

Please I will like to know how the calculations of table 1 is being done I am not too good in mathematics.

I did not understand the table and figuring out the calculation of these figures.

The Profit and Loss statement may be broken up to show both a vertical and horizontal analysis

giving the right answers

Accounting -> Understanding and using accounting information - example Example For example, let us select the profit to sales ratio. In a hypothetical example, net profit to sales may fall in the budgeted year. This may be due to a fall in profit or a rise in sales and reasons may include: an increase in the unit cost of items sold reduced prices; for example, discounting increased operating expenses an increase in competition The Profit and Loss statement may be broken up to show both a vertical and horizontal analysis. For instance, the revenue section may be presented as follows: Table 1 2000 Actual 2000 2000 Actual 2000 2000 Budget 2000 $ % $ % $ % Revenue Cash sales 367 125 78.09 351 450 76.83 366 000 76.57 100 95.73 99.69 Credit sales 103 000 21.91 106 000 23.17 112 000 23.43 100 102.91 108.74 Total revenue 470 125 100.00 457 445 100.00 478 000 100.00 100 97.30 101.68 This process may be repeated for the entire Profit and Loss statement. Several other graphs and tables may be presented to complete the identification task. Profitability ratios may be shown as: Table 2 2000 2001 Magnitude and direction Fav/ Unfav 2002 Magnitude and direction Fav/ Unfav NP/OE ROI 80.2% 40.9% Decrease by 49% Unfav 45.9% Increase by 12.2% Fav GP/sales NP/sales Legend NP/OE = Net profit to owner's equity ROI GP/sales = Gross profit to sales NP/sales = Net profit to sales It is important to note that the percentage change is not arrived at by direct deduction alone. For NP/owner's equity the percentage in 2000 is 80.2% and in 2001,40.9%. Many students then deduct 40.9% from 80.2% and say that this ratio has decreased by 39.3%. However, the 39.3% must then be divided by 80.2% to find the actual percent change. Having completed the table above, you should then show this data in a line graph for each profitability measure Suppose the issue is liquidity. Once again Table 1 would be repeated, this time selecting ratios relevant to liquidity. The ratios to select include: working capital quick asset ratio creditors turnover debtors turnover stock turnover bank balance ( not a ratio but could be plotted) These figures can then be converted into line graphs. Remember to correctly label all graphs. Relevant reasons have to be given for changes to liquidity. Reasons for deterioration of liquidity include: deterioration in cash cycle such as slow paying debtors, slow moving stock items buying of non-current assets for cash excessive cash drawings loan repayments specific costs such as unexpected legal expenses new and increased expenses without commensurate selling price increases

Information has been given in a simplified way.

there's alot to take into consideration.

What is understanding and using accounting information have to do with business?

done