1. INTERPRETING FINANCIAL RESULTS

2. INTERPRETING FINANCIAL RESULTS
Learning Objectives
Outline the main elements and components of a set of financial statements
Explain the difference between gross profit, net profit and cash on hand
Explain reasons for increases/decreases in expenses
Identify ways to reduce shrinkage

3. INTERPRETING FINANCIAL RESULTS
Learning Objectives
Understand the difference between technical and fundamental analysis
Apply profitability, liquidity and investment ratios
Assess the efficiency and profitability of a business using these tools

4. Statement of Comprehensive Income
The following comprehensive income items have a direct or indirect effect on profitability:
Sales
Cost of sales
Gross profit
Expenses
Interest
Income tax
The primary aim of any business is to maximise profits

5. Statement of Comprehensive Income
Sales – selling price
Business A
Business B
Business C
Selling Price
400
1500
8000
Number of units
142 75 15
Sales Revenue
56 800
Cost of sales
Gross Profit
28 400
37 500
52 500
Weekly o/h exp
Net Profit
9 900
16 500
12 500
Gross Profit %
50%
33.3%
43.75%
Net Profit %
17.43%
14.67%
10.42%

6. Effect of the reduced Selling Price
Business A
Selling Price
400
300
Number of units
142
210
Sales Revenue
56 800
63 000
Cost of sales
Gross Profit
28 400
21 000
Weekly o/h exp
Net Profit
9 900
2 500

7. Effect of the reduced Selling Price
Business B
Selling Price
1500
1125
Number of units 75
130
Sales Revenue
Cost of sales
Gross Profit
37 500
16 250
Weekly o/h exp
Net Profit
16 500
(4 750)

8. Effect of the reduced Selling Price
Business C
Selling Price
8000
6000
Number of units 15 21
Sales Revenue
Cost of sales
Gross Profit
52 500
31 500
Weekly o/h expense
Net Profit
12 500
(8 500)
Conclusion:
The clearance sale was not profitable for any of the businesses. Both Business B and C made a loss during the clearance sale week, while Business A made a lower than usual net profit.

9. Maximising Profits How do you increase Sales?
Increasing demand for the product
Ensure you have the best product
Ensure your products keep up with the trends that prevail in the market
Try to set new trends and fashions with new products
Advertising your products
Offer discounts to increase sales
Maintain sales returns to a minimum

10. UNIT SALES LOSS IN PROFITS Maximising Profits
If a business chooses to offer discounts to increase demand:
UNIT SALES
LOSS IN PROFITS

11. Sales – Cost of sales = Gross Profit
Maximising Profits
Cost of sales
The net purchase cost of goods that have been sold during a period
Sales – Cost of sales = Gross Profit
PROFITS
COST OF SALES
SALES

12. Maximising Profits Reduce COST OF SALES Reduce Production costs
Reduce Purchase costs
Negotiate discounts / improved payment terms
Reduce stock loss from damage or theft
Decrease transport and storage costs
Buy in bulk to get a better purchase price
Buy from different suppliers

13. Maximising Profits Reduce COST OF SALES
Negotiate with another Supplier
WANNABE – RICH TRADERS
Selling Price
150
Cost of Sales
100 96
Number of units
500
Sales Revenue
75 000
Cost of sales
Gross Profit
25 000
27 000
Weekly o/h expense
Net Profit
10 000
12 000

14. Maximising Profits Reduce COST OF SALES
Negotiate with another Supplier
WANNABE – RICH TRADERS
Selling Price
150
Cost of Sales
100 96
Number of units
500
Sales Revenue
75 000
Cost of sales
Gross Profit
25 000
27 000
Weekly o/h expense
Net Profit
10 000
12 000
Gross Profit %
33.3%
36%
Net Profit %
13.3%
16%

15. Statement of Comprehensive Income
Question 2.2
Business A
Business B
Business C
Selling Price per unit, excl VAT
(456 / 1.14)
400
(1710 / 1.14)
1 500
(9120 / 1.14)
8 000
Cost Price per unit, excl VAT
(228 / 1.14)
200
(1140 / 1.14)
1 000
(5130 / 1.14)
4 500
Gross Profit per unit
500
3 500

16. Effect of the reduced Cost of Sales
Business A
Selling Price
400
Cost Price
200
190
Number of units
142
Sales Revenue
56 800
Cost of sales
Gross Profit
28 400
29 820
Weekly o/h exp
Net Profit
9 900
11 320

17. Effect of the reduced Cost of Sales
Business B
Selling Price
1500
Cost Price
1000
950
Number of units 75
Sales Revenue
Cost of sales
Gross Profit
37 500
41 250
Weekly o/h exp
Net Profit
16 500
20 250

18. Effect of the reduced Cost of Sales
Business C
Selling Price
8000
Cost Price
4 500
4 275
Number of units 15 21
Sales Revenue
Cost of sales
Gross Profit
52 500
55 875
Weekly o/h expense
Net Profit
12 500
15 875