M3 Interpret the contents of a trading and profit and loss account performance of the organisation Essay

Interpret the contents of a handicraft and derive and loss account and difference sheet for a selected keep company explaining how accounting proportionalitys can be employ to monitor the financial performance of the organisation.Profit and Loss account.The P&L will non tell you about the underlying health of the commercial enterprise, such as how much bills it owes or is owed and what the nurture of its assets argon. It shows how much money did demarcation made in a year. It records two things utter(a) vernacular sales and cost/turnover.The trading account shows the income from sales and the direct be of making those sales. It includes the balance of stocks at the start and end of the year. at that place are different sections of P&L which include1. Sales- it is the total value of what youve sold during the period of time. The conventionality for it is price times quantity.2. Cost of sales- these are the costs that are directly related to the sales you have made. I t includes raw materials or stock you have purchased to resell. It may also include the cost of creating the items that you sold, including the cost of staff time if you are sell service.3. Gross Profit This is the sum of sales revenue negatively charged cost of sales. It tells you how much lucre you are making directly from your sales.4. Operating Costs These are only the other costs associated with running a business, such as the rent and rates on your premises, method of accounting and legal fees, and depreciation. These costs can non be directly linked to your sales and may non change precise much even if your sales figures were to change significantly.5. Net Profit This is the gross profit minus the operate(a) costs. This is almost the true profit of your business because its made up of all the income and all the costs. The gain profit is transferred over to balance sheet.Balance sheetA balance sheet shows the value of a business on a particular date. A balance she et shows what the business owns and owes. It is also use as a guide for solvency of the company.Anything in your business that has financial value is included in the balance sheet. Everything is split into four groups.1. In first group is included everything that can be liquidated (sold for cash) including stock, cash, and money owed by customers, are received assets. These are usually short term.2. Second group is more long-run including property, machinery, patents and long-term investments these are called fixed assets, which are long term liquidation.3. Third part of balance sheet is current liabilities and they are what the business owes in the short-term money owed to suppliers, taxes due, short-term loans and overdrafts.4. The last group is long-term liabilities they are what the business owes in the long-term to be paid after one year, as well as capital and reserves.Gross Profit MarginThis ratio examines the relation between the gross profit and sales revenue. It also me asures the % of gross profit that is made from a given amount of sales. It shows how efficiently a business is using its materials and labours in the production process and gives an indication of the pricing, cost coordinate, and production efficiency of your business. The higher the gross profit margin ratio the better it is for business. The higher the percentage, the more the business retains of each bewilder of sales, which direction more money is left over for other operating expenses and net profit. A low gross profit margin ratio means that the business generates a low level of revenue to constitute for operating expenses and net profit. It indicates that either the business is unable to control production or inventory costs orthose prices are set too low.Acid Test RatioThis method excludes stock as stock is not a very liquid asset. Acid-Test ratio provides a more rigorous assessment of a companys ability to pay its current liabilities. A higher acid-test ratio indicates greater short-term financial health. The acid-test ratio is more conservative than the current ratio, which measures much the same thing, because the current ratio excludes the value of inventory.Net Profit MarginNet profit margin measures how much of each pound earned from sales of good and service the company is translated into profits. It also provides clues to the companys pricing, cost structure and production efficiency. Net profit is used to pay for interest, tax and distribution to the owners. The higher the net profit margin ratio the better it is for the business. It indicates whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory. A low net profit margin ratio may mean that you are not generating enough sales, the gross profit margin is too low, or that you are not keeping your operating expenses under control to leave an acceptable profit. A business with a low ratio mightiness need to take on debt to pay its expenses.Re turn On Capital EmployedIt shows the return for money that is spent and it also says how well you do with the money. ROCE should always be higher than the rate at which the company borrows otherwise any increase in borrowing will reduce shareholders earnings and it indicates that the company is not employing its capital effectively and is not generating shareholder value. For a company, the ROCE trend over the years is also an of the essence(p) indicator of performance. In general, investors tend to favour companies with stable and rising ROCE numbers over companies where ROCE is volatile and bounces roughly from one year to the next.Debtors DaysIt shows how long it takes debtors to pay you money back.Increases in debtor days may be a sign that the quality of a companys debtors is decreasing. This could also mean a greater risk of defaults. It could similarly be an indicator that cash flow is likely to weaken or that more working capital will be required. Investors should be aware of why changes in debtor days are happening, especially if there is a very large increase or a clear long term increasing trend. It may reflect a change in how the business operates, or its environment. This is not necessarily bad, but it can be an indication of a potentially honorable problem.