Worrying Features Of The Profit And Loss Statement

Published Date: 02 Nov 2017

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Section:

Index:

S. No

Contents

Page No

1

Meaning of terms in profit and loss account

3

2

Review of Alaradi horse shop from profit and loss statement

3

3

Worrying features of profit and loss account

4

4

Meaning of terms in balance sheet

4

5

Review of Alaradi horse shop from balance sheet

5

6

Worrying features of balance sheet

5

7

Ratios to assess business success of Alaradi horse shop

6

8

Table of ratios

7

9

Interpretation of ratios

7

10

References

8

Task 1:

1 a. Meaning of following terms in profit and loss account:

Sales:

It shows distinct areas of sales that determine the amounts obtained from varying products, demographic regions and other distinct areas that help getting income. It is shown as a single or a figure with various entries regarding the total sum earned in a year.

Cost of sales:

It refers to the straightforward and frequent changing expenses which are harmonized to the terms or production of the goods sold. Moreover it also includes supplies that are apprehended at the end of the term. Such supplies are deducted from the purchases figure.

In short it the representation of cost acquired by the trade in generating products or services which has been sold in the concerned period.

Gross profit:

It is the representation of excess of net income from the sales over the cost of goods sold.

Net profit:

It refers to the disposable rise in capital from various profit-making activities.

1 b. Review of profit and loss parameters of Alaradi Horse Shop:

Sales:

It was 2833000 BD for the year 2011 whereas for the year 2012, it was 2645000 BD. This shows a decline in sales, thereby calling for identifying areas of active marketing to encourage increase in sales.

Cost of sales:

This has also declined from 1464000 BD in 2011 to 1198000 BD in 2012 thereby requiring more focus on best business strategies that confine to quality and also ensure cost-effective products to the company.

Gross profit:

This has seen an increase from 1369000 BD in 2011 to 1447000 BD in 2012, thereby showing that company has retained some efforts in controlling their expenses in the making of a product or a service.

Net profit:

Here the profit has reduced from 236000 BD in 2011 to 234000 BD in 2012, thus requiring correct balance in managing the costs and expenses in a way to keep pace with the production and be in competition.

Hence overall it can be said from the gross profit that the company has taken adequate measures to beat any financial loss thereby fostering a healthy business,

1 c. Worrying features of the profit and loss statement:

From the revenue aspect, the sales figure shows a drop in its figures thereby depicting little trouble in business. To sustain a healthy business it is important to see that the revenues are kept increasing in each profit and loss period by ensuring frequent checks in primary revenues of production compared to secondary revenues that are uncertain.

From the expenditure point of view, it is necessary to see that a balance is maintained in checking reduction in costs of sales by looking for suppliers who can offer quality at cheaper rates or otherwise steps can be taken to see if chances are available to establish own manufacturing premises for the raw materials. This can help to still lower the expense of the company.

1 d. Meaning of following terms in the balance sheet:

Fixed assets:

It refers to those assets which are in custody for usage by the firm rather than putting them on auction or any other exchange into cash. This includes the buildings and machineries owned by Alaradi Horse shop.

Current assets:

It refers to cash and anything else that can take the form of cash when converted within a span of twelve months on the balance sheet.

Liabilities:

It refers to the long term loans that the company has taken to run its business and short term loans owing to business activities to date.

Debtor:

It refers to the money the company owes to another person or a firm.

Creditor:

It refers to the person or firm to whom the company has lent money or a credit.

1 e. Review of the company from the balance sheet:

Fixed assets:

The reduction in fixed assets from 5061000 BD in 2011 to 3503000 BD in 2012 shows that the company had failed in certain aspects in retaining their fixed assets which had led them to selling of these assets.

Current assets:

Decrease in the current assets from 1039000 BD in 2011 to 925000 BD in 2012 depicts the wrong forecast made by the company in certain decisions regarding buying raw materials or other assets.

Current liabilities:

Reduction of current liabilities from 804000 BD in 2011 to 568000 BD in 2012 shows the performance of the company in trying to bring down the debts they owe. It helps to instill confidence in investors as well as in stakeholders.

Overall from the balance sheet it can be concluded that even though the company has managed to reduce their current debts, they have failed to an extent in trying to retain their current assets and fixed assets, which would have helped them in the long run.

1 f. Worrying features of the balance sheet:

From the aspect of financial ratio, it can be said that the debt-equity ratio for 2012 has declined from 2011, thereby requiring changes or leverage in commitments existing for the company currently.

From the point of view of activity ratio, it can be said that despite efforts by the company to increase their working capital, the company has failed to ensure consistency or increase in its current assets.

Task 2:

Ratios to assess the rate of success in the business of Alaradi Horse shop:

Solvency ratios:

Current ratio formula:

Current ratio = Current assets / Current liabilities

Acid test ratio formula:

Quick ratio = (Current assets-Stock) / Current liabilities

Profitability ratios:

Gross profit % formula:

Gross profit % = (Gross Profit / Sales) * 100

Net profit % formula:

Net profit % = (Net Profit / Sales) * 100

Return on capital employed (ROCE) formula:

ROCE = (Net profit / Capital employed) * 100

Performance ratios:

Stock turnover formula:

Stock turnover = Cost of sales / Average stock held

Debtors’ collection period formula:

Debtors collection period = (Debtors / Sales turnover) * 365

Assets turnover ratio formula:

Assets turnover = (Net sales / Total assets)

The financial performance in terms of ratios:

S.No

Ratios

2011

2012

1

Current Ratio

1.292

1.628

2

Acid test ratio

0.670

0.827

3

Gross profit percentage (in %)

48.323

54.707

4

Net profit percentage (in %)

9.742

10.359

5

Return on capital employed (in %)

22.35

23.34

6

Stock turnover ratio

3.07

2.509

7

Debtor collection period (in days)

66.996

47.609

8

Asset turnover ratio

0.859

0.925

Interpretation of ratios:

Ratios

Interpretation

Current ratio

Though there is an increase in this ratio, it is not satisfactory. However it is important to note here that despite having lower ratio the company is steady enough to pay its dues as it has fast moving inventories like stock and bank balance.

Acid test ratio

Despite having reduced ratios it is significant to note that the bank has taken steps to reduce the debtors from the previous year as these are slow moving inventories.

Gross profit percentage

It is of great significance to observe that this percentage that helps the company to handle the production and other overhead costs has increased.

Net profit percentage

This parameter that evaluates the company performance over time has shown significant increase in 2012 compared to that in 2011, thereby taking efforts to change proceeds into authentic earnings.

Return on capital employed

Though the figures are low, the increase in the percentage in 2012 from 2011 denotes that the company has followed strategies to keep this rate higher than their borrowing rates thereby leading to increase in shareholder earnings.

Stock turnover ratio

The reduction in this ratio in 2012 compared to 2011 shows that the company is taking limited steps to grow their business. This can be due to the piling up of horses of different type, brand and size.

Debtor collection period

The decrease in this parameter in 2012 from 2011 shows the stability of the company to get back money from its debtors in a shorter duration as compared to the previous year thereby enabling smooth cash flow in the business.

Asset turnover ratio

The increase in this ratio shows the efficacy of the firm in making use of its resources for the functioning of its business. However to increase the business, it is necessary to see that outdated resources are disposed and existing resources are used considerably well.