Definitions
Sales revenue – Sales returns
Net Sales
Ratio
a technique used to analyse items and/or groups of items in the same financial period.
Vertical Analysis
"Sales" is in which financial statement?
Statement of Profit or Loss
Net Sales $1000
Net Profit $400
40%
Net sales – Cost of goods sold
Gross Profit
How to convert a decimal to a percentage
multiple by 100
a technique used to analyse items and/or groups of items in consecutive financial periods.
Horizontal Analysis
"Owner's Equity" is in which financial statement?
Statement of Financial Position
Calculate Gross Profit Ratio
Net Sales: $200
Gross Profit: $90
45%
Total revenue – Total expenses
Net Profit
Net profit ÷ net sales
Comparing Gross Profit for 2022 to 2021
Horizontal Analysis
Name one strategy to improve the Gross Profit Ratio
- increase selling prices
- reduce cost of goods sold
- find a cheaper supplier for goods sold
Calculate Net Profit Ratio
Sales revenue $1000
Sales returns $200
Net Profit $400
50%
A span of time that covers certain accounting functions; it can be either a calendar or fiscal year, but also a week, month, or quarter, for example.
Accounting Period
Net profit ÷ net sales
Net profit ratio
Comparing Sales and Net Profit. Is this vertical or horizontal analysis
vertical
Name one strategy to improve the Net Profit Ratio
- increase sales revenue
- reduce expenses
Calculate Return on Owner's Equity for 2022
2022 Net Profit: $900
2022 Owner's Equity: $1000
2021 Owner's Equity: $1400
75%
Average owner's equity
(opening + closing owner's equity) divided by 2
Net profit ÷ average owner’s equity
Rate of return on equity
What is the effect of a low gross profit ratio
- the business may have difficulty covering other operating costs
- a net loss may occur
- there is an inadequate return on investment
Name one strategy to improve the Return on Equity ratio
- Decrease owner's investment if is considered to be overcapitalised
- increase net profit
- the owner could contribute more capital if undercapitalised
Calculate Return on Owner's Equity for 2022
2022 Net Profit: $100
2022 Owner's Equity: $2300
2021 Owner's Equity: $1700
5%