5.5 Analysis of Accounts Flashcards
what’s profitability
how much of sales revenue the business turns into profit
what’s liquidity
ability/extent to which a bus can pay for its short-term debts
(good indication of working capital/cash flow)
what’s gross profit margin
% of sales that is turned into gross profit
only shows profit made on RM
what’s profit margin
amount of profit a bus makes as a % of its sales
why is the profit margin a much better indicator of profitability?
it shows the profit the bus can either retain/distribute to shareholders, overheads have already been paid
return on capital employed formula?
net profit b4 tax/capital invested x 100
what’s return on capital employed
how much profit bus has made as a % of capital employed
how do other company managers use the income statement
- compare profit margins
- measure own performance, decide how to improve product lines
how does the gov use an income statement
profit b4 tax –> calculate corporation tax, see if right amount is paid
how do current shareholders use an income statement
- see how much profit’s allocated to dividends
- dividends affect future value of shares
how do potential shareholders use an income statement
- see retained profit–> normally grows since more profitable :. invests
- dividends
how do lenders use an income statement
- ensure bus has sufficient profit to make necessary repayments b4 offering credit
+ afford interest
how do trade payables use the FPS
ensure if bus has enough cash/working capital to pay if a credit period is agreed (current liabilities)
how do lenders use the FPS
- see value of assets, should repayments be made
- less likely to loan if they have high borrowing levels `
how do auditors use FPS
ensure value of assets aren’t exaggerated to attempt investors
