Trading profit and loss appropriation account and balance sheet

When comparing business performance, therefore, a number of years and time periods may be more suitable. The balance sheet is the accounting equation but set out in a vertical form in order to be more readily, understood i. Capital at 1 January x Profit for the year x x Less: These are fixed accounts, current accounts, current liabilities and funds: They are normally valued at cost less accumulated depreciation.

D Net current assets: This can also be called working capital. F This total is the total of the business's net assets. G This total is the total of proprietor's funds, i. Within these main headings the following items should be noted.

Prepayments are items paid before the balance sheet date but relating to a subsequent period. Accrued charges are amounts owed by the business, but not yet paid, for other expenses at the date of the balance sheet.

This is a term given to net current assets, or total current assets less total current liabilities, e. Working capital is important; lack of it leads to business failure.

Appendix i shows a sample balance sheet and a full set of accounts for the Cerial Marketing Board of Zimbabwe. Almost every company carries stocks of some sort.

In an agricultural business, these may be fertilisers, chemicals, produce, etc. Accounting for stocks presents a problem, because stocks in hand at the end of the financial year are regarded as current assets, whereas stocks used during the year form part of the company's costs. Hence, stocks assets appear in the balance sheet, and stocks used must be accounted for in the trading and profit and loss account.

Valuing closing stocks has always been a problem and a source of disagreement. There are many methods of establishing the value of stocks. Three common alternatives are average cost, first in first out Fifo and last in first out Lifo. This average price may be derived by means of a continuous update, a periodic calculation, or a moving period calculation. This method is often used to calculate the cost of low value items, e.

Consider the following example comparing the effect of valuing stock of units: In both cases, there are items in stock. The lower of cost and net realisable value: The most fundamental accounting concept with regards to the valuation of stocks and work-in-progress is that they need to be stated at cost, or if lower, at net realisable value.

Net realisable value is the amount at which it is expected that items of stock and work-in-progress could be sold after allowing for the costs of completion and disposal. If net realisable value is higher than cost, then cost is taken, as valuing stocks at a higher value would not be prudent, i. It is important to check against the net realisable value to ensure that the current asset, stock, is not stated at a figure above that for which it could be realised at the balance sheet date.

If it is decided to reduce the value of certain items of stock from cost to net realisable value, e. Stock is reduced in value, and a charge is made against profits. The full amount is deducted from stock in the balance sheet, but only the decrease between the beginning and end of a period is shown in that period's trading and profit and loss account. Purchases of peanuts were made as follows: You are required to calculate the value of closing stock and to prepare the trading account on the following bases: The interpretation of company accounts-ratio analysis Why ratios: Ratios are the means of presenting information, in the form of a ratio or percentage, which enables a comparison to be made between one significant figure and another.

Often the same ratios of like firms are used to compare the performance of one firm with another. A "one off" ratio is often useless - trends need to be established by company ratios over a number of years. Present and potential investors can therefore quickly assess whether the company is a good investment or not.

Potential suppliers will, for example, want to judge credit worthiness. Management can compare current performance with previous periods and competing companies. Which areas are used for analysis Four key areas are generally used for analysis: Therefore, "profit maximisation" entails the most efficient allocation of resources by management, and "profitability ratios" when compared to others in the industry will indicate how well management has performed this task.

Key questions to be identified in profitability analysis include: If so, is it clear why? A sufficient amount of cash and other short-term assets must be available when needed.

On the other hand, because most short term assets do not produce any return, a strong liquidity position will be damaging to profits. Therefore, management must try to keep the firm's liquidity as low as possible whilst ensuring that short term obligations will be met.

This means that industries with stable and predictable conditions will generally require smaller current ratios than will more volatile industries. Key questions to be identified in liquidity analysis include: Too much equity in a firm often means the management is not taking advantage of the leverage available with long-term debt.

On the other hand, outside financing will become more expensive as the debt-to-equity ratio increases. Thus, the leverage of an organisation has to be considered with respect both to its profitability and the volatility of the industry. Key questions to be identified in leverage analysis include: When compared to the industry average, the fixed-asset turnover ratio, for example, will show how well the company is using its productive capacity.

Similarly, the inventory turnover ratio will indicate whether the company used too much inventory in generating sales and whether the company may be carrying obsolete inventory. Key questions to be identified in activity analysis are: Are they replaced on a regular basis and adequately maintained? These may relate to long-term trends in the business or to fixed assets, e. What is their estimated current value? Are different lives used for Current Cost Accounting?

What is their value? How long is the commitment? Is market value used if it is lower than cost? How have they been treated in the balance sheet? Methods used to evaluate organisational performance To evaluate the performance of a company with respect to these ratios, three methods are used, namely industry comparisons, time series analysis and absolute standards.

The danger is that when industry averages include companies with different products or markets, averages can be misleading. These time series can also be used to project the future financial performance of the company. A thorough financial analysis usually is a condition of these three approaches.

Other useful ratios 1 Stock market ratios a Earnings per share: Financial measures of business unit performance If an organisation is made up of multiple divisions or Strategic Business Units SBU's , then the following measures can be computed, provided that balance sheet and income statement data are available at the divisional or SBU level. Some argue that interest expenses and tax should not be considered as they are outside the SBU manager's control. However, interest may be added to show managers that invested funds are not a free resource.

This, however, understates the true cost of capital employed, because the interest is a charge for only the debt portion of capital. If the latter, then cash receivables or payables or both should be omitted from the investment base. It differs in two ways: If no tax is paid or if tax is deferred, use Net Income or Profit before tax.

The changes in D are calculated by the company's balance sheet entries for two consecutive periods. What is required is a balance sheet for the SBU which includes a justified assignment of the proportion of the total corporate short-run liabilities and long-run debt.

Once accomplished, the maximum sustainable growth rate a measure of the ability of the business to fund the new assets needed to support increased sales is estimated by: The growth rate is expressed in nominal terms.

Real SGR is reduced by 2. If the actual growth rate exceeds SGR, then the organisation can consider a number of strategic actions which affect the "productivity" side of the quest for increased profits "productivity" as opposed to "volume" strategies to increase profits. Six years later his condensed financial accounts for the last three years are summarised below N. Cost of goods sold: Opening stock 35 40 65 Purchases Less; Closing stock 40 65 Gross profit 80 Less: Capital Add.

It records the direct expenses of a business firm. Batlibboi- The Trading Account shows the result of buying and selling goods. In preparing this account, the general establishment charges are ignored and only the transactions in goods are included. The profit and loss account is a statement that summarizes the revenue's and expense's of an accounting period so as to reflect the changes in various critical areas of a firm's operations.

It records the indirect expenses of a business firm. The balance statement demonstrates the financial position of a business on a specific date.

The financial position of a business is found by tabulating its assets and liabilities on a particular date. The excess of assets over liabilities represents the capital sunk into the business, and reflects the financial soundness of a company.

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