analysis of accounts

Question 1

how accounts are used

Answer 1

• used by shareholders, governments and creditors to check on company performance
• lenders decide whether or not to give the loan
• managers use them for taking decisions and controlling the operations of a business
• other companies use them for comparing performance

Question 2

limitations of accounts

Answer 2

• not full details of accounts for external users
• ratios based on past data
• accounting data over time affected by inflation
• different accounting methods used by different companies

Question 3

net profit margin formula & analysis

Answer 3

net profit/revenue x 100

using income statement:
- increase in net profit means gross profit was higher or expenses were lower
- compared with previous years or other companies

Question 4

gross profit margin formula & analysis

Answer 4

gross profit/revenue x 100

using income statement:
- increase in gross profit means increased prices or decreased cost of goods
- compared with previous years or other companies

Question 5

return on capital employed

Answer 5

net profit/capital employed x 100

using income statement and balance sheet:
- compare with previous years and other companies to see if business more efficient or not
- shows profit earned from capital used in business

Question 6

current ratio formula & analysis

Answer 6

current assets/current liabilities

result of 1+ means that business has sufficient current assets to pay current liabilities
<1 then illiquid
>2 then too much working capital

Question 7

acid test ratio formula & analysis

Answer 7

current assets - inventories/ current liabilities

similar to current ratio but can be slightly <1 and can be used to repay current liabilities as they fall due