Who is interested in company’s Annual Accounts?

Who? Why? What do they want to know?

1) Shareholders

2) ?

3) ?

Name 10 altogether!

Profitability Ratios

Cost of Sales

Overheads

Net Profit

S a

l e

sG

ross P

rofit

C.O.S.

£400

Overheads

£300

Net Profit

£300

Sales = COS + O’Heads

+ N. Profit

Sales = £1000

G. Profit = O’Heads + N. Profit

Sales = £225m

Gross Profit % 72 x 100 = 32%225

Gross Profit£72m

C.O.S.£153m

Sales = £225m

Net Profit % 13 x 100 = 5.8%225

Net Profit£13m

C.O.S.£153m

Overheads£59m

Sales = £225m

Expenses/Sales % 59 x 100 = 26.2%225Net Profit

£13m

C.O.S.£153m

Overheads£59m

Note

GP% = NP% + Expenses/Sales%32% = 26.2% + 5.8%

Bigger Expenses means smaller NP

GP% indicates how well COS being controlled

NP% indicates how well Expenses being controlled

Cost of Sales

Overheads

Net Profit

S a

l e

sG

ross P

rofit

1. Ultimate objective is to maximise!

2. Maximise!(Good marketing)

3. Minimise! Keen purchasing Efficient production Economy of Scale

4. Minimise!Efficiency(people)(procedures)

COST(to us)

£1-00

MARKUP

25% SELLINGPRICE£1-25

MARGIN

20%

Mark Up = “Gross Profit” as a % of CostMargin = “Gross Profit” as a % of Selling Price

Answering Ratio Questions in exam

1) Write formula 2) Do calculation

3) Is bigger or smaller better?

(If you are comparing ratios…)

4) Which ratio is better? Last year’s ratio or this year’s? Company A or company B?

5) What may have caused ratio to be good or bad?

6) How to improve a poor ratio?

7) Can’t make final judgment if industry norms unknown