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BTEC Business Unit 2, Busness Resources M3 D2 (Interpret the contents of a trading and profit and loss account and balance sheet for a selected company explaining how accounting ratios can be used to monitor the financial performance of the organisation)R131,27
BTEC Business Unit 2, Busness Resources M3 D2 (Interpret the contents of a trading and profit and loss account and balance sheet for a selected company explaining how accounting ratios can be used to monitor the financial performance of the organisation)
BTEC Business Extended Diploma
Unit 2: Busness Resources M3 D2
This is the complete version of the coursework assignment, which has already been marked and approved by a teacher.
P1 P2 P3 P4 P5 P6 P7 M1 M2 M3 M4 D1 D2 D3
(Interpret the contents of a trading and profit and loss account and balance s...
1) Know how human resources are managed
2) Know the purpose of managing physical and technological resources
3) Know how to access sources of finance
4) Be able to interpret financial statements
Task 5:
a) Interpret the contents of a trading and profit and loss account and balance sheet for a
selected company explaining how accounting ratios can be used to monitor the
financial performance of the organisation.
b) Evaluate the adequacy of accounting ratios as a means of monitoring the state of the
business in a selected organisation, using examples
2
,Unit 2: Business Resources M3 D2
Income statement and balance sheet
Financial statement – is records that outline the financial activities of a business. Its shows
if business has made any progress in profits or not. There are four main types of financial
statements: Financial position, Income statement, Cash flow statement, Statement of changes
in equity. In financial accounting, the balance sheet and income statement are the two most
important types of financial statements.
Income statements – is one of the financial statements of a company and shows the
company's revenues and expenses during a particular period. Income Statement usually
includes such figures: revenue, gross profit, operating profit, cost of sales, taxation, profit
before tax, and profit after tax…
Balance sheet provides a good picture of the financial health of a business and is a tool
used to evaluate a business's liquidity. Balance sheet usually includes such figures: current
liabilities, non-current liabilities, current assets, non-current assets, net assets, equity, total
equity…
The analysis of the financial statements and interpretations of financial results of a particular
period of operations with the help of 'ratio' is termed as "ratio analysis."
Ratio analysis provides a way of summarizing a large volume of accounting information
into simple financial measurements. These ratios can be used to monitor a firm's financial
performance compared to previous accounting periods, or may be used to check how well the
firm is doing compared to its competitors.
There are the various types of financial ratios may be calculated, for example: profitability,
liquidity, performance, etc…
My TESCO’s performance analysis involves calculation of accounting equations such as:
Profitability Ratios - Gross Profit Margin, Net Profit Margin, Return on Capital
Employed.
These are ratios that assess the trading or operating performance of the company, i.e.
levels of trading profits generated, and the productivity of trading assets.
Liquidity Ratios - Current Ratio, Quick Ratio (Acid Test).
These are ratios that assess the risk that the company may be unable to pay its
creditors as they fall due with cash and assets generated from trading.
Performance Ratios - Stock Turnover Ratio, Asset Turnover Ratio, Creditors Days
ratio and Debtors Days ratio.
These are ratios that assess the returns to the providers of finance, who may be either
shareholders or lenders.
The profit and loss account (Income statement), detailing revenue and costs – is a key
component of useful understanding the health of a business. Executives and managers
continually monitor profit and loss actuals versus budgets and forecasts to ensure their
business is operating on plan.
Generated profit and loss reports allow managers to see current period revenue, costs, and
profitability, period over period and actuals to plan. Business management also permits
development of more accurate and timely quarterly and yearly performance analysis, allows
navigation to detailed revenue and cost components, and enables more refined margin and
contribution assessment.
3
, Unit 2: Business Resources M3 D2
Tesco’s Income statement and balance sheet
Income statements report operating results, such as sales and expenses, and so allow
investors to evaluate the company’s performance and consider how future cash flows might
look. Most investors start by looking at recent income statements when analysing investment
potential.
TESCO’s income statement for year 2012 and 2013 52 weeks’ time:
2012 (52 2013 (52 Figure used to work out:
weeks) £M weeks)
£M
Revenue 63.916 64.826 Gross profit margin, net profit
margin, assets turnover, debtor’s
days
Gross profit 5.397 4.089 Gross profit margin
Operating profit 4.182 2.188 Return on capital employed
(ROCE)
Cost of Sales 58.519 60.737 Stock turnover, creditor’s days
Taxation 874 574 At net profit margin to work out
net profit
Profit before tax 4.038 1.960
Profit after tax 120 2.814 Net profit margin
The balance sheet provides a good picture of the financial health of a business and is a tool
used to evaluate a business's liquidity.
It should always be borne in mind that it is only a picture of the company at the specific
point of time. Each transaction impacts on the accounting equation, hence the balance sheet
just after the year end may be significantly different from that at the yearend if a company
has undertaken significant transactions.
TESCO's balance sheet for year 2012 and 2013:
25 23 Figure used to work out:
February February
2012 £M 2013 £M
Non-current assets 37.918 37.033 At assets turnover to work out net
assets
Current assets 12.863 13.096 Current ratio, acid test
Current liabilities 19.180 18.703 Current ratio, acid test
Non-current liabilities 13.731 14.483
Net assets 17.801 16.661 Assets turnover
Total equity 17.801 16.661
4
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