D2 Evaluate the adequacy of accounting ratios as a means ...



D2 Evaluate the adequacy of accounting ratios as a means of monitoring the state of the business in a selected organisation, using examples

|Solvency |Current ratio |The information the current ratio provides is that the current ratio is current assets / current liabilities. The ratio shows how many assets |

| |Acid test ratio |a business has compared to liabilities. This information is useful to the business because it shows how much assets a business has which are |

| | |most likely going to be income and cash plus all other types of ones such as vehicles and stocks. This is useful to a business to know because|

| | |if a business was to have any investors or shareholders which may want to invest in the business this enables the company to show them how |

| | |well their statistics are based on current assets and current liabilities, which they are obviously going to want to know so it’s going to be |

| | |much better for the company to know about it and try and study and figure out how to improve it if it is quite bad. The actions the company |

| | |should take when trying to improve their current ratio would have to be by always paying of their labilities which are most likely going to be|

| | |debts, and not leaving them to keep increasing and stacking the amount up because you might not be able to pay them back later on. Also you |

| | |could probably also think about paying back debts early on so later on in the year you are going to be making a much greater gross profit |

| | |which is obviously going to be not just for you but for investors and shareholders as well. The one thing I would recommend to the company |

| | |would yet again be to always pay back loans early on so you will be obviously not having much money early on but you will be making a much |

| | |greater profit and income much later in the year for you are you shareholders and investors. |

| | | |

| | |The information the acid test ratio provides is that whether or not the actual company is able to use its assets which are most likely going |

| | |to be income and cash to get rid of its liabilities which are most likely going to be debts and loans. This information is useful to the |

| | |business because it demonstrates and shows not just the business but investors and shareholders that the actual business is able to quickly |

| | |pay back debts with cash, so it also shows investors and shareholders that the actual business does actually have some cash and income to |

| | |actually pay the debts back in the first place. The actions the business should take when faced with the problem of debt would have to be that|

| | |always pay back your debts as soon as you can because if not this can lead to finance problems later on in the years to come. Also another |

| | |factor you should take into consideration would have to be always try to make sure you are sorted financially so you are not spending more |

| | |money than you are actually earning and making as part of the business or the actual business is making overall. The one thing I would |

| | |recommend would have to be yet again always make sure you are sorted on income and you are never losing income such as profit and always make |

| | |sure you have assets which you are going to be able to convert into cash so you can always pay back debts and liabilities. |

|Profitability |Gross profit percentage |The information the gross profit provides is how well the company is actually doing because it measures how much money the company is making |

| |Net profit percentage |annually. The gross profit is the company’s total sales minus the cost of the goods and merchandise and even service the company actually |

| |ROCE (Return on capital employed) |sells. This information is useful because it shows the business how well they are doing and where they are going well. Because if they have a |

| | |decent gross profit then they are going to know that customers are liking and buying their stuff and it is actually what the people want. It |

| | |is also great for them because of the shareholders and investors because they are going to want to obviously invest more money in the business|

| | |for the business to use which is obviously going to make them more money. The actions the business should take would have to be to always |

| | |spend on the essential things you need and not the desirable things you need because if you are going to keep on spending you are not going to|

| | |be making much profit at the end of the year, there is the chance you won’t make any profit at all. This is also one thing I would recommend |

| | |to the business as well to make sure it is achieving and using its assets in the best way possible. |

| | | |

| | |The information the net profit percentage provides is that it’s the amount of revenue which is the income after all costs and expenses have |

| | |been paid off. This information is useful to a business because it shows what has been paid and what hasn’t so the company is able to |

| | |determine how much money or assets they are going to need to actually pay the rest of, so this enables them to determine how much they could |

| | |potentially be making at the end of the year after they pay of the rest of the expenses they need to pay for. The actions the business should |

| | |take would have to be always keep documents to determine costs and keep of assets and cash because this will help them be able to account |

| | |ratios much easily to determine solvency, the profitability of the actual company which is going to be great for investors and shareholders to|

| | |know and also the actual performance of the business. The one thing I would recommend to the business to ensure this information is used in |

| | |the best way possible to support itself would have to be yet again document expenses and every exchange payment you make, but actually also |

| | |one another thing could be to always try to keep track of profit and losses because this is essential to know so you can know where you are |

| | |going wrong and so you know where to pick up from last time so you do not make any more unneeded losses. |

| | | |

| | |The information the ROCE provides is that it shows a business and its investors and shareholders how well the actual company is at making |

| | |profit, so its profitability. And also the efficiency of it making profit. This information is useful to a business and its shareholders and |

| | |investors because it shows them how well and how good they make profit so overall how good essentially the business is. This will lead to more|

| | |investors and shareholders wanting to invest more money in the business which would lead to a much greater business which much greater |

| | |partners, shareholders and investors. The actions the business should take and the factors is should take into consideration would have to be |

| | |to always ensure you are making the right amount of payment when you need to and also make sure it is to the right individuals. Also make sure|

| | |to always spend when you actually need to and never spend in any other individual at your company’s name because that is going to be identity |

| | |theft which can lead to you having to spend even more money sorting it all out. The one thing I would recommend to the business would have to |

| | |be to always keep documents of all your ratios not just your profits but actually all of them because working out your net profit would also |

| | |help you determine your gross profit if the net profit is documented somewhere. |

|Performance |Debtors collection period |The information the debtor’s collection period provides is that it shows the amount of time the business takes to collect debts. This |

| |Asset turnover |information is useful to the business and its shareholders and investors because such as if a company amount of time was decreasing then this |

| | |shows the investors and shareholders or any other aspect joined to the business that the actually businesses efficiency is increasing. It |

| | |shows and lets the business compare all the collection periods such as the real period and the granted period. The one thing I would recommend|

| | |to the business would have to be always make sure you always keep a good time for collecting debts. |

| | | |

| | |The information the asset turnover provides is that it shows how well and efficient a company is at making sales income and revenue. This |

| | |information is useful to the business because it shows them how well they are doing with making sales. The actions what should be taken and |

| | |the factors what should be taken into consideration would have to be that always try to keep a low profit margin because companies with low |

| | |profit margins always tend to have high asset turnovers. That is also one thing I would recommend to the company as well. |

1. Comment on the information the ratios provide

2. How is this information useful to the business and what actions should it take?

3. What other factors should be taken into consideration when using accounting ratios to determine the solvency/ profitability/ performance of an organisation?

4. What would you recommend to the organisation to ensure that this information is used in the best way to support organisational performance?

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