1. Who is interested in company’s Annual Accounts?
Who? Why? What do they want to know?
1) Shareholders
2) ?
3) ?
Name 10 altogether!

2. Profitability Ratios

3. Cost of Sales
Sales
Overheads
Gross Profit
Net Profit

4. Sales = £1000
C.O.S.
Sales = COS
+ O’Heads
£400 + N. Profit
Overheads
G. Profit = O’Heads
£300 + N. Profit
Net Profit
£300

5. Sales = £225m
C.O.S.
£153m
Gross Profit
Gross Profit %
£72m 72 x 100 = 32%
225

6. Sales = £225m
C.O.S.
£153m
Overheads
£59m
Net Profit %
Net Profit
13 x 100 = 5.8%
£13m
225

7. Sales = £225m
C.O.S.
£153m
Overheads Expenses/Sales %
£59m 59 x 100 = 26.2%
225
Net Profit
£13m

8. Note
GP% = NP% + Expenses/Sales%
32% = 26.2% + 5.8%
Bigger Expenses means smaller NP
GP% indicates how well COS being controlled
NP% indicates how well Expenses being controlled

9. 3. Minimise!
4. Minimise!  Keen purchasing
Efficiency  Efficient production
(people)  Economy of Scale
(procedures)
Sales Cost of Sales
Overheads
Gross Profit
Net Profit
2. Maximise!
(Good marketing)
1. Ultimate objective is to maximise!

10. 25% SELLING
MARK PRICE
UP £1-25
MARGIN
20%
COST
(to us)
£1-00
Mark Up = “Gross Profit” as a % of Cost
Margin = “Gross Profit” as a % of Selling Price

11. Answering Ratio Questions in exam
1) Write formula
2) Do calculation
3) Is bigger or smaller better?
(If you are comparing ratios…)
4) Which ratio is better? Last year’s ratio or this year’s?
Company A or company B?
5) What may have caused ratio to be good or bad?
6) How to improve a poor ratio?
7) Can’t make final judgment if industry norms unknown