Notesale: Turn your study into money

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Unit 2 – Investigating Business Resources
M3 – Interpret the contents of a given profit and loss account and balance sheet and
explain in detail how accounting ratios can be used to monitor the financial state of the
given organisation
In order to discover the financial state of my given organisation, Domestic Dog Homes, I will
need to compare the finances in their profit and loss account and balance sheet during 2006
and 2007
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First I will look at the profitability ratios, which can assist with the formula on the total gross
profit, net profit and return on capital employed
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The results had shown that in 2006, the
gross profit was 49
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23%
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For
the net profit, the ratio is relatively the same, since I have to again divide sales with the
current net profit for each profit and loss account during the past two years and times them by
100
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61% net profit in 2006, and a 9
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This ratio has helped show again that they benefited more from last years earnings, and the
business had found out that this can lead to a rise in tax payment and loans
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The formula has shown that in 2006, the result was
53
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61%
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These profitability ratios have
assisted Domestic Dog Homes to discover their financial state compared to previous earnings,
and have now realised what the cause was and what they can do for the future
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For the working capital ratio, I will need to work out the formula which divides
current liabilities with current assets but not times by 100 as this needs to be presented as an
actual ration
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69:1, whilst in 2007 it was 1
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This could be due to
focusing on their interest, taxes and creditors more than their debtors, bank earnings and
stocks last year
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This change results in a 0
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70:1 in 2007
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These solvency ratios have proven that Domestic Dog
Homes can narrow down further their financial state as well as find out the causes are
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When working out the proper ratio for
assets to sales, I will need to divide the number of fixed assets by total sales
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99:1 in 2006 and 3
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For rate of stock turnover, the ratio is closing stock divided by the cost of sales,
where for 2006 the result is 4
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70 times for 2007
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Debtors collection period requires the ratio
to first divide total sales by their trade debtors and then times the answer by 365 as it’s the
number of days in a year
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5 days, whilst in 2007 its 25
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The result is that money is being collected from debtors slower in 2007, which is a problem
since it can lead to other assets being more expensive such as bank and stock
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32 days and 2007 its 43
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This shows that creditors are being paid later in
contrast to last year, which is a concern since it would put records with suppliers on edge and
they will doubt selling goods on credit to the company
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