Accounting for the accounts 1

W 1: How Are The Ratios Looking?

This worksheet looks at a ratio analysis of the accounts of Cameron Balloons. For more information about the work of the accounts department at Cameron Balloons you may want to look at the accounts explanation section.

A printable version of this worksheet is available for filling in answers.

Step 1 - Accounting for the accounts

Below is a simplified version of the annual accounts for Cameron Balloons. As a limited company they are required by law to submit an audited version of their accounts to Companies House in Cardiff. This is an approximate simplified version of the accounts.

Balance Sheet
		£
Fixed assets		387,000
Current assets
	Stock	1,559,000
	Debtors	434,000
	Cash	119,000
Liabilities		2,497,000
Share capital		100
Profit and loss account		1,900
Profit And Loss Account
		£
Turnover		7,644,000
less Cost of goods sold		6,355,000
Gross Profit		1,289,000
less Overheads		972,000
Net Profit		317,000

Please note that these are not full, true accounts but are simply representative to illustrate the company's position.

Step 2 - Rationalising the ratios!

Now let's try calculating the ratios from these accounts. Starting with the profitability ratios:

(N.B. If you need a reminder of how to calculate the ratios, you may want to look at the accounting theories section .)

Profitability ratios

Using the table below calculate the return on capital employed and the profit margin:

RETURN ON CAPITAL EMPLOYED		PROFIT MARGIN
Variable	£'000	Variable	£'000
Net profit		Net profit
Total capital employed (Total assets)		Turnover
	%		%
Return on capital employed = Net profit / capital employed * 100		Profit margin = Net profit / Turnover * 100

• What do these figures show us?
• Are they good figures?

Liquidity ratios

Now try to do the same thing for the main liquidity ratios:

CURRENT RATIO		ACID TEST RATIO
Variable	£'000	Variable	£'000
Current assets		Current assets
Current liabilities		Current liabilities
		Stock
Current ratio = current assets / current liabilities		Acid test ratio = current assets - stock / current liabilities

• What do these figures show us?
• Are they good figures?
• What does the comparison of the current ratio and the acid test ratio tell us about the company's situation? What can you say about the level of stock at Cameron Balloons?

Step 3 - Any more ratios?

There is also another category of ratios known as activity ratios. These show how effectively the resources are being used by the business, and can be a useful measure. Calculate the figures in the table below from the information given at the start of the worksheet.

STOCK TURNOVER		DEBT COLLECTION PERIOD
Variable	£'000	Variable	£'000
Cost of goods sold		Debtors
Stocks		Turnover
	Times		Days
Stock turnover = Cost of goods sold / Stock		Debt collection period = Debtors / Turnover x 365 (No. of Days)

• What do these figures show us?
• Are they good figures?

Sourch :
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