FINANCIAL MANAGEMENT

Financial Management

Assignment 2

Question 1:

Simon Sparks

Profit and Loss Account

For the year ended 30 June 200X

Sales

292,000

Sales return

(13,800)

Net Sales

278,200

COGS

Op Stock

15,100

Purchase

135,600

Purchase returns

(5,200)

Cl. Stock

(16,200)

129,300

Gross Profit

148,900

Expenses

Advertising

6,000

Electricity

11,100

Insurance

5,700

Motor expenses

16,600

Postage

2,400

Rent and rates

20,900

Salaries and wages

37,200

Drawings

15,800

115,700

Net Profit

33,200

Simon Sparks

Balance Sheet

As at 30th June 200X

Assets

Non Current Assets

Fixtures and Fittings

60,300

Motor Vehicle

42,000

Current Assets

Debtors

24,000

Inventory

16,200

Cash

600

143,100

Liabilities

Creditors

20,500

Bank overdraft

5,600

26,100

Equity

Capital

83,800

Net Profit for the year

33,200

117,000

143,100

Ratios for Simon Sparks

Ratios

Liquidity Ratios

Current Ratio

1.56

Quick Ratio

0.94

Profitability Ratios

Gross Profit Margin

54%

Return on Assets

23%

Return on Equity

28%

Comments

Ratios are basically used for comparison purpose. They can be compared to the similar businesses to assess business performance within the industry or they can be compared over the years of the same business to assess the business performance. They are of many types but here we will discuss only two types; Profitability and Liquidity Ratios.

Profitability Ratios

A class of financial metrics that are used to evaluate a business's capability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the similar ratio from a previous period is indicative that the company is doing fine. In this case, we are not provided with the useful data which could help us to assess the business properly.

Gross Profit Margin

A ratio of profitability calculated as gross profits divided by sales. It measures how much out of every pound of sales a company actually keeps in earnings. Simon keeps 54% of the sales in earnings, which itself is quite high and postive for the business.

Return on Asset

A gauge of how profitable a business is relative to its total assets. ROA gives an indication as to how efficient management is at using its assets to generate earnings. It is calculated by dividing earnings by its total assets, ROA is displayed as a percentage. The formula for return on assets is:

Simon generates 23% profit from his total investments annually which is quite efficient.

Return on Equity

The amount of net income returned as a percentage of total equity. Return on equity measures a business's profitability by enlightening how much profit a company generates with the money shareholders have invested.   ROE is expressed as a percentage and calculated as:Return on Equity = Net Income / Shareholder's Equity

Liquidity Ratios

A class of financial ratios that are used to determine a business's ability to pay off its short-terms debts obligations. The higher the value of the ratio, the larger the margin of safety that the company possesses to face short-term debts. Liquidity ratios include the current ratio, the quick ratio and the operating cash flow ratio. Here we will discuss only the current ratio and the quick ...