LO 6 - Teacher PDF

Subject focus 6: Finance. 6.2a Explain the reasons for business financing. Business financing is essential for various reasons, including: a. Startup Costs: Many businesses require financing to cover initial startup costs such as purchasing equipment, leasing office space, or hiring...

Subject focus 6: Finance. 6.2a Explain the reasons for business financing. Business financing is essential for various reasons, including: a. Startup Costs: Many businesses require financing to cover initial startup costs such as purchasing equipment, leasing office space, or hiring employees. b. Expansion and Growth: Financing enables businesses to expand their operations, enter new markets, launch new products, or invest in research and development to fuel growth. c. Working Capital: Businesses often need financing to cover day-to-day operational expenses, such as inventory purchases, payroll, and utilities, especially during periods of growth or seasonal fluctuations. d. Capital Expenditures: Financing is necessary for capital expenditures, including investments in infrastructure, technology upgrades, or equipment replacements to improve efficiency and competitiveness. 6.3a Analyse why different types of business organisations have different financial needs. Different types of business organizations have varying financial needs due to factors such as their size, structure, industry, and growth stage. Here's a brief analysis: a. Sole Proprietorships and Partnerships: May rely on personal savings or loans from family and friends for financing. b. Small to Medium-Sized Enterprises (SMEs): Often require financing to fund growth and expansion initiatives. Access to external funding sources such as bank loans, lines of credit, or government grants may be crucial. c. Corporations: Larger in scale and more complex in structure compared to smaller businesses. Require significant financing for capital investments, research and development, and market expansion. Often SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 1  have access to a wider range of financing options, including equity financing through public offerings and debt financing through bonds or commercial loans. d. Startups: Often have high initial capital requirements for product development, advertising and buying inventory. Seek financing from investors, venture capital firms, or crowdfunding platforms to fund growth and achieve profitability. e. Industry-Specific Businesses: Financial needs may vary depending on the nature of the industry. For example, manufacturing companies may require significant investment in machinery and equipment, while technology startups may prioritize funding for research and development. In summary, the financial needs of different types of business organizations are influenced by factors such as their size, structure, growth stage, industry, and strategic objectives. Understanding these needs is crucial for businesses to identify appropriate financing options and effectively manage their financial resources. Activity 1. Introduction to finance. 1. Describe the term startups. 2. Explain why business finance is essential for startups and for businesses which are willing to expand. 3. Analyse the financial needs of sole traders and public limited companies. Activity 1 – Answers. 1. Startups are business owners who have just started a new business. 2. To be able to buy the necessary stock (inventory) for the business and to advertise the new business so that consumers will be aware of it. 3. Sole trader mainly relies on personal savings and loans to finance the business. Public limited companies rely on share issue and debenture (bonds) issue to finance its business activities. 6.1b List internal and/or external sources of business finance. 6.2b Explain the types of internal and/or external sources of finance used by businesses. 6.3b Compare and contrast different sources of finance available to businesses. SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 2  Sources of finance for the private sector:- Internal sources of finance:- Money coming from INSIDE the business. The most common sources of internal finance include:- a) Retained profits – Those profits kept in the business after the owners have taken part of their profit for themselves. b) Selling of non-current assets – Assets are things that the business owns. Examples of assets include; machines, company cars, buildings of the business and stock. Selling of assets refers to when the business sells old assets. c) Reducing Inventory (stock) – When the goods in stock are reduced, the business will save money by buying less stock. Retained profits Selling of non-current assets Internal sources of finance. Reducing inventory (stock) Activity 2. Internal Sources of Finance. Fill in:- a) When the business gets money from inside the business this is referred to as internal sources of finance. b) Three types of internal sources of finance are: retained profit, selling of non-current assets and reducing stock level. External sources of finance:- Money coming from OUTSIDE the business. The most common sources of external finance include:- a) Bank loans – When the business borrows money from a bank. There are two types of loans:- i. Secured loans – When the borrower agrees to give up some of his assets (at least of the same value of the loan), if he fails to pay back his loan. An example of a secured loan is a mortgage. A mortgage is when a property is given as a security for a loan. This is usually done while people buy houses. SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 3  ii. Unsecured loans – When the borrower offers no security on the money borrowed. This type of loan is very risky to the lender and so high interest rates are charged. Banks do not offer unsecured loans. b) Overdraft – The business is allowed by the bank, to write cheques with a greater amount of money than it has in its current account. c) Hire purchase – Is usually used when businesses buy cars. By hire purchase, the business will be given the cars immediately and then it will pay for the cars by installments (paying a small sum of money every month or every three months). d) Shares issue – Public limited companies can sell shares to people and in return they will get money. People who buy shares are called shareholders and they become the owners of the company. e) Bonds (Debentures) – When the company borrows money from people. f) Leasing – When the business leases (hires) a machine or a car for a long time. There are two types of leasing: i. Operating lease – When the business hires an equipment or a car for a long time. The business has to pay every year during the lease time. ii. Finance lease – The same as operating lease but the lessee (the business that is hiring the equipment or the car) can buy the asset at the end of the lease time. g) EU funds – include various financial instruments such as grants, loans, guarantees, and equity investments. These funds are administered through different EU programs and initiatives tailored to specific objectives and priorities. h) Crowdfunding - involves raising funds from a large number of individuals or investors, to finance a specific project, launch a new product or support business growth. It allows businesses to access capital without relying solely on traditional financing sources like banks. SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 4  Leasing Bank loans Overdrafts EU funds External sources of finance. Crowdfunding Bonds Hire purchase Shares Activity 3. External Sources of Finance. Answer the following questions:- 1. Explain: a) External sources of finance b) Overdraft c) Hire purchase. 2. What is the difference between:- a) Secured loan and Unsecured loan. b) Operating lease and Finance lease. c) Shareholders and bond holders. 3. Explain the term crowdfunding and show why it is considered as an external source of finance to a business. Activity 3 – Answers 1. a) External sources of finance – when a business obtains money from sources outside the business. b) Overdraft – when the business withdraws more money from a bank account than it actually has. c) Hire purchase – when an asset bought and payments are made by installments. 2. a) Secured loan - When the borrower agrees to give up some of his assets (at least of the same value of the loan), if he fails to pay back his loan. Unsecured loan - When the borrower offers no security on the money borrowed. SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 5  b) Operating lease - When the business hires an equipment or a car for a long time. Finance lease – The same as operating lease but the lessee (the business that is hiring the equipment or the car) can buy the asset at the end of the lease time. c) Shareholders are people who buy shares in a limited company and forms part of the ownership of that company. Bond holders are people who buys bonds of a public limited company and they become lenders to that company. 3) Crowdfunding involves raising funds from many individuals or investors to finance a specific project. Crowdfunding is an external source of finance to a business since the business is getting funds from outside sources. 6.1c List the functions of the Malta Financial Services Authority (MFSA). 6.2c Explain the functions of the Malta Financial Services Authority (MFSA). 6.3c Analyse how the Malta Financial Services Authority supports and regulates business activity. The Malta Financial Services Authority (MFSA) supports and regulates business activity in Malta through various measures: i. Licensing and Supervision: The MFSA issues licenses to financial services providers, including banks, insurance companies, investment firms, and collective investment schemes, ensuring they meet regulatory standards. It supervises these entities to ensure compliance with laws, regulations, and best practices. Since 2018, it is also responsible for regulating Virtual Financial Assets. SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 6  ii. Market Integrity: The MFSA regulates securities (stock) markets, ensuring fair and transparent trading practices. It monitors market activities to detect and prevent market abuse, insider trading, and other fraudulent activities that could undermine market integrity. iii. Consumer Protection: The MFSA safeguards consumers by enforcing regulations related to financial products and services. It ensures that consumers receive fair treatment, adequate disclosure, and appropriate recourse mechanisms in case of disputes or complaints. iv. Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT): The MFSA combats financial crime by enforcing AML/CFT regulations on financial institutions. It conducts assessments, inspections, and investigations to prevent money laundering, terrorist financing, and other illicit activities. v. Supervisory Cooperation: The MFSA cooperates with other regulatory authorities, both domestically and internationally, to enhance supervision and facilitate cross-border business activities. It participates in regulatory forums, exchanges information, and coordinates regulatory actions to address common challenges effectively. Overall, the MFSA plays a crucial role in supporting and regulating business activity in Malta by promoting financial stability, market integrity, consumer protection, and compliance with regulatory standards. 6.1d Define fixed and/or variable cost. 6.2d Classify fixed and/or variable cost. 6.3d Explain the difference between fixed and variable cost. SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 7 Fixed and variable costs are two types of expenses incurred by businesses in their operations. Here's how they differ: Fixed Costs are expenses that remain constant regardless of the level of production or sales volume. These costs do not fluctuate with changes in output in the short term. Examples of fixed costs include: Rent or lease payments for office space or manufacturing facilities. Salaries or wages of permanent employees. Insurance premiums. Depreciation of fixed assets. Property taxes. Variable Costs are expenses that vary directly with the level of production or sales volume. These costs increase as production increases and decrease as production decreases. Examples of variable costs include: Raw materials or components used in production. Direct labour costs, such as hourly wages for production workers. Packaging materials. Sales commissions or bonuses tied to sales volume. Water and electricity expenses directly related to production. Other examples of fixed and variable costs: Fixed Cost Example: Suppose a bakery pays €2,000 per month for rent. Whether the bakery produces 100 loaves of bread or 1,000 loaves, the rent expense remains constant at €2,000 per month. Similarly, if the bakery hires a manager with a fixed salary of €3,500 per month, this cost is fixed regardless of the bakery's sales volume. Variable Cost Example: Consider a car manufacturing company that purchases steel to produce cars. The cost of steel directly varies with the number of cars produced. If the company produces 100 cars, it may require 10 tons of steel, but if it produces 200 cars, it will need 20 tons of steel. Therefore, the cost of steel is a variable cost. Similarly, if the company hires hourly workers and their rate of SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 8 pay is based on the number of hours worked, the labour cost would be variable because it changes with production levels. Understanding the distinction between fixed and variable costs is essential for businesses to analyse their cost structure, make pricing decisions, and determine profitability at different levels of production or sales. Activity 4 – MFSA and type of costs. 1. What do the letters MFSA stand for? 2. Two functions of MFSA are licensing and supervision and consumer protection. Explain. 3. Distinguish between fixed costs and variable costs. 4. Give two examples of fixed costs and two examples of variable costs. Activity 4 – Answers 1. Malta Financial Services Authority. 2. The MFSA issues licenses to financial services businesses, such as banks and insurance companies, ensuring they meet regulatory standards. MFSA supervises businesses in the financial sector to ensure compliance with laws, regulations, and best practices. The MFSA safeguards consumers by enforcing regulations related to financial products and services. 3. Fixed costs are costs which do not vary with the level of production and sales volume and variable costs are costs which vary with the level of production and sales volume. 4. Examples of fixed costs: rent and insurance. Examples of variable costs: packaging materials and cost of raw materials. 6.2e Calculate fixed cost, variable cost, and/or total cost. Activity 4 – Calculation of fixed, variable and total cost. Question 1 Mr. P. Camilleri is planning to open a business. The following table shows the costs he thinks he will have to face. Output Fixed Variable Total Cost Cost Cost units € € € 0 360 0 360 10 360 130 490 20 360 260 620 30 360 390 750 40 360 520 880 50 360 650 1,010 60 360 780 1,140 70 360 910 1,270 SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 9 The following information is also relevant:- Variable costs are €13 per unit. Complete the table above. Question 2. Mr. A. Caruana is in business producing shirts. From the following information:-  Fill in the empty columns if fixed costs are €200 and variable costs are €15 per unit. Units Fixed Variable Total Produced Cost Cost Cost and Sold (€) (€) (€) 0 200 0 200 10 200 150 350 20 200 300 500 30 200 450 650 40 200 600 800 50 200 750 950 60 200 900 1,100 Question 3: A company produces bicycles. The total cost of producing 200 bicycles is €15,000, and the total cost of producing 400 bicycles is €25,000. Determine the fixed cost and variable cost per bicycle. Let x be the number of bicycles produced. We can set up two equations based on the given information: For 200 bicycles: Fixed Cost + 200 × Variable Cost = 15,000 For 400 bicycles: Fixed Cost + 400 × Variable Cost = 25,000 To solve for fixed and variable costs, we need to solve these equations simultaneously. Subtracting the first equation from the second gives: Fixed Cost + 400 × Variable Cost = 25,000. Fixed Cost + 200 × Variable Cost = 15,000 / 200 × Variable Cost = 10,000 So variable cost = 10,000 ÷ 200 = €50 per bicycle. To find fixed cost: Fixed Cost + 400 × Variable Cost = 25,000. But variable cost is 50, so; Fixed cost + 400 × 50 = 25,000 Fixed cost + 20,000 = 25,000 Fixed cost = 25,000 – 20,000 = €5,000 SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 10 Question 4: A company incurs a total cost of €8,000 for producing 500 units and a total cost of €11,000 for producing 700 units. Determine the fixed and variable costs. Let x be the number of bicycles produced. We can set up two equations based on the given information: For 200 bicycles: Fixed Cost + 500 × Variable Cost = 8,000. For 400 bicycles: Fixed Cost + 700 × Variable Cost = 11,000 To solve for fixed and variable costs, we need to solve these equations simultaneously. Subtracting the first equation from the second gives: Fixed Cost + 700 × Variable Cost = 11,000 Fixed Cost + 500 × Variable Cost = 8,000 / 200 × Variable Cost = 3,000 So variable cost = 3,000 ÷ 200 = €15 per unit. To find fixed cost: Fixed Cost + 700 × Variable Cost = 11,000. But variable cost is 15, so; Fixed cost + 700 × 15 = 11,000 Fixed cost + 10,500 = 11,000 Fixed cost = 11,000 – 10,500 = €500 6.1f Classify transactions into capital expenditure and revenue expenditure of a business organisation. 6.2f Explain capital and/or revenue expenditure of a business organisation. 6.3f Distinguish the treatment of capital and revenue expenditure in the financial statements of a sole trader business. Capital Expenditure – When non-current assets are bought, or when a business spends money to add to the value of an existing non-current asset. A capital expenditure will result in an increase in the value of non-current assets in the Statement of Financial Position. SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 11  Revenue Expenditure – Is money spent on day-to-day expenses and does not increase the value of non-current assets. A revenue expenditure will increase the amount of expenses in the Income Statement. Question 1. Study carefully the below list of expenses and tick whether you consider them to be revenue or capital expenditure:- Capital Expenditure Revenue Expenditure 1) Purchase of an extra machinery. √ 2) New tyre for van. √ 3) Building extension to the business. √ 4) Painting extension to business when it √ was first built. 5) Repainting extension to business 3 √ years later. 6) Carriage costs on purchases. √ 7) Additional cash register. √ 8) Roof repairs. √ 9) Wages of shop assistants. √ 10) Installing thief detection equipment. √ 11) Paying a telephone bill. √ 12) Carriage costs on sales. √ 13) Carriage costs of a new computer. √ Question 2. (Find answers accounting book 3rd edition chap 23) Classify the following into items of Capital or Revenue Expenditure: i) Building of extension to warehouse. ii) Painting extension when it was first built. iii) Redecorating wall of shop. iv) Legal costs in acquiring new premises. v) Water and electricity bill. vi) Paid wages. vii) Cost of transport of machinery to the firm. viii) Cost of transport of goods for resale to the firm. Question 2 – Answers. i) Capital Expenditure ii) Capital Expenditure iii) Revenue Expenditure iv) Capital Expenditure v) Revenue Expenditure vi) Revenue Expenditure vii) Capital Expenditure viii) Revenue Expenditure Question 3. Indicate, with reasons, whether the following are regarded as capital or revenue expenditure: i) A new machine, which cost €10,000 is purchased on credit. ii) Payment for repairs to the machine to keep it in working order. SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 12 iii) Wages paid to the machine operator. iv) Materials and wages needed for installation of machine. Question 3 – Answers. i) The purchase of the Machine is Capital Expenditure. ii) Revenue Expenditure – a daily expense iii) Revenue Expenditure – a daily expense iv) Capital Expenditure – part of cost in installing Non-Current Asset Question 4. L. Mamo buys new machinery on 1st March 2024 for €10,000. He pays for this by taking out a bank loan, for which he is charged €1,200 interest during the year ended 31st December 2024. The cost of transportation to bring the machine to the firm amounted to €300. The installation of the new machinery cost him €450 for labour and €75 for materials. As the machinery is specialised, its purchase cost him an additional €80 in legal fees. During the year ended 31st December 2024 he spent €500 on power to operate the machinery, €8,500 on the wages of the machine operator and €9,250 on the materials used in production. You are required to provide a classification of the items above under the headings Capital Expenditure and Revenue Expenditure. Question 4 – Answers. Purchase of machinery €10,000 – Capital Expenditure Interest on bank loan €1,200 – Revenue Expenditure Cost of transportation to bring the machine €300 – Capital Expenditure The installation of the new machinery cost him €450 for labour and €75 for materials – Capital Expenditure Legal fees €80 – Capital Expenditure Power to operate the machinery €500 – Revenue Expenditure Wages of the machine operator €8,500 – Revenue Expenditure Materials used in production €9,250 – Revenue Expenditure Question 5. 1. Distinguish between capital and revenue expenditure. 2. Give two examples of capital expenditure and two examples of revenue expenditure. Question 5 – Answers. 1. Capital Expenditure is when non-current assets are bought, or when a business spends money to add to the value of an existing non-current asset. Revenue Expenditure – Is money spent on day-to-day expenses and does not increase the value of non-current assets. 2. Examples of capital expenditure: Building of extension to the business and buying a new motor van for the business. Examples of revenue expenditure: wages to sales persons and rent of the business. SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 13  6.1g Define a Statement of Profit or Loss and/or Statement of Financial Position. The Statement of Profit or Loss provides a summary of a business revenues, expenses, profits or losses over a specific period, typically one year. The Statement of Financial Position provides a summary of a business financial position at a specific point in time, typically one year. It presents the business assets (what it owns), liabilities (what it owes), and capital (the difference between assets and liabilities). Users of financial records (Stakeholders) The following are interested in the financial records of the business:- a) Government – Because businesses provide a source of revenue by paying corporation tax. b) Owners (Shareholders) – Who wish to find out the value of their investments c) Managers – Who need to check the efficiency of their departments. d) Trade Payables (Creditors) – To see whether it is safe to allow credit to the business. e) Other Lenders – Such as banks and debenture holders, who are interested in how easily it is for the business to pay back its debts. 6.2g Explain why businesses should prepare a Statement of Profit or Loss and/or Statement of Financial Position. Businesses should prepare a Statement of Profit or Loss and a Statement of Financial Position for several reasons: a. Financial Performance Evaluation: These statements provide a clear overview of a business financial performance over a specific period. The Statement of Profit or Loss highlights the revenue generated and expenses incurred, indicating whether the business is profitable or experiencing losses. The Statement of Financial Position shows the business assets, liabilities, and capital, enabling stakeholders to assess its financial health and stability. b. Decision Making: By analyzing these statements, management can make informed decisions about investment opportunities and operational improvements. For instance, if the statement of profit or loss shows declining profits, management may investigate cost-cutting measures or methods to sell more to improve the business profits. c. Investor Confidence: Investors and creditors (trade payables) rely on these statements to check the business financial performance and potential for future growth. 6.1h Identify the main sections in a Statement of Profit or Loss and/or Statement of Financial Position of sole traders. 6.2h Calculate missing figures in a given Statement of Profit or Loss and/or Statement of Financial Position of sole traders. SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 14  6.3h Interpret missing figures in a given Statement of Profit or Loss and/or Statement of Financial Position of sole traders. Final Accounts Every year a business person prepares final accounts to provide a financial summary of all the trading activities during the year. The final accounts, which are prepared at the end of each business’s financial year, are the following:- Statement of Profit or Loss (Income Statement) – Trading section and Profit and Loss section. Statement of Financial Position. Statement of Profit or Loss (Income Statement) – The Trading Section. This shows:-  What has been spent on buying stock.  How much money was received from the sales of a business.  The gross profit of the business. The Gross Profit of a business is the difference between sales and cost of sales in a certain time period. Gross profit is calculated as follows:- Gross Profit = Sales – Cost of Sales The Cost of Sales is the cost of the goods actually sold by the business during a certain period of time. Cost of goods sold is calculated by the following formula:- Cost of sales = Opening inventory + Purchases – Closing inventory Statement of Profit or Loss (Income Statement) - The Profit and Loss Section. Probably the main objective of accounting is the calculation of the profits or losses of a business during a period of time (usually 1 year). The profit or loss of a business is calculated in the Statement of Profit or Loss (Income Statement) - Profit and Loss section. It shows the Net Profit or Net Loss, a business has actually made during the previous year. The Net Profit (or Net Loss) is calculated as follows:- Net Profit = Gross Profit – Expenses SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 15 Example of a Statement of Profit or Loss (Income Statement) of a Sole Trader. Statement of Profit or Loss of C. Cauchi for the year ended 31st December 2024 € € a. Sales 15,000 Less Cost of sales: b. Opening Inventory 2,300 c. Add Purchases 7,500 9,800 d. Less Closing Inventory (3,500) Cost of sales (6,300) e. Gross Profit 8,700 f. Less Expenses: Rent 1,200 Communication expenses 200 Electricity 500 Wages 2,000 Total Expenses (3,900) g. Net Profit 4,800 Notes a) Sales:- Total sales during the year (also known as turnover or business takings) b) Opening Inventory:- Value of stock (goods unsold) at the beginning of the year. c) Purchases:- Goods bought for resale during the year. d) Closing Inventory:- Value of stock at the end of the year. e) Gross Profit:- Sales less Cost of Sales. f) Expenses:- All expenses made by the business during the year. g) Net Profit:- Gross Profit less Total Expenses. Statement of Financial Position. After the Statement of Profit or Loss (Income Statement) has been drawn up, a statement is done in which the remaining balances in the books are shown. This statement is known as the Statement of Financial Position. A Statement of Financial Position is a statement showing the financial position of a business at one moment in time. It shows all that the business owns (assets) and all that the business owes (liabilities). In a Statement of Financial Position one can find the following information:- 1) ASSETS – Are all things that the business owns, such as; goodwill, land, machinery, inventory, and cash at bank. There are mainly three types of assets:- I. Non-Current Assets – These are things which the business own but cannot be changed into cash easily. Examples; Land and Buildings, Office Furniture, Office Equipment, Plant and Machinery, and Motor Vans. These should be shown in the Statement of Financial Position in this order. SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 16  II. Current Assets – These are things that the business own which can be changed into cash easily. Examples; Inventory (closing inventory), Trade Receivables (people who owe the business), Bank and Cash. These items should be shown in the Statement of Financial Position in this order. 2) LIABILITIES – Money which the business owes. There are two types of liabilities:- I. Non-Current Liabilities – these are liabilities (debts), which take more than one year to be paid. Examples; Loans or bank loans. II. Current Liabilities – These are liabilities (debts) which have to be paid in a short time, usually one year. Examples; Trade Payables (People or businesses to whom the business owes money) and Bank Overdraft. 3) CAPITAL – The money invested by the owner in the business. 4) WORKING CAPITAL – The amount of money the business has to work with. It is calculated by the following formula:- Working Capital = Current Assets – Current Liabilities 5) CAPITAL EMPLOYED – Is the effective amount of money that is being used by the business. It is is calculated by the following formula:- Capital Employed = Non-Current Assets + Current Assets – Current Liabilities 6) DRAWINGS – Things or money which the owner takes from the business for his personal use. 7) NET PROFIT – The Net Profit for the year as calculated in the Statement of Profit or Loss. SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 17  Example of a Statement of Financial Position of a Sole Trader:- Statement of Financial Position of C. Cauchi as at 31st December 2024 € € Non-Current Assets Land and buildings 120,000 Fixtures and fittings 5,000 Motor vans 12,000 137,000 Current Assets Inventory 3,500 Trade Receivables 2,400 Bank 2,200 Cash 1,000 9,100 146,100 Capital Balance at 1/1/2024 120,000 Add Net Profit 4,800 124,800 Less Drawings ( 2,200) 122,600 Non-Current Liabilities Bank loan 20,000 Current Liabilities Trade payables 3,500 146,100 REVISION SUMMARY (a) ) Statement of Profit or Loss (Income Statement) - The Trading section. ✓ Sales revenue is the income from selling goods and services. ✓ Cost of goods sold = Opening inventory + Purchases – Closing inventory. ✓ Gross Profit = Sales – Cost of sales. ✓ Does not include overhead expenses. (b) Statement of Profit or Loss (Income Statement) - Profit and Loss section. ✓ Takes gross profit from the Trading section. ✓ Net profit = Gross profit – Expenses (c) Statement of Financial Position. ✓ Lists Assets and Liabilities. ✓ Assets can be either non-current or current. ✓ Liabilities can be either current or non-current. ✓ Working capital = Current assets – Current liabilities. ✓ Capital employed = Non-Current assets + Current assets – Current liabilities. SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 18  ACTIVITIES Activity 1 Complete the following table (all numbers in €):- Sales Cost of goods sold Gross profit a) 3,000 1,500 1,500 b) 25,000 16,000 9,000 c) 80,000 60,000 20,000 d) 75,000 25,000 50,000 Activity 2 Complete this table:- Cost per unit Opening Purchases Closing Cost of goods Inventory Inventory sold a) € 3 500 3,000 200 € 9,900 b) € 2 1,000 5,000 500 €11,000 c) € 5 100 400 300 €1,000 d) € 1 2,000 6,000 2,000 €6,000 Activity 3 Here is a list of questions managers frequently ask:- a) What was the gross profit of the business? b) What were the sales of the business? c) What is the total value of the current assets? d) What expenses did the business pay last year? e) What was the net profit of the business? f) What is the capital employed of the business? For each question, indicate where the answer can be found, choosing from one of the following options:- Statement of Profit or Statement of Profit or Statement of Loss - Trading section Loss - Profit and Loss Financial Position section a, b a, d, e c, f SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 19 Activity 4 An owner of a business is trying to write out a Statement of Financial Position for the business. The following items have been listed. You have been asked to help this business owner by ticking under the correct box. Current Non Current Non - Business Expenses assets Current liabilities Current Capital assets liabilities Business √ vehicles Cash in √ the till Ten-year √ bank loan Capital of the √ business Money owed √ by customers Unsold √ goods Buildings of √ the business Amounts √ owed to suppliers Tax owed to √ government Rent √ Activity 5. a) From the following balances which appeared in the books of Mr. B. Webb, you are required to draw up a Statement of Financial Position as at 31/12/2024. Premises €15,000 Drawings € 8,950 Motor vehicles €12,000 Capital (at 31/12/2024) €82,490 Trade Receivables €19,500 Inventory (at 31/12/2024) €25,480 Trade Payables €15,380 Cash at bank €16,540 Cash in hand €400 b) Give two examples of non-current assets that are not included in the above list. c) Give the meaning of the following terms:- Final Accounts, Cost of sales and drawings. d) What is the difference between:- Non current assets and current assets. Non-current liabilities and current liabilities. Gross profit and net profit. Capital employed and working capital. SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 20  Activity 6. Tick in the correct box:- Current Current Non-Current Non-Current Assets Liabilities Assets Liabilities Machinery. √ Trade Payables. √ Inventory. √ Office furniture. √ Bank Overdraft. √ Bank Loans. √ Trade Receivables √ Activity 7. State whether the following are Trade Receivables or Trade Payables of XYZ Co. Ltd. a. A customer owes XYZ Co. Ltd. €200. Trade Receivable b. XYZ Co. Ltd. owes R&P plc. €250. Trade Payable c. Peter bought goods on credit worth €500 from XYZ Co. Ltd. Trade Receivable d. XYZ Co. Ltd. bought Furniture and Fittings on credit. Trade Payable Activity 8. Mr. A. White is in business producing shirts. He started up his business with €50,000. He has the following assets and liabilities:- Land and Buildings €100,000 Cash €16,000 Motor Vans €11,000 Trade Payables €4,000 Cash at Bank €24,000 Bank Loan €79,920 During the year ended 31st December 2023, he had the following information:- Sales €50,000 Closing Inventory €4,000 Opening Inventory €8,000 Purchases €20,000 During this year he paid the following expenses:- Telephone Bill €1,040 Stationery €80 Rent and Rates €600 Wages and Salaries €3,200 You are required to prepare:- ▪ The Statement of Profit or Loss (Income Statement) for the year ended 31/12/2023. ▪ The Statement of Financial Position as at that date. SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 21 Activity 9. Mr. A. Borg has stationery. His capital is €50,000. The business sales for the year 2022 were €200,000 and purchases €100,000. The inventory at 1/1/2022 was € 10,000 and inventory at 31/12/2022 was €30,000. During the year Mr. Borg business had the following balances:- Trade Receivables €2,000 Loan from Mr. P. Grech €6,000 Trade Payables €28,000 Land and Buildings €100,000 Bank €6,000 Drawings €10,000 Motor Vans €20,000 Cash €20,000 During the year he had the following expenses:- Electricity €400 Rates €400 Telephone bill €1,000 General expenses €2,000 Stationary €200 Wages and Salaries €8,000 Rent €4,000 Use the above information to prepare:- a. Statement of Profit or Loss (Income Statement) as at 31/12/2022. b. Statement of Financial Position as at that date. Homework:- Business Accounting. Answer the following questions:- 1) What is the difference between:- a. Record making and accounts. b. Accountant and Auditor. 2) Mention two users of accounts and explain why these two are interested in accounts? 3) What are the final accounts? 4) Why does a business prepare:- a) A Statement of Profit or Loss b) A Statement of Financial Position. 5) Explain and give one example of the following:- a) Non-Current assets b) Current assets. 6) What is the difference between current liabilities and non-current liabilities. Give an example of each. 7) Explain the following terms:- Working capital, Opening inventory and Closing inventory. 8) Give two examples of the business expenses. SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 22 ANSWERS Activity 5. a. Statement of Financial Position of Mr B. Webb as at 31 December 2024 € € Non-Current Assets Premises 15,000 Motor Vehicles 12,000 27,000 Current Assets Inventory 25,480 Trade receivables 19,500 Cash at bank 16,540 Cash in hand 400 61,920 88,920 Capital Capital 82,490 Less Drawings (8,950) 73,540 Add Current Liabilities Trade payables 15,380 88,920 b. Machinery, Furniture and fittings, Office equipment. c. Final accounts refer to the statement of profit or loss and statement of financial position. Cost of sales = Opening inventory + Purchases – Closing inventory. The cost of the items bought by the business for resale. Depreciation – the loss in value of an asset over time. Drawings – Cash or things taken by the owner of the business from the business for personal use. d. Non-Current Assets – These are things which the business own but cannot be changed into cash easily. Current Assets – These are things that the business own which can be changed into cash easily. Non-Current Liabilities – these are liabilities (debts), which take more than one year to be paid. Current Liabilities – These are liabilities (debts) which have to be paid in a short time, usually one year. Gross Profit = Sales – Cost of sales. Net Profit = Gross Profit – Expenses. Capital Employed = Non-Current Assets + Current Assets – Current Liabilities. Working Capital = Current Assets – Current Liabilities SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 23 Activity 8. a. Statement of Profit or Loss of Mr A. White for the year ended 31 December 2023 € € Sales 50,000 Less Cost of Sales: Opening inventory 8,000 Add Purchases 20,000 28,000 Less Closing inventory (4,000) Cost of goods sold (24,000) Gross Profit 26,000 Less Expenses: Telephone bill 1,040 Rent and rates 600 Stationery 80 Wages and salaries 3,200 (4,920) Net Profit 21,080 b) Statement of Financial Position of Mr A. White as at 31 December 2023 € € Non-Current Assets Land and Buildings 100,000 Motor Vans 11,000 111,000 Current Assets Inventory 4,000 Cash at bank 24,000 Cash 16,000 44,000 155,000 Capital 50,000 Add Net Profit 21,080 71,080 Add Non-Current Liabilities Bank loan 79,920 Add Current Liabilities Trade payables 4,000 155,000 SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 24 Activity 9. a. Statement of Profit or Loss of Mr A. Borg for the year ended 31 December 2022 € € Sales 200,000 Less Cost of Sales: Opening inventory 10,000 Add Purchases 100,000 110,000 Less Closing inventory (30,000) Cost of goods sold (80,000) Gross Profit 120,000 Less Expenses: Electricity 400 Telephone 1,000 Stationery 200 Rent 4,000 Rates 400 Wages and salaries 8,000 General expenses 2,000 (16,000) Net Profit 104,000 b. Statement of Financial Position of Mr A. Borg as at 31 December 2022 € € Non-Current Assets Land and Buildings 100,000 Motor Vans 20,000 120,000 Current Assets Inventory 30,000 Trade receivables 2,000 Bank 6,000 Cash 20,000 58,000 178,000 Capital 50,000 Add Net Profit 104,000 154,000 Less Drawings (10,000) 144,000 Add Non-Current Liabilities Loan from Mr P. Grech 6,000 Add Current Liabilities Trade payables 28,000 178,000 SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 25 Homework – Answers 1. a. Record-making is when someone keeps records of the financial transactions that happen in a business. Accounting helps business owners to be able to analyse and interpret various financial topics of the business. b. Accountants are qualified people who keep accurate accounts and produce final accounts. Auditors are accountants outside the business who check the accounts of a business. 2. Any two of the following: Government – Because businesses provide a source of revenue by paying corporation tax. Owners (Shareholders) – Who wish to find out the value of their investments Managers – Who need to check the efficiency of their departments. Creditors – To see whether it is safe to allow credit to the business. Other Lenders – Such as banks and debenture holders, who are interested in how easily it is for the business to pay back its debts. 3. Final accounts are prepared at the end of every financial year and they are statement of profit or loss and statement of financial position. 4. a. Income statement (statement of profit or loss) is prepared to calculate the net profit of the business. b. A statement of financial position is prepared to show the financial position of the business at one point in time. 5 a. Non-Current Assets are things which the business own but cannot be changed into cash easily. Example; Land and Buildings. b. Current Assets are things that the business own which can be changed into cash easily. Example; Inventory. 6. Non-Current Liabilities are liabilities (debts), which take more than one year to be paid. Example; Loans. Current Liabilities are liabilities (debts) which have to be paid in a short time, usually one year. Example; Trade Payables. 7. Working capital = current assets – current liabilities. Opening inventory is the inventory of the business at the beginning of the financial year. Closing inventory is the inventory of the business at the end of the financial year. 8. Any two of the following: Wages, telephone, stationery, rent, rates, depreciation, machinery expenses, motor van expenses……. SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 26 6.1i Calculate accounting ratios. Gross profit margin, net profit margin, return on capital employed, current ratio, and inventory turnover ratio. 6.2i Explain profitability and/or liquidity of a business using accounting ratios. Gross profit margin, net profit margin, return on capital employed, current ratio, and inventory turnover ratio. 6.3i Compare profitability and liquidity of a business organisation using accounting ratios. Ratio analysis is useful to compare business performance with other businesses and with previous years. The following are interested in a business financial performance:- AREAS OF ANALYSIS The accountant will analyse the business’:- ▪ Liquidity. ▪ Profitability. The following example shows how a business’ final accounts are analysed:- Statement of Profit or Loss of Beta Confectionery for the year ended 31st December 2023 € € Sales 10,000 Less cost of goods sold:- Opening Inventory 1,000 Add Purchases 5,000 6,000 Less Closing Inventory (1,500) Cost of goods sold (4,500) Gross Profit 5,500 Less Expenses:- Telephone 500 Rates and electricity 500 (1,000) Net Profit 4,500 SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 27  Statement of Financial Position of Beta Confectionery as at 31 December 2023 € € Non-Current Assets Land and Buildings 11,000 Motor Vans 1,000 12,000 Current Assets Inventory 1,500 Trade receivables 400 Cash 100 2,000 14,000 Capital 9,000 Add Net Profit 4,500 13,500 Less Drawings (500) 13,000 Add Current Liabilities Trade payables 800 Bank overdraft 200 1,000 14,000 RATIOS USED IN ACCOUNTING. LIQUIDITY RATIOS: Liquidity Ratios show the ability of a business to pay back its short term debts. a. Current ratio (Working capital ratio):- Current Assets = 2,000 = 2 Current Liabilities 1,000 A result of 1 would mean that the business could just pay off its short-term debts from current assets. In this example the current ratio is 2. This means that Beta confectionery is in a position to pay all its short term debts from current assets. b. Inventory turnover ratio:- The inventory turnover ratio measures how efficiently a company manages its inventory by indicating how many times the inventory is sold and replaced within a specific period, typically a year. It is calculated by the following formula:- Cost of Sales = 4500 = 4500 = 3.6 times. (Opening Inventory + Closing Inventory)÷2 (1000+1500)÷2 1250 This ratio gives the number of times per period that the average inventory is sold. This ratio should be compared with other years to see if the business is managing its inventories more efficiently. A result greater than 3.6 in the coming year would mean that the business is managing inventories more efficiently and turning inventory into sales more quickly. SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 28 PROFITABILITY RATIOS: Profitability ratios are based on the profit of the business to give an indication about its performance. a. Gross Profit Margin (Gross Profit as a % of Sales):- Gross Profit × 100 = 5,500 × 100 = 55% Sales Turnover 10,000 This ratio shows what percentage of sales is represented by gross profit (how many cents out of every €1). The answer of 55% shows that for every €1 sales Beta confectionery made 55c gross profit. b. Net Profit Margin (Net Profit as a % of Sales):- Net Profit × 100 = 4,500 × 100 = 45% Sales Turnover 10,000 This ratio shows what percentage of sales is represented by net profit. The higher this result, the more successful the business is in making net profit from sales. The answer of 45% shows that Beta confectionery is making 45c net profit from every €1 sales. c. Return on Capital Employed (ROCE or Return on Net Assets):- Net Profit × 100 = 4,500 × 100 = 34.6% Capital Employed 13,000 The purpose of this ratio is to find out how profitable is the owners’ investment. This can then be compared to the rate of return the owners would be likely to receive if they invested in other areas. In the example, the 34.6% means that the owners of Beta confectionery are earning 34.6c per every €1 capital employed. Disadvantages of Ratio Analysis:-  Ratios are based on past results and may not indicate how a business may perform in the future.  Accounting results over time will be affected by inflation (rising in prices) and comparisons between years may be misleading. SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 29 Activity – Ratio Analysis. Question 1. The following is a summarized Statement of Financial Position of a sole trader. Statement of Financial Position of P. Grech Boutique as at 31/12/2022 € Non-Current Assets 35,000 Current Assets 38,000 73,000 Capital 40,000 Non-Current Liabilities 15,000 Current Liabilities 18,000 73,000 The following information is related to the year ended 31/12/2022:- Sales € 80,000 Cost of Sales €53,000 Expenses € 18,000 1) From the above information, you are required to find (Give an interpretation of the ratios you are going to calculate):- a) The gross profit. b) The net profit. c) The gross profit as a % of sales. d) The net profit as a % of sales. e) The working capital f) Return on capital employed (ROCE). g) Current ratio. 2) Why is ratio analysis important to a business? 3) Give two examples of; profitability ratios and liquidity ratios. Explain why the ratios you have mentioned are calculated by a business. Answers to Question 1. 1. a. Gross profit = Sales – Cost of sales €80,000 - €53,000 = €27,000 b. Net Profit = Gross Profit – Expenses €27,000 - €18,000 = €9,000 c. Gross profit as a percentage of sales = Gross Profit × 100 Sales 27,000 × 100 = 33.75% 80,000 This means that for every €1 sales the business is earning a gross profit of 33.75c. d. Net profit as a percentage of sales = Net Profit × 100 Sales 9,000 × 100 = 11.25% 80,000 This means that for every €1 sales the business is earning a net profit of 11.25c. d. Working Capital = Current Assets – Current Liabilities €38,000 - €18,000 = €20,000 SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 30  e. ROCE = Net Profit × 100 Capital Employed First find the value of capital employed: Capital employed = Non-current assets + Current assets – Current Liabilities €35,000 + €38,000 - €18,000 = €55,000 Secondly insert values in formula to find ROCE: ROCE = 9,000 × 100 = 16.4% 55,000 This means that for every €1 invested in business, the owner is getting 16.4c in return. f. Current ratio = Current Assets 38,000 = 2.1 Current Liabilities 18,000 Since the current ratio is more than one, the business is in good liquidity position and so it is able to pay its short term debts through its current assets. 2. Ratio analysis is important to compare business performance with other businesses and with previous years. 3. Profitability ratios: i. Return on capital employed to find out how profitable is the owners’ investment. ii. Net profit as a percentage of sales to find how much net profit is generated from sales in percentage terms. Liquidity ratios: i. Working capital ratio shows the ability of the business to pay its short term debts. ii. Inventory turnover ratio shows how many times inventory is sold and replaced over a specific period, usually a year. Question 2 The following information appears in the books of Ms K Zammit: K. Zammit Statement of Profit or Loss (Income Statement) for the year ended 31 December 2023 € € Sales 90,000 Less Cost of Sales: Opening Inventory 4,000 Purchases 67,480 Closing Inventory (3,000) (68,480) Gross Profit A Less Expenses: Salaries and wages 8,000 Electricity bill 1,500 SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 31  Advertisements 630 Repairs of machinery 790 B Net Profit 10,600 K. Zammit Statement of Financial Position as at 31 December 2023 € Non-Current Assets 120,000 Current Assets 50,000 C Capital 119,400 Add Net profit 10,600 D Current Liabilities 40,000 170,000 a. Calculate the missing figures represented by the letters A, B, C and D. b. Give one example for each of the following: i. Non-Current Assets ii. Current Assets iii. Non-Current Liabilities iv. Current Liabilities d. Give the formula for each of the following and calculate: (show all workings and give answers correct to 1 decimal place, where necessary). i. Gross Profit Margin ii. Net Profit Margin. iii. Current Ratio. iv. Rate of Inventory Turnover. v. Capital Employed. vi. Return on Capital Employed. Answers to Question 2. a. A = 21,520 B = 10,920 C = 170,000 D = 130,000 b. Any one (1) of the following (for each section) or any other answer deemed suitable: i. Non-Current Assets: Land and Buildings, Office Furniture, Office Equipment, Plant and Machinery, Motor Vans. ii. Current Assets: Inventory, Trade Receivables (debtors), Bank, Cash. iii. Non-Current Liabilities: Bank Loan, Loan. iv. Current Liabilities: Bank Overdraft, Trade Payables (creditors) d. i. 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 21,520 × 100 × 100 = 23.9% 𝑆𝑎𝑙𝑒𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 90,000 SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 32  d. ii. 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 10,600 × 100 = 11.8% × 100 𝑆𝑎𝑙𝑒𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 90,000 d. iii. 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 50,000 = 1.3 or 1.3:1 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 40,000 d. v. 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 68,480 = 19.6 (𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦+𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦)÷2 (4,000+3,000)÷2 d. vi. Capital employed = Total assets – Current Liabilities. 170,000 – 40,000 = €130,000 d. vii. 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 10,600 × 100 × 100 = 8.2% 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑 130,000 Question 3. Susan opened a retail firm a year ago. Her accountant has provided her with an Income Statement as well as with a Statement of Financial Position. The accountant has also given her a report to help her understand the financial position of the business. a) What is the purpose of:- (i) A Statement of Profit or Loss. (ii) A Statement of Financial Position. b) In his report the accountant noted that Susan had made too many purchases and so ended up with a high inventory level. (i) What are purchases? (ii) Give two disadvantages of having high inventory level. c) At the end of the first financial year, non-current assets were €15,000, current assets €40,000 and current liabilities €20,000. (i) Distinguish between non-current assets and current assets. (ii) Calculate the current ratio. d) Briefly explain the terms:- (i) Trade Receivables. (ii) Trade Payables. e) The gross profit was €48,000, the net profit €12,000 and sales were €240,000. (i) What was the gross profit margin? (ii) What accounts for the difference between gross and net profit? (iii) Answers to question 3. a) i. Statement of Profit or loss is prepared to calculate the business’ net profit. ii. Statement of financial position is prepared to show the business’ financial position at one point in time. SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 33  b) i. Purchases are goods bought by the business for resale. ii. Some items in stock may become out of fashion and cannot be sold. More storage costs. c) i. Non-current assets are things used by the business which will remain in the business for a long time, example machinery. Current assets are things which the business own which can be changed into cash easily, example inventory. ii. Current ratio = Current Assets 40,000 = 2 Current Liabilities 20,000 d) i. Trade receivables are credit business customers who owe money to business. ii. Trade payables are credit business suppliers to whom the business owes money. e) i. Gross profit as a percentage of sales = Gross Profit × 100 Sales 48,000 × 100 = 20% 240,000 ii. Expenses. Question 4. 3. The following information relates to Bellavita Ltd for the years ending 2020 and 2021: 2020 2021 € € Sales 300,000 400,000 Net profit 60,000 100,000 Inventory 25,000 45,000 Capital employed 500,000 625,000 Current assets (including inventory) 150,000 180,000 Current liabilities 100,000 225,000 Required: a. Write down the formula which is used to calculate the capital employed and hence find the non-current assets of Bellavita Ltd. for the years 2020 and 2021. b. Calculate the following ratios for the years 2020 and 2021: i. Net profit as a percentage of sales. ii. Return on capital employed (ROCE). iii. Current ratio. c. By comparing the results obtained in question b, for years 2020 and 2021, comment on the profitability and liquidity position of Bellavita Ltd. SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 34 Answers to Question 4. a. Capital employed = Non-current assets + Current assets – Current liabilities 2020: 500,000 – 150,000 + 100,000 = €450,000 2021: 625,000 – 180,000 + 225,000 = €670,000 b. 2020 2021 i. Net profit as a 60,000 ×100 100,000 ×100 = 20% = 25% percentage of 300,000 400,000 sales ii. ROCE 60,000 ×100 100,000 ×100 = 12% = 16% 500,000 625,000 iii. Current ratio 150,000 180,000 = 1.5 = 0.8 100,000 225,000 c. Profitability: The net profit as a percentage of sales shows an increase between years 2020 and 2021. This means that the business was generating a higher net profit from sales in 2021. The ROCE is also showing an increase between years 2020 and 2021. This is indicating that the business was yielding a higher return to its owners in 2021. Liquidity: The current ratio fell from 1.5 in year 2020 to 0.8 in year 2021. The business liquidity position was unsatisfactory in year 2021 since the business was unable to pay its short-term debts through its current assets. SBA 3 - Homework – Ratio Analysis. The following is a summary of a Statement of Financial Position of R. Vella who is the owner of a grocer:- Statement of Financial Position of R. Vella as at 31/12/2023 € € Non-Current Assets 70,000 Current Assets 76,000 146,000 Capital 80,000 Non-Current Liabilities 30,000 Current Liabilities 36,000 146,000 You are also given the following information for the year ending 31st December 2023 about R. Vella’s business:- Sales €160,000 Cost of Sales €106,000 Expenses €36,000 SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 35 1) From the above information you are required to find:- a. The Gross Profit. b. The Net Profit. c. The Capital Employed. d. The Working Capital. e. The Gross Profit as a percentage of Sales. f. The Net Profit as a percentage of Sales. g. The Working Capital Ratio. h. The Return on Capital Employed. i. The rate of Inventory Turnover. (The value of opening inventory was €50,000 and the value of closing inventory was €40,000) 2) You are also asked to give an interpretation to the answers obtained in Question 1; e, f, g, h, and i. 3) From the answers obtained in question 2, can you say if the business is doing better or worse than the previous year? What additional information is required to be able to give a good interpretation about this year performance of the business when compared to the previous year? 4) Give two examples of profitability ratios. SBA 4 – Test – Subject Focus 6: Finance SUBJECT FOCUS 6: FINANCE – MR IVAN GAUCI 36