Generally Accepted Accounting Principles and Net Profit Margin Essay

Submitted By ShahFahad1
Words: 1189
Pages: 5

Task 1b

The purpose of trading profit and loss account weather the business has made a profit or loss over a financial year. It record sales, cost and profit for a year. The account is made in a way that allows us to find out net profit or loss. This account is also useful to show the potential investors, such as bank to show how profitable company is.
The Balance Sheet is a statement of financial position of a business at a specific point in time usually at the end of the month or year. The Balance Sheet sums up the assets, debts and other long-term liabilities and the owners’ Capital at a particular point of time.
How Gross profit calculated?
Gross profit is calculated by deducting cost of goods sold from sales. To demonstrate this let’s take C&V example here
Sales (199000) - cost of goods sold (81000) = gross profit (119200)
Net profit is calculated?
Net profit is calculated by taking out all the expenses from gross profit. To demonstrate this let’s C&V trading profit and loss account example: Gross profit (118,000) – overheads (71,400) = net profit (47,800)
Fixed assets
A long-term tangible piece of property that a firm owns and uses in the production of its income. It is an asset that is not consumed or sold during the normal course of business, such as land, buildings, equipment, machinery, vehicles, leasehold improvements, and other such items. Fixed assets enable their owner to carry on its operations.
Current assets
Currents assets are the section of the balance sheet which shows assets that business owns which are either cash or equivalent to cash, or are likely to be turn into cash in twelve months of period. In accounting, any asset expected to last or be in use for less than one year is considered a current asset. Current assets also called circulating asset.

Working capital
Current assets minus current liabilities. It is cash available for covering all the day to day running expenses of the business. Working capital measures how much in liquid assets a company has available to build its business. Sources of working capital are net income, long-term loans, sale of capital assets, and injection of funds by stockholders.

Task 2

A liquidity ratio measures a company's ability to pay short-term obligations. The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). There are two liquidity ratios
• Current ratio
• Acid test ratio/liquidity ratio.

Current ratio
The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligation. If they came due at that point that shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing but it is apparently not a good sign.
Formula:

Acid test ratio
Not all assets can be turned into cash quickly or easily. Some - notably raw materials and other stocks - must first be turned into final product, then sold and the cash collected from debtors. The Acid Test Ratio (sometimes also called the “Quick Ratio”) therefore adjusts the Current Ratio to eliminate certain current assets that are not already in cash (or "near-cash") form. The tradition is to remove inventories (stocks) from the current assets total, since inventories are assumed to be the most illiquid part of current assets – it is harder to turn them into cash quickly.
Formula:

Profitability
Profitability measures that indicates how well a business is performing in terms of its ability to generate profit. It is the measure of the difference between the purchase price and the costs of bringing to market i.e. the revenue a company derives from its operations, less all explicit costs. For example, if a company's revenue is $1 million and its total overhead is $750,000, its accounting profit is…