Accounts And Balance Sheets

earned doing nothing. In fact the net profit expressed as a percentage of proprietor's capital is only around 22%. As a percentage of total sales it is just over 20%.

3. Rate of stock turnover. Total goods sold in the year, valued at cost, stand at a figure below the average stock held. This indicates that goods are being turned over less than once a year. In other words, each item is, on average, held for more than a year before it is sold. There is something wrong here. It would be normal for stock to turn over about three to four times a year. Is some of the stock unsaleable?

4. Fixed capital. This is the term used to denote that part of the capital employed in a business that is tied up in fixed assets of a long-term nature, assets that cannot easily be sold or exchanged for others. This business has little in the way of fixed assets - only furniture and fittings valued at £11,710. Goodwill cannot easily be disposed of, but it is not a fixed asset except in a fictional sense; it is better to describe it, therefore as a fictitious asset.

5. Working capital. This is the term used to describe that part of business capital which is continually circulating between cash, goods, debtors and creditors; in other words, it is the trading capital. The quantity of working capital can be calculated from a balance sheet by adding together all the current assets - in this case Stock £306,827, Debtors £14,193, and Balance at bank £12,191 plus Expenses paid in advance £1184 (total £143,396), and deducting the current liabilities of Creditors £113,547 and £1250 (13,797), making a figure of £129,599. Current assets less current liabilities gives a figure sometimes referred to as net current assets, but more generally known as working capital. On the balance sheet figures in the case of the business under review, working capital is more than adequate. The suspicious feature in this case is the very large proportion of this that consists of stock. Much of the stock carried is being financed by trade creditors - in other words, it hasn't been paid for.

6. Credit taken. Balance sheet figure for trade creditors is nearly half as much as total purchases for the year. One should suspect the business of being saddled with stock it can't sell (see 3 above), ar-I of consequently being unable to pay its bills. Note that the liquid assets (cash and near cash) of Bank balance and Debtors is less than half the amount owed to Creditors. If the creditors were to press for payment the business might be forced into liquidation, stock having to be sold off at give-away prices.

Credit given. Sundry debtors at £14,193 are the customers to whom he has sold goods on credit, and who have not yet paid their bills. As a proportion of total sales this looks reasonable, but without knowing what total credit sales were (jewellers sell mostly for cash) one cannot make a reasonable judgement on this.


Financial Statements

deemed likely to arise. The commonest provision is one for bad or doubtful debts. Where there are very many credit customers, and where the total due from them is large, it is reasonable to assume that a small proportion of them will fail to pay. In this case an amount of, say, 2% to 5% of the total of debtors might be written off current profits and held in a 'provision' account. This can be topped up as total debtors rise, or written back to profits as total debtors fall.

`Reserves' are different from provisions. Making a provision is merely being cautious in not taking credit for profits... see: Financial Statements


Refunds, Personal And Business Finance 2017

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