Interpret the contents of a trading and profit and loss account and balance sheet for a selected company

1164 Words May 5th, 2015 5 Pages
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.

Profit and loss account and balance sheet for Tesco.
Consolidated Profit & Loss Account for the year ended

2013
2014

Weeks
52
52

Currency

£ Million

£ Million

Turnover

23653.0

20988.0

Cost of sales

-21866.0

-19400.0

Gross Profit

1787.0

1588.0

Operating Expenses

-465.0

-422.0

Operating Profit

1322.0

1166.0

Other costs/income

32.0

13.0

Profit before interest and taxation

1354.0

1179.0

Net interest receivable (payable)

-153.0

-125.0

Profit on ordinary activities before taxation

1201.0

1054.0

Tax on
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Net profit before interest and tax *100=ROCE%

Capital employed (including shareholder funds)

Tesco will calculate its debtor’s collection period which looks at the link between the number of debtors and how long on average it takes the business to collect its debts. Tesco calculates the debtor’s collection period in the following formula:

Debtors * 365=total number of days it takes debtors to pay

Credit sales

The final ratio that will help Tesco work out the performance of a business is asset turnover.

Sales = asset turnover

Total assets

Asset-based ratio analyses are very useful to Tesco looking at trends in their performance to see how well they are making use of their assets.

D2: Evaluate the adequacy of accounting ratios as a means of monitoring the state of the business in a selected organisation, using examples.

Accounting ratios cannot always be good enough for monitoring the state of the business. For a large business like Tesco the accounting ratios cannot be good enough for the state of the business.
Tesco can have information problems. Ratios are not definitive measures for a large organization like Tesco. Ratios need to be interpreted carefully. They can provide clues to the company’s performance or financial situation. But on their own, they cannot show whether performance is good or bad. Ratios require some quantitative information for an informed analysis to be made. This can put down the
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