3 Accounts and finance

Table of Contents

1. Topic pack - Accounts and finance - introduction
2. 3.1 Sources of finance - notes
3. 3.1 Sources of finance - questions
4. 3.2 Investment appraisal - notes
5. Investment appraisal
6. 3.2 Investment appraisal - questions
7. 3.3 Working capital - notes
8. 3.3 Working capital - questions
9. 3.4 Budgeting - notes (HL only)
10. 3.4 Budgeting - questions
11. 3.5 Final accounts - notes
12. 3.5 Final accounts - questions
13. 3.5 Final accounts - simulations and activities
14. 3.6 Ratio analysis - notes
    1. Ratio analysis
    2. Profitability ratios
    3. Interpretation of profitability ratios
    4. Profitability - examples
    5. Liquidity ratios - introduction
    6. Current ratio
    7. Acid test ratio
    8. Efficiency ratios
    9. Efficiency ratios - ROCE
    10. Efficiency ratios - asset turnover ratio
    11. Efficiency ratios - stock turnover ratio
    12. Debtor days
    13. Creditor days
    14. Efficiency ratios - use and calculation
    15. Financial efficiency ratios - examples
    16. Shareholders' ratios
    17. Factors affecting share prices
    18. Gearing
    19. Ratio analysis - A summary
15. 3.6 Ratio analysis - questions
16. 3.6 Ratio analysis - simulations and activities
17. Printable version

Interpretation of profitability ratios AO2, AO4

AO2 You need to be able to: Demonstrate application and analysis of knowledge and understanding Command Terms: These terms require students to use their knowledge and skills to break down ideas into simpler parts and to see how the parts relate: Analyse, Apply, Comment, Demonstrate, Distinguish, Explain, Interpret, Suggest

AO4 You need to be able to Demonstrate a variety of appropriate skills. Command Terms These terms require you to demonstrate the selection and use of subject-specific skills and techniques: Annotate, Calculate, Complete, Construct, Determine, Draw, Identify, Label, Plot, Prepare

General comment

As always with ratios, you need a series of ratios and the equivalent data for other firms in the same industry to be able to make useful comparisons. You must also be sure which profit has been used to calculate the ratios. Remember, a firm may well make a gross profit, but this may become a loss when the value is converted to trading profit.

It is also useful to have the interest rate to hand, as this puts rates of profit into perspective. Is the return the firm is making more than the existing market rate of interest? In fact, the more you know about the state of the economy and how it has changed over the period of your comparisons the better.

Interpretation is all about trends and comparisons in context.

Improving the ratios

Profit margins can change in different ways as the result of a single action. Imagine the following scenario:

A firm reduces the price of its product and increases sales revenue as a result. The costs and expenses of the firm remained unchanged. The gross profit margin will fall, but the net profit margin will rise.

Calculation of ratios

Follow the link below to get the balance sheet and profit and loss account for Student Computers plc and use them to work out the gross profit margin and net profit margin ratios - it will be good practice. Jot down some notes on how well the firm has performed and the difference between the ratios. Once you have had a go, and then follow the answer link below to see how you got on. N.B. Calculate the ratios for both years to compare them.

Balance sheet and profit and loss account - Student Computers Plc

Answer - gross profit margin and net profit margin calculation