This document gives you an in-depth knowledge about analysis of accounts. Giving a better understanding about liquidity and equations about profit margins. This document focuses more on solving and how to know whether a business current ration and acid test ratio is acceptable.
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Unit 6
TOPIC(S): Analysis of Accounts pt. 1
PAGE(S):
1.1 Analysis of Accounts
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In the first two years of a business, its goal should be
survival. In the succeeding years, businesses should KEY WORDS
be focused on their profitability.
Accounting ratio:
Measuring the Businesses Performance: measures the relationship
GPM (Gross Profit Margin) → (gross profit ÷ between two or more
revenue) x 100% components in a financial
statement.
PM (Profit Margin) → (profit before tax ÷
revenue) x 100% Adding value: selling a
product than more than it
ROCE (Return on Capital Employed) → (Profit
costs to produce it.
before tax ÷ capital employed) x 100%
Measuring business
performance: profitability is
How Accounting Statements are Interpreted: one of the most important
identifies strength and weakness indicators of business
performance.
shows if business is meeting objectives
improves future business performance
Gross profit margin: ratio
between gross profit and
Stakeholders May Want to Know: revenue, it tell us how much
gross profit is earned per $1
will the business have profits to reinvest in the
or revenue.
business?
Profit Margin: ratio
will the business continue to exist?
between profit before tax
will it be able to pay long term borrowing? and revenue, it tells us how
will future profits rise or fall? much profit is earned per $1
of revenue.
will it be able to pay debts?
Return on Capital
Employed: ratio between
profit before tax and capital
employed, it measures
efficiency and is most
important in analysing a
businesses profitability.
Unit 6 1
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