Trading and profit and loss account vertical format
From this, the chapter looks at the construction of manufacturing, trading and profit and loss accounts and the drawing up of a balance sheet. Key questions to be identified in activity analysis are: Some trading and profit and loss account vertical format that interest expenses and tax should not be considered as they are outside the SBU manager's control. Three common alternatives are average cost, first in first out Fifo and last in first out Lifo. Even if cash for sales has not been received in the year or period under review, sales will be included in the trading account.
In an agricultural business, these may be fertilisers, chemicals, produce, etc. We have now arrived at the cost of sales. The lower of cost and net realisable value: A trading account is prepared very much like a manufacturing account but substituting the production cost of completed goods for the usual purchasing figure see exercise 2.
Working capital is important; lack of it leads to business failure. On the other hand, because most short term assets do not produce any return, a strong liquidity position will be damaging to profits. It is essential that these steps are carried out in the order indicated. Two important factors need to be taken into account: Ratio analysis is a particularly powerful technique aimed at helping marketers to compare sets of figures over time and between companies.
In this instance, a manufacturing account is required in order to arrive at the final cost of manufacture. The profit and loss statement enables a marketer to examine overall and specific revenues and costs over similar time periods and analyses the organisation's profitability. Six years later his condensed financial accounts for the last three years are summarised below N.
Following the same reasoning that allows us trading and profit and loss account vertical format deduct closing stock on the debit side of the trading account, we may deduct the debit balance on the sales returns account from the sales credited in the trading account. The changes in D are calculated by the company's balance sheet entries for two consecutive periods. This is the "accruals" concept. Once accomplished, the maximum sustainable growth rate a measure of the ability of the business to fund the new assets needed to support increased sales is estimated by:
What is their value? Goods which have been returned by customers are represented by a debit balance on the sales return account. Present and potential investors can therefore quickly assess whether the company is a good investment or not.
Key questions to be identified in liquidity analysis include: This gives the total cost of goods available for sale. Manufacturing account There are many firms, whether parastatal, sole trader, partnership or limited company, which manufacture the final product to be sold from raw materials, e. In both cases, there are items in stock. Debit balances represent expenses and losses of the business and are known as overheads, e.
It is, therefore, only a "snapshot" in time. Accrued charges are amounts owed by the business, but not yet paid, for other expenses at the date of the balance sheet. We have now arrived at the cost of sales. When examining a profit and loss statement, it is important to recognise one difference between manufacturers and retailers.