What the  word ASSET means

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The list below includes assets. Some are fixed assets and some are current assets. Can you tell which is which?  Some of these items are not assets at all.  Can you tell which items these are and why they are not assets ?

 [a] Motor Vehicles      [h] Stock
 [b] Premises                [i] Fixtures and Fittings
 [c] Office Machinery   [j] Loan from Mary
 [d] Creditors               [k] Debtors
 [e] Cash at Bank         [l] Cash in Hand
 [f] Capital                    [m] Bank Overdraft
 [g]   Rent and rates     [n] Office expenses

take a peep at the answer
 Ready to try a ratio question?
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Answer to Asset questions
 
 

Current Assets 
are bought for resale 
or used within a year		 Fixed Assets 
are used within the business		 Liabilities 
are amounts owed to others		 Capital 
is assets introduced by the owners
cash 
bank 
stock 
debtors		 motor vehicles 
premises 
office machinery 
fixtures and fittings		 creditors = short         term 
loan may be long or short term 
bank overdraft = short term		 capital which is also a liability of the business
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Learning more about the significance of Assets
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By using Ratio Analysis the words in the Balance Sheet and Profit and Loss Account can tell us something about how well the business has performed.
Asset is used in the Asset Turnover ratio (Ratio 8 below) and can therefore tell us something about the efficiency of the business.
The higher the figure the more sales is earned on the assets used.
In other words the bigger the ratio the better.
Other common ratios are also listed below .
Profitability
1 Return on Capital Employed  =   Profit            x  100 = %
                                                       Capital

2 Gross Profit Ratio                  =   Gross Profit  x  100 = %
                                                            Sales

3 Net Profit Ratio                      =   Net Profit      x  100 = %
                                                           Sales

Efficiency Ratios
4 Stock Turnover Ratio            =  Cost of Goods Sold =  No of times
                                                          Average Stock

5 Fixed Assets Turnover Ratio =  Sales                       = No of times
                                                        Fixed Assets at NBV

6 Debtor Collection Period        =  Average debtors     x 365  = No of days
                                                                   Sales             x   52  = No of weeks
                                                                                         x  12   = No of months

7 Suppliers Payment Period       =    Creditors               x 365   = No of days
                                                          Purchases               x  52    = No of weeks
                                                                                          x  12    = No of months

8 Asset Turnover                       =      Sales                      = No of Times
                                                     Capital Employed

Liquidity Ratios
9 Current Ratio                          =   Current Assets        = Expressed as a
                                 p;                     Current Liabilities        Factor

10 Quick or Acid Test               =  Current Assets - Stock [Also expressed as a Factor]
                                                        Current Liabilities

Investment Ratios
11. Gearing                                 =  Preference Shares + Long Term Loans    X  100%
                                                        Shareholders funds + Long Term Loans
 
 

A Note of caution:
Ratio Analysis is all about comparing one set of ratios with another.
This can mean comparing one year with another, or comparing the performance of one company with another or with its budgets.
To achieve greater confidence in the conclusions you draw, you really need to compare more values than just two. You also need to bear in mind that there is some flexibility in the accounting treatments adopted by accountants when preparing the financial statements and so differences observed in performance might in part be due to differences in the way items have been treated in the accounts rather than differences in performance.
Now test your understanding by attempting to calculate  the suppliers payment period from our own figures.
First you need to know whether to examine  the  trading, profit and loss account or the balance sheet.
If you make a mistake you may return here, for another try, by pressing your internet return button. You must return to this point in any event if you wish to take a peep at the answer
 Trading, profit and loss account          Balance sheet

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

answer to asset turnover question
asset turnover = sales                                  =     2,000               =     0.97 times
                            capital employed (note 1)         2000 + 55
Sales is found on the top of the trading profit and loss account.
Capital employed is calculated from figures present in the balance sheet.
Note 1.
           Capital employed = all capital used to finance operations and therefor has to include long term liabilities which are also known as long term finance.
Capital employed is therefor:

You might notice that some text books calculate  this differently. It all rather depends on the purpose for calculating the ratio. This is the simplest method and the answer means that each pound of assets generates 97p worth of business (sales). On the face of it the business appears not to be utilizing it's assets very efficiently.
 return to asset turnover