Question

Assess your business: Fast forward a few months... Your friend asks you how your business is doing and you are unsure how exactly to answer. In fact, you are not necessarily sure how your business is doing since you are so new to this! This part will help you organize your thoughts and come up with a more formalized process and financial reporting can help you demonstrate your success (or lack thereof!). For your cart, come up with a way to determine profit and financial position. Expand your Excel spreadsheet from Part 1 by adding an additional tab. There is no specific format for this. Data should be reasonable based on your projections from Part 1 and include all expenses. Your grade is not dependent on whether you are making a profit. Use the momentum from the discussion forums from Weeks 3 & 5 where we collectively brainstormed methods of determining if the business was profitable and how to measure profitability in a professional format. Include an analysis that summarizes your findings in a professional manner. This part of the project should be approximately 2 - 4 pages, including the financials.

The first part to this is on my first post

Answer 1

Answer:

Income statement is prepared to find the profitability of the company.

The following ratios are used for measuring the profitability of the company:

* Return on equity

* Return on assets

* Profit margin ratio

* Gross margin ratio

* Earnings per share

* Return on capital employed

Return on equity (ROE):- The return on equity is calculated by dividing the net profit by the shareholders' equity. The formula used for calculating the return on equity is given as follows:

Return on equity = Net profit / Shareholders' equity

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Return on assets:- Return on assets is calculated by dividing the net profit by the average total assets. The following formula is used for calculating the return on assets:

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Return on assets = Net profit / Average total assets

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Profit margin ratio:- It is also known as the return on sales ratio. Profit margin ratio is calculated by dividing the net profit by the net sales. The following formula is used for calculating the profit margin ratio:

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Profit margin ratio = Net profit / Net sales

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Gross margin ratio:- Gross margin ratio is computed by dividing the gross margin by the net sales. The following formula is used for calculating the gross margin ratio:

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Gross margin ratio = Gross margin / Net sales

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Earnings per share:- Earnings per share is calculated by dividing the net profit by the number of outstanding common shares. The following formula is used for calculating the earnings per share:

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Earnings per share (EPS) = Net profit / Number of outstanding shares

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Price earning ratio is computed by dividing the market price per share by the earnings per share.

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Return on capital employed:- The following formula is used for calculating the return on capital employed:

Return on capital employed = Net operating profit / Capital employed

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The following financial statement analysis measures the profits:

* Trend analysis

* Comparative financial statement

* Common size financial statement