Summary
Summary Accounting - Interpretation of financial statements
- Course
- Accounting
- Institution
- 11
8 page detailed summary of all the accounting indicators and ratios to analyze financial statements
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INTERPRETATION OF FINANCIAL STATEMENTSFINANCIAL INDICATORS INDICATE:
If the business is profitable.
- Is it able to make a good profit?
- How well does it manage its expenses?
If the business is making a good return for the owners.
- Is it a good investment for the partner?
- Could they get a better return on a different investment?
If the business solvent.
- Can the business pay of all of its debt and liabilities?
If the business is liquid.
- Can the business pay off all of its short term debts and liabilities?
If the business has good internal controls in place.
- Are assets, expenses, incomes and liabilities well managed and controlled?
If the business is sustainable.
- Does the business respect the environment?
- Does the business support the local and wider community?
INDICATOR 1&2: GROSS PROFIT ON SALES & GROSS PROFIT ON COST OF
SALES:
Gross profit on sales = gross profit x 100
Sales 1
Gross profit on cost of sales = gross profit x 100
Cost of sales 1
Indicates profit mark-up
If strictly obtained the business will be able to obtain their profit mark-up from one
year to the next.
, if the percentage decreases it could be due to:
- too many discounts
- poorly controlled sales
- mistakes in marking prices on stock
- Mistakes in source documents.
If the percentage increases it could be due to:
- Mistakes in the source documents
- There is a higher demand for your product
- Your products are cheaper compared to other competitors
INDICATOR 3: OPERATING PROFIT ON SALES:
Operating profit on sales = operating profit x 100
Sales 1
The amount by which the operating income exceeds the operating expenses.
Compare to gross profit on sales
There for the difference can show you if the expenses are in proportion to the
volume of business activity
Can indicate:
- What percentage of gross profit is spent on operating expenses
- If business is growing or deteriorating compared to previous years
- How efficient the purchasing policy, sales policy and expense control is
INDICATOR 4: OPERATING EXPENSES ON SALES:
Operating expenses on sales = operating expenses x 100
Sales 1
Indicates turnover
Determine if operating expenses have remained constant
Determine if expenses are being efficiently controlled
INDICATOR 5: NET PROFIT ON SALES:
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