Accounting Project

Presented by Au Yick Kin

Wong Chu Wah
Accounting Project
Purpose of this project is a pre-study of Form 7
Principles of Accounts--accounting ratio.
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■ Café de Coral Profit & Loss Account
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■ Farewood Profit & Loss Account

Net Loss (57,658) (126,034)

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■ Café de Coral Balance Sheet
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■ Farewood Balance Sheet
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■ We are going to analyze these two above companies’, Café de
Coral and Farewood, financial conditions, including
profitability, liquidity, activity and efficiency, and return on
capital employed. The business nature of these two companies
is similar, which is fast food restaurant. In order to compare
and analyze the financial conditions, we can use different
accounting ratios. For example, the ratios of net profit to sales
ratio, expenses to sales, return on total assets are utilized to
analyze the profitability of the firms. The current ratio and
quick ratio are used to analyze the liquidity of a firm.
 Accounting Project
■ Definition of Accounting Ratio:
■ Profitability
■ Gross Profit to Sales Ratio: Return on Total Assets:
■ Gross Profit *100% Net Profit * 100%
■ Sales Total Assets
■ Liquidity
■ Current Ratio:
■ Current Assets : 1
■ Current Liabilities
■ Activity and Efficiency
■ Asset Turnover Ratio:
■ Sales = Number in times
■ Total Assets
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■ Definition of Accounting Ratio:
■ Return on Capital Employed
■ Return on (Opening) Capital Employed
■ Net Profit *100%
■ Opening Capital
■ Return on (Closing) Capital Employed
■ Net Profit *100%
■ Closing Capital
■ Return on (Average) Capital Employed
■ Net Profit *100%
■ Average Capital
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■ The table of different accounting ratios of Café de Carol in 1998:(`000)
■ Profitability:
■ Net profit to sales Return to total asset $142529 *100%=6.53% $142529
*100%= 11.3%
■ $2181544 $1260627(921383+339244)
■ Liquidity:
■ Current ratio
■ $339244:1=0.89:1
■ $380165
■ Activity and efficiency:
■ Asset turnover ratio
■ $2181544 =1.73 times
■ $1260627 (921383+339244)
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■ Return on capital employed
■ Return on capital Return on capital
■ (opening) employed (closing) employed
■ $142529 *100%=20.1% $142529 *100%=17.96%
■ $708585 $793477
■ Return on capital
■ (average)employed
■ $142529 *100%=18.89%
■ ($708585+$793477)/2= $751031
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■ The table of different accounting ratios of Farewood in 1998:(`000)
■ Profitability:
■ Net loss to sales Loss to total asset $38397 *100%=3.6%
$38397 *100%= 6.4%
■ $1060342 ( $409986+185440)
■ =595426
■ Liquidity:
■ Current ratio
■ $185440:1=1.3:1
■ $142767
■ Activity and efficiency:
■ Asset turnover ratio
■ $1060342 =1.78times
■ $595420
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■ Return on capital employed
■ Loss on capital Loss on capital
■ (opening) employed (closing) employed
■ $38397 *100%=11.03% $38397 *100%=10.85%
■ $347846 $353802
■ Loss on capital
■ (average)employed
■ $38397
■ $350824*100%=10.94%
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■ Analysis:
■ Now we are going to make a comparison between their profitability,
liquidity and future financial prospect by a thorough ratio analysis.
First of all, we compare the profitability of Café de Carol and
Farewood:
■ Profitability:
■ Café de Carol had good profitability compared with that of Farewood .

■ As it had relatively high net profit to sales ratio (6.53%) and return on
total assets ratio(11.3%).
■ Farewood only had low net profit to sales ratio(3.6%) and return on
total assets ratio(6.4%).

■
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■ Liquidity:

■ Farewood had a stronger liquidity position than that of Café de Carol .

■ We can see that :
■ The current ratio of Farewood (1.3:1) is larger than that of Café de
Carol (0.89:1).

■ Farewood had a good liquidity position and it could use the instant
liquidity cash to repay the current liabilities in due course, whereas ,
■ in Café de Carol, the current liabilities are more than current assets.
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■ Activity and efficiency

■ Café de Carol, and Farewood had a similar activity and efficiency.

■ Café de Carol had 1.73 number in times asset turnover ratio and
Farewood had 1.78number in times asset turnover ratio.

■ They both had good asset turnover ratio. In accordance with this asset
turnover ratio, although Farewood had lower net profit than that of Café
de Carol, it didn’t mean Farewood was inefficient.
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■ The return on capital employed

■ The return on capital of Café de Carol is high by referring return on

opening capital employed (20.1%), return on closing capital employed
(17.96%) and return on average capital employed (18.98%).

■ The return of Farewood is too low in accordance with the return on

opening capital employed (11.03%), return on closing capital
employed (10.85%) and return on average capital employed
(10.94%) .

■ The reasons of low return of capital employed may be the low level of
net profit and over amount of capital.
■ The suggestion is that reducing the amount of capital by decreasing
the investment or improving the profitability.
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■ To conclude all accounting ratios,Café de Carol and Farewood both had
acceptable financial conditions and performances.

■ Café de Carol had higher net profit, turnover and return on capital.
However, its current ratio was lower.It means that was rather dangerous.

■ Although Farewood had better current ratio, its net profit and return on
capital was poor.

■ We advise that Café de Carol should put emphasis on controlling the

working capital. For example, it should increase its cash or pay for
creditors early and not to accumulate so much current
liabilities,whereas,
■ Farewood should increase his sales or reduce the operation expenses
■ because of lower level of net profit.
Presented by Au Yick Kin
Wong Chu Wah

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