Ch 13 - Evaluating the performance of a service business Flashcards
How can accountants make income statements more understandable?
Presenting dollar figures in percentage terms
Whats an alternative form of presenting income statements?
Pie charts and sometimes other types of graphs
What is the first point to consider when evaluating an income statement’s net profit figure?
The length of the accounting period
What are the three financial benchmarks/standards when evaluating performance?
- Trend analysis
- Budgeted profit
- Industry averages
What is trend analysis?
- Comparing one period’s profit to previous results
What is budgeted profit?
The profit a business has decided as a benchmark determining their performance
eg: decided on $52000 annually, only made 40000 –> decline in profit performance
What are industry averages?
The industry statistics that usually accounts provide to a business in order to advice how much profit they should be making
What are the financial indicators?
- Net profit margin
- Return on owner’s investment
- Rate of return on assets
What is net profit margin?
Return on sales ratio, compares net profit for a period to amount of revenue
How do you calculate net profit margin?
net profit / total sales
What is return on owners investment?
compares profit earned b to the funds contributed by its owner
How do you calculate return on owners investment?
net profit / average capital
What is rate of return on assets?
net profit is compared to investment made in the assets of the business
How do you calculate rate of return?
net profit / average total assets
What is liquidity?
the ability of a business to meet short term debts/obligations when they fall due
