ABC Tradig Sdn Bhd - polo PDF

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ABC Trading Sdn Bhd, who sells printing machines, has the following financial statement for years 2017 and 2018 Revenue Statement Sales lessCostofSales GrossProfit less:Expenses Salaries Maintenanceunderwarranty Transport Advertisement Utilities Insurance Rental Otherexpenses

2017 2,000,000 400,000 1,600,000 480,000 30,000 25,000 30,000 60,000 10,000 60,000 15,000

NetProfit

2018 2,500,000 750,000 1,750,000 600,000 70,000 27,000 50,000 80,000 10,000 120,000 15,000

710,000 890,000

972,000 778,000

2,017

2,018

400,000 100,000

400,000 100,000

1,250,000

1,250,000

1,750,000

1,750,000

Balance Sheet

FixedAssets MotorVehicles Furniture Machinary& Equipments

CurrentAssets Stocks Debtors CashatBank

250,000 400,000 500,000

250,000 800,000 898,000 1,150,000

CurrentLiabilities BankOverdraft Creditors

LongTermLiabilities BankLoan

RepresentedBy: ShareCapital RetainedProfits

150,000 250,000

1,948,000

100,000 320,000 400,000

420,000

- 2,500,000 

- 3,278,000 

1,000,000 1,500,000 2,500,000

1,000,000 2,278,000 3,278,000

Using the information given : a. List 3 purposes of Profit and Loss Account

(10 marks)

The profit and loss (P&L) statement is a financial statement that summarizes the sales, losses and expenses accrued during the defined period, typically in the fiscal quarter or year. The P&L statement is synonymous with the statement of sales. This records offer statistics on the success or failure of an organization to achieve profit by increasing sales, reducing expenses, or both. Some refer to the P&L document as the statement of benefit and loss, the statement of profits, the statement of activities, the statement of financial performance or income, the statement of earnings or the statement of expenditures. One of purpose a profit and loss account to assess your break-even point is an important aspect of business accounting. When you have a constant deficit resulting in losses, you can see that the cost needs to be trimmed or where the income needs to be raised to reach the break-even stage. If you know the percentage of losses per month or year, you will determine which facets of your company you want to improve. In the same way, you will reduce prices for consumers and win greater market share if your company is successful. Next is a profit and loss account offers essential data to banks and other providers of funds anytime you see a deficit in your cash flow estimate. It shows the willingness of your company to afford funding and justifies the creditor's decision to offer assistance. Your balance sheet and your estimated cash flow which show minus figures for stretches of time, but an accurate profit and loss report would give creditors confidence to provide funding for your company at those times. Lastly, assets in the form of real estate, machinery and intellectual property are priced when a company is sold, but the value of a business increases when it is sold as a profitmaking enterprise. The opportunity to show a record of profit-making is an important factor, and the profit and loss account is an invaluable instrument for investors. Consistent earnings and a functioning business plan are always worth more to prospective customers than to capital assets, and reliable accounting can show the health of a corporation.

b. List 3 purposes of the Balance Sheet

(10 marks)

The balance sheet is a financial statement that reports the assets, liabilities and equity of the company at a specific point in time and provides the basis for the measurement of the rate of return and the estimation of its capital structure. It is a financial statement that offers a snapshot of what the company owns and owes, as well as the amount invested by the shareholders. The purpose of balance sheet is as a tool for investors. Investor research companies in great depth when determining to choose whether or not invest in the venture. Normally, they use the balance sheet as a means to tool the company's overall financial standing. This is because the Balance Sheet actually lists the net reserves that the company has, as well as the amount it owes to its creditors. Next is to assess the overall financial assets that a company owns. Balance sheet lists down all assets, both short-term, as well as long-term, which are owned by the organization. It is important to keep a track of the overall assets, because an increase in profitability, with no increase in assets, would not make sense. Lastly, the purpose of balance sheet is to conduct Ratio Analysis. Ratio Analysis is essentially a calculation of the line items presented in the Balance Sheet. Getting a compiled list of assets, liabilities and resources will help them perform a Ratio Study, and will provide them with useful insights into the things that need to be worked on in order to enhance their financial status.

c. Compute 2 common profitability ratios for 2017 and 2018

(10 marks)

2017 Gross Profit Ratio = GP/SALE X 100% = 1600000/2000000 X 100% = 80%

2017 Net Profit Ratio = NP/SALE X 100% =890000/2000000 X 100% = 44.5%

2018 Gross Profit Ratio = GP/SALE X 100% = 1750000/2500000 x 100% = 70%

2018 Net Profit Ratio = NP/SALE X 100% = 778000/2500000 X 100% = 31.12%

d. Interpret the profitability ratios calculated (5 marks) ThegrossandnetprofitmargindeclinedinYear2018.Noticethatintermsof dollaramount,grossandnetincomeishigherinYear2017.Thesalein2018ishigher however,itrepresentsonly31.12%ofnetprofit,whileinYear2017,itrepresents44.5% netprofitratio.Henceintermsofmanagingcostsandexpenses,thecompanydidbetter inYear2017.Adeeperanalysisofthefiguresabovewouldrevealthatthecompany incurredsignificantlyhighcostofsalesandoperatingexpensesinYear2018.Thehigher thenetprofitmargin(orreturn on sales),thebetter.Ahighpercentagemeansthatthe companydidwellinmanagingitsexpenses.

e. Compute 2 common liquidityity ratios for 2017 and 2018

(10 marks)

2017 Current Ratio: 1150000(current asset)/400000(current liability) =2.88:1 Acid Test: 1150000(current asset) – 250000(stock)/400000(current liability) =2.25:1 2018 Current Ratio: 1948000/420000 = 4.64:1 Acid Test: 1948000-250000/420000 = 4.04:1 f. Interpret the liquidity ratios of the company

(5 marks)

Generally, a value greater than 1 is a favourable sign. It means that the company can meet its current liabilities with its current assets. For both years, company doing well because the value is more than 1. For 2018, the score is 4.64 which is higher than 2017. The ratios is to measure the ability of a company to pay short-term obligations and to measure whether the company has enough current assets (or specific current assets) to meet current liabilities.

g. List and explain 3 ways the company can improve its gross profit

(10 marks)

Three ways the company can improve its gross profit reduce the cost of goods sold, increase the selling price without increasing the cost of goods sold and increase the sales volume. For the cost of goods sold, a decrease in cost of goods sold will cause an increase in gross profit margin. Finding lower-priced suppliers, cheaper raw materials, using laboursaving technology, and outsourcing, are some ways to lower the cost of goods sold. The bigger the difference between cost of goods sold and sales, the bigger the gross profit margin will be. Next, for increase the selling price without increasing the cost of goods sold, with all factors being equal, any increase in selling price that is not accompanied by an increase in cost of goods sold will increase the gross profit margin. Compute the new gross profit margin using the new price and compare the figure against the old margin to see how much improvement will be made before apply the price change. Lastly, for increasing sales volume can reduce the cost of goods sold since the fixed manufacturing cost per unit becomes smaller as production volume becomes bigger. An increase in sales that is accompanied by a reduction in cost of goods sold per unit results to a higher gross profit margin.

h. List and explain 3 ways the company can improve its net profit

(10 marks)

Three ways that company can improve its net profit first is reduce utilities. Company might be able to downgrade the utility subscriptions. For example, company might downgrade the phone, internet, and refuse plans. At the same time must ensure the utilities cover enough to keep business functional, but not too much that cause wasting money. Second is reduce operation costs. The company can try buying common items in bulk to receive reduced pricing. Buying wholesale for business owners can significantly reduce the monthly expenses. Also, see if the vendors will give company discounts for paying bills early. Third is increase sales revenue. A company can try decreasing prices or running sales to attract more customers. A reduced price might put the items at a better price point for more people, encouraging more long-term revenue. Sales encourage impulse buys and pull in people who want to try the product or service before paying full price....