Unit 2 Mock Assignment P5 P7 M3 D2

1525 WordsJan 21, 20157 Pages
Task 1-P5 The main purpose of the trading account is to know the gross profit/loss of the business. According to the trading profit and loss account for Smiths for the year ended 31st December the gross profit is £186,325. However the trading account is used to see whether the material costs and direct expenses are covered or not. Material costs means the price of the items used to produce the goods for the sale. Direct Expenses means the expenses are linked to the production to make the goods for a profitable purpose. In the trading, profit and loss account for smiths the material costs are motor expenses which are £9,622 while the direct expenses is Electricity which costs £7,400. The purpose of the profit and loss account is to enable…show more content…
Debtor Collection Period 2123/223110*365= 4 days Debtors/Credit Sales*365 Debtor’s collection period shows the link between the number of debtors and how long on average it takes the business to collect debts. Asset Turnover 223,110/210,403=1:1 Sales/Total assets=asset turnover This means for every £1 of assets Smiths was able to generate £1 of sales. 223,110/167,300=1 223,110/43,103=5 Sales/fixed assets and sales/current assets The asset based ratio analysis shows how well smiths are making use of their assets in comparison to what industry smiths is in. Task 3 –M3 Ratios Ratio for Mr Jones' Business Ratio for Smiths Current Ratio 3.01:1 1 to 1 Acid Test 2.01:1 1 to 1 Gross Profit Percentage 97.20% 84% Net Profit Percentage 32.03% 58% Return on Capital Employed 35.04% 78% Stock Turnover 35 times per year 17 times per year Debtor Collection Period 14 days 4 days Asset Turnover 1.02:1 1 to 1 The Current Ratio for Jones is 3.01:1 shows that Mr Jones’ business has 3 times more assets than liabilities so they have a lot of money left over. This shows it is bad for the business as the money should be used within the business such as reinvesting the money back into the business to improve it.However for Smiths the current ratio is 1:1 this is bad for the business as they may find it difficult to pay it suppliers as the current assets equal the current liabilities so there is no money left over. The Acid Test Ratio for Jones is 2.01:1 shows that Mr

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