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Business Accounts Notes

LPC Law Notes > Business Law and Practice Notes

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BUSINESS ACCOUNTS
Ratios
Return on Capital Employed [ROCE]
Indicated the rate of return on the capital employed in the business. The higher, the better.
Net Profit:
 In P&L, net profit = operation profit
Net Profit
 Partnerships: before deduction of interest
× 100 %
 Companies: before deduction of interest AND tax
Capital Employed
Capital Employed:
 Total assets less current liabilities
Net Profit Percentage (Net Return on Sales)
Gives the net profit margin on sales and is based on the profit figure before interest has been paid.
Net Profit:
 In P&L, net profit = operation profit
Net Profit
 Partnerships: before deduction of interest
× 100 %
Companies: before deduction of interest AND tax
Sales
Sales:
= turnover
 Margins which are above average will imply good management, but if unusually high may indicate the company has a favoured position in the market which may soon be eroded by competition.
 Low margins may sometimes be deliberately set to increase the company's market share or attract business from its competitors, but low margins will also be an indication of poor management.
Gearing Ratio
Analyses the financial structure of the company.
Borrowings:
 In Balance Sheet, = long-term loans (i.e. creditors falling
Borrowings due after 1 year)
× 100 %
Capital Employed:
Capital Employed
 In Balance Sheet, = creditors falling due after 1 year + called up share capital + share premium account
A high geared business has acquired most of its long-term finance by borrowing whereas a low geared business will have most of its long-term finance from its proprietors.
Liquidity Ratios
Acid Test
Current Ratio
Preferred measure of the position of a business.
Current Assets:
Liquid Assets:
 Includes stock,
 Current assets debtors, and cash excluding stock
Current Liabilities:
Current Liabilities:
Current Assets
Liquid Assets
:1  Balance Sheet, any
:1  Balance Sheet, any debts due within the debts due within the
Current Liabilities
Current Liabilites next 12 months (e.g.
next 12 months (e.g.
taxation, trade taxation, trade creditors, dividends creditors, dividends payable)
payable)
If the ratio is less than 1:1 this will usually give cause for concern - may signify shortage of working capital.
Earnings per Share (companies only)
Primary measure of a company's performance.

Net Profit (after tax , interest ∧preference share dividend ,if any)
Number of Ordinary Shares

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