# Understanding and using accounting information - example

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### Diploma in Business Management & Entrepreneurship - Understanding and using accounting information - example

• Topic Reviews
Turkey 09 April 2017
BabaJide Martins F.

I don't get it...

Equatorial Guinea 09 April 2017
Alice B.

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

Saint Lucia 09 April 2017
Hermina S.

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

South Africa 09 April 2017
Morne V.

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

Nigeria 09 April 2017
Sunday O.

giving the right answers

Uganda 09 April 2017
Odongo M.

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

Nepal 08 April 2017
Manish K.

Information has been given in a simplified way.

United States of America 08 April 2017
Penelope M.

there's alot to take into consideration.

Morocco 08 April 2017

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

United Arab Emirates 08 April 2017
Gloria N.

done

• Text Version

### Diploma in Business Management & Entrepreneurship - Understanding and using accounting information - example

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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