can someone read through my section2 dec 2007 and give me some feedback pls

lisnic Registered Posts: 141 Dedicated contributor 🦉
ok if someone could give my section 2 from dec 2007 a read through and give me some feedback id really really appreciate it

2.2 first as its smaller!

a) i got the equation and defined asset and liability almost word perfect

would this be ok for equity (hope so as what i wrote!) - equity is the net assets of the business. The capital is the interest of the oweners.

b) The profits forthe years affect the accounting equation as any profits can be used to purchase/fund assets that will generate future profits for the entity or can be used to settle liabilities of the entity. Profits of the business are used to pay dividends to owners and so the value of the profts will affect this

2.1 ratios - i calculated all the formulas correct and stated them so rather than not type those out here is report bit:

The first 2 ratios, gross profit margin and net profit margin are used to show the profitability of the business.

The gross profit margin declined slightly from 45% in 2006 to 42% in 2007. The gross profit margin is a measure of profit from normal trading activities of the business. As the revenue of the business has increased in 2007 compared to 2006, this reduction in the gross profit margin will be to do with some aspect of the cost of sales. Looking at the inventory figures in the balance sheet, which show and increase to the closing inventories of the business in 2007 compared to 2006 would effect the cost of sales figure. The inventories turnover ratio i have claculated shows that the time taken for inventories to be sold has also increased and this could effect closing inventories and thus cost of sales which will have an impact on gross profit.

The net profit margin in 2007 has infact improved in comparison to 2006. Revenue in 2007 has increased compared to 2006 and also the expenses have deccreased between the 2 years. This wil be the reason why the net profit margin has improved

Looking at the working capital ratios, both inventories turnover and trade receivable have deteriorated from 2006 to 2007, this is of some concern. Firstly looking at the inventories turnover this has increased from 66 days to 84 days which means that is it taking the business over 2 more weeks to move inventory in 2007 compared to 2006. This should be addressed as it will impact on the profitability of the business and could also cause cash flow problems. Additional cost could also be incurred such as storage costs. The reasons for the increase need to be looked into. It may be due to obsolenscence of stock or simply due to stock control measures. The increased revenue in 2007 does not indicate that it could be due to a downturn of the market.

the deterioration of the trade receivables is also some concern. In 2007 it is taking debtors 15 days more to pay the business. This can cause cash flow problems, an also the longer debts remain unpaid the higher the risk of debts becoming bad. The reason for the decline could be simply due to stricter credit control needing to be carried out.

The analysis of the inventories and trade receivables indicates that the working capital of the business could be managed better and that this has slipped in 2007 compared to 2006.

The gross profit margin could be improved through more efficient inventory control, managing inventories held and when purchases are made more effectively.

The net profit margin could be improved by reducing the expenses further. The distribution costs have increased in 2007 and so these could be looked at to see if any savings could be made.

The inventories turnover could be improved through stricter stock control. The business should look at its current stock levels and manage purchases of further inventories more efficiently.

The trade receivables turnover should be improved through stricter credit control. This is key to cash flow and will minimise the risks of debts going bad.
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