{"id":3391,"date":"2023-10-05T08:24:40","date_gmt":"2023-10-05T08:24:40","guid":{"rendered":"http:\/\/localhost\/ecole9ja\/?p=3391"},"modified":"2023-10-05T08:27:12","modified_gmt":"2023-10-05T08:27:12","slug":"week-5-and-6-ss2-third-term-commerce-notes","status":"publish","type":"post","link":"https:\/\/ecolebooks.com\/nigeria\/posts\/week-5-and-6-ss2-third-term-commerce-notes\/","title":{"rendered":"Week 5 and 6 – SS2 Third Term Commerce Notes"},"content":{"rendered":"

\u00a0WEEK FIVE AND SIX
\n<\/strong>TOPIC: THE FINANCIAL POSITION OF BUSINESS FIRMS
\n<\/strong>CONTENT
\n<\/strong>DETERMINATION OF THE VIABILITY OF A BUSINESS
\n<\/strong>To determine whether or not a business is viable an investigation into the following sources of information must be made.
\n1.\u00a0\u00a0\u00a0\u00a0Trading, Profit and Loss Account.
\n2.\u00a0\u00a0\u00a0\u00a0Balance Sheet
\n3.\u00a0\u00a0\u00a0\u00a0Annual Reports of Limited companies.
\n4.\u00a0\u00a0\u00a0\u00a0Stock Exchange Report relating to quoted companies.
\n5.\u00a0\u00a0\u00a0\u00a0Financial Ratios prepared by accountants and investment analysts.<\/p>\n

\u00a0BALANCE SHEET
\nThe Balance sheet of a firm is the summary or statement of the financial position of that firm at
\na particular date, usually at the end of the financial year.<\/p>\n

\u00a0STRUCTURE OF THE BALANCE SHEET
\nThe normal balance sheet shows the capital and liabilities on the left-hand side and the assets
\non the right-hand side. An illustration is given below<\/p>\n

\u00a0Peter Okocha Trading Enterprises:
\nBalance Sheet as at 31st December, 2005
\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0N\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0FIXED ASSETS\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0N
\nCapital\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 25,000\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Premises\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 20,000
\nAdd: Net Profit\u00a0\u00a0\u00a0\u00a0 35,000\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Machinery\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 25,000
\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 60,000\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Fixtures & Fittings\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 5,000
\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 50,000
\nCURRENT LIABILITIES:\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0CURRENT ASSETS:
\nCreditors\u00a0\u00a0\u00a0\u00a0 27,000\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Stock\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a018,000
\nBank Overdraft 3,000\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Debtors\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a012,000
\n\u00a0\u00a0\u00a0\u00a0 30,000\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Cash in Bank\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 6,000
\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Cash at Hand\u00a0\u00a0\u00a0\u00a0 \u00a0\u00a0\u00a0\u00a0 4,000 40,000<\/p>\n

\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 90,000\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 \u00a0\u00a0\u00a0\u00a0 90,000<\/p>\n

\u00a0REVIEW QUESTIONS
\n1.\u00a0\u00a0\u00a0\u00a0List six examples of each of the following:
\n\u00a0\u00a0\u00a0\u00a0(a) \u00a0\u00a0\u00a0\u00a0Fixed Assets
\n\u00a0\u00a0\u00a0\u00a0(b)\u00a0\u00a0\u00a0\u00a0Current Assets
\n2.\u00a0\u00a0\u00a0\u00a0State two importance of the Balance Sheet as a financial statement.<\/p>\n

\u00a0USES OF FINANCIAL RATIO:
\n<\/strong><\/p>\n

    \n
  1. Ratios are used in preparing industrial averages.\n<\/li>\n
  2. They can be used to interpret financial statements.\n<\/li>\n
  3. They help in comparing performances between and among related organizations.\n<\/li>\n
  4. Ratios help to measure the ability of a given entity to meet its short-term obligations.\n<\/li>\n
  5. \n
    They are used in evaluating the performance of companies in the same business\n<\/div>\n

    \u00a0DISADVANTAGES OF USING RATIO
    \n<\/strong><\/li>\n

  6. Ratios can easily be affected by inflation\n<\/li>\n
  7. They can be manipulated upon or abused\n<\/li>\n
  8. \n
    Different accounting policies affect ratio calculation\n<\/div>\n

    \u00a0TYPES OF RATIO
    \n<\/strong><\/li>\n

  9. Profitability and efficiency ratio\n<\/li>\n
  10. Liquidity ratio\n<\/li>\n
  11. \n
    Investment ratio\n<\/div>\n

    \u00a0PROFITABILITY AND EFFICIENCY<\/strong>:
    \nProfitability and efficiency ratios measure the effectiveness of the management as shown by the returns obtained on sales and capital invested. This can be broken down into the following.\n<\/li>\n

  12. Net profit%\n<\/li>\n
  13. Gross profit%\n<\/li>\n
  14. Returns on capital employed\n<\/li>\n
  15. Assets turnover ratio\n<\/li>\n
  16. \n
    Individual expenses items to sales ratio e.g advertising carriage outwards etc\n<\/div>\n

    \u00a0Formulae:\n<\/li>\n

  17. \n
    NP% = NET PROFIT \u00d7 100\n<\/div>\n

    SALES 1\n<\/li>\n

  18. \n
    GP% = GROSS PROFIT \u00d7 100\n<\/div>\n

    SALES 1\n<\/li>\n

  19. \n
    Returns on capital employed ROCE. This measures management ability to utilize effectively the organizations resources.\n<\/div>\n

    It is PROFIT \u00d7 100
    \n CAPITAL EMPLOYED 1
    \nWhere capital employed can be : a) total asset b) total assets to current liabilities\n<\/li>\n

  20. \n
    ASSETS TURNOVER RATIO<\/strong>:\n<\/div>\n

    This ratio measures the turnover generated by assets and show how fully a company is utilizing its assets.
    \nFormula: SALES
    \n\t\t\t\t\u00a0\u00a0\u00a0\u00a0CAPITAL EMPLOYED\n<\/li>\n

  21. \n
    INDIVIDUAL EXPENSE TO SALES<\/strong>:\n<\/div>\n

    This helps to reveal the reason for improvement or reduction in the net profit to sales.
    \nFormula : INDIVIDUAL EXPENSES \u00d7 100
    \n SALES 1\n<\/li>\n

  22. \n
    LIQUIDITY RATIOS<\/strong>:\n<\/div>\n

    These ratios help in measuring the ability of an organization to meet its obligations as they fall due.Ratios under this heading are:\n<\/li>\n

  23. Current ratio or working capital ratio\n<\/li>\n
  24. Average stock\n<\/li>\n
  25. Stock to net current assets\n<\/li>\n
  26. Debtors ratio\n<\/li>\n
  27. \n
    Creditors ratio\n<\/div>\n

    \u00a0<\/li>\n

  28. \n
    CURRENT RATIO OR WORKING CAPITAL RATIO:<\/strong> This ratio indicates the ratio of current assets to current liabilities. It shows the extent the firm can meet up with its short-term creditors. Low ratio implies lack of working capital while high ratio suggests too much of working capital or capital tied up.\n<\/div>\n

    Formula: CURRENT ASSETS
    \n\t\t\t\t\tCA
    \n\t\t\t\t CURRENT LIABILITIES CL<\/p>\n

    \u00a0<\/li>\n

  29. \n
    ACID-TEST \/ LIQUID RATIO<\/strong>:\n<\/div>\n

    This ratio provides measures of the firm’s ability to meet its current liability. Should it fall below 1:1,the firm may have some difficulty in paying its debt.
    \nFormula: CURRENT ASSETS \u2013 STOCK OR INVENTORY
    \n CURRENT LIABILTIES<\/p>\n

    \u00a0<\/li>\n

  30. \n
    STOCK TURNOVER RATIO<\/strong>:\n<\/div>\n

    This is used to measure the number of times stocks are replaced during a given period.
    \nFormula: COST OF GOODS SOLD
    \n\t\t\t\t AVERAGE STOCK<\/p>\n

    \u00a0<\/li>\n

  31. \n
    AVERAGE STOCK: OPENING STOCK + CLOSING STOCK\n<\/div>\n

    2
    \nN.B<\/strong>: Where there is no opening stock,average stock could be calculated by adding closing stock to purchases and dividing by 2<\/p>\n

    \u00a0<\/li>\n

  32. \n
    STOCK TO NET ASSET<\/strong>. This ratio is used to express the stock as a percentage of net assets.\n<\/div>\n

    Formula: = STOCK \u00d7 100
    \n NET ASSET 1<\/p>\n

    \u00a0<\/li>\n

  33. \n
    DEBTORS RATIO<\/strong>: Debtors ratio measures the average collection period from debtors. It shows the average credit period given to debtors.\n<\/div>\n

    Formula: DEBTORS \u00d7 365 DAYS
    \n CREDIT SALES
    \nLong collection dates indicate poor credit policy.<\/p>\n

    \u00a0<\/li>\n

  34. \n
    CREDITORS RATIO<\/strong>: This ratio shows the average credit period received from suppliers.\n<\/div>\n

    \u00a0\u00a0\u00a0\u00a0Formula: TRADE CREDITORS \u00d7 365 DAYS
    \n\u00a0\u00a0\u00a0\u00a0 CREDIT PURCHASES<\/p>\n

    \u00a0GEARING OR LEVERAGE:<\/strong> This shows the relationship between owners equity or capital and
    \ndebt financing of business assets. It shows the proportion of the assets being financed with
    \nlong-term debt.
    \nGearing Ratio or Leverage Ratio = Long term liabilities
    \n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Equity Capital<\/p>\n

    \u00a0If the Gearing Ratio is above 40% (0.4) the business is said to be highly geared. If lower than
    \n40% (0.4) the business is low geared.<\/p>\n

    \u00a0REVIEW QUESTIONS\n<\/li>\n

  35. State two uses of financial ratio.\n<\/li>\n
  36. \n
    List four liquidity ratios that can be used to evaluate the viability of a business firm.\n<\/div>\n

    \u00a0READING ASSIGNMENT
    \n<\/strong>Essential Commerce for SSS by O.A Longe page 153-162.<\/p>\n

    \u00a0WEEKEND ASSIGNMENT<\/strong>
    \n\t\t\t\t1.\u00a0\u00a0\u00a0\u00a0If the turnover of a business is N16,000 and the cost of goods sold is N12,000. What is the percentage of gross profit on sales. (a) 70%\u00a0\u00a0\u00a0\u00a0(b) 40% (c) 33.3% (d) 25%
    \n2.\u00a0\u00a0\u00a0\u00a0What are fixtures and fittings in a balance sheet. (a) liquid capital\u00a0\u00a0\u00a0\u00a0(b) working capital (c) fixed assets (d) current assets
    \n3.\u00a0\u00a0\u00a0\u00a0The form of capital which is easily transferred into the form desired is known as ___
    \n\u00a0\u00a0\u00a0\u00a0(a) working capital\u00a0\u00a0\u00a0\u00a0 (b) liquid capital \u00a0\u00a0\u00a0\u00a0 (c) circulating capital (d) capital employed
    \n4.\u00a0\u00a0\u00a0\u00a0When a company uses more of loans than equity to finance its business the company is said to be
    \n\u00a0\u00a0\u00a0\u00a0(a) bankrupt\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0(b) solvent\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0(c) highly geared\u00a0\u00a0\u00a0\u00a0 (d) insolvent
    \n5.\u00a0\u00a0\u00a0\u00a0Which of the following shows the financial position of a business on a given date____
    \n\u00a0\u00a0\u00a0\u00a0(a) bank statement\u00a0\u00a0\u00a0\u00a0 (b) journal\u00a0\u00a0\u00a0\u00a0 (c) balance sheet (d) cash book<\/p>\n

    \u00a0THEORY
    \n<\/strong>1.\u00a0\u00a0\u00a0\u00a0State three uses of the balance sheet prepared by business firms.
    \n2.\u00a0\u00a0\u00a0\u00a0List four uses of the Trading, Profit and Loss Account prepared by business firms.<\/p>\n

    \u00a0GENERAL EVALUATION QUESTIONS
    \n<\/strong><\/li>\n

  37. Explain seven roles of transport to businessmen\n<\/li>\n
  38. List ten sources of capital available to a public limited company\n<\/li>\n
  39. Give seven reasons why consumers need protection\n<\/li>\n
  40. State five effects of hire purchase on the buyer\n<\/li>\n
  41. \n
    State eight reasons why a bank may dishonor a cheque\n<\/div>\n

    \t\t\t\t\u00a0<\/li>\n<\/ol>\n","protected":false},"excerpt":{"rendered":"

    \u00a0WEEK FIVE AND SIX TOPIC: THE FINANCIAL POSITION OF BUSINESS FIRMS CONTENT DETERMINATION OF THE…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1,270],"tags":[],"class_list":["post-3391","post","type-post","status-publish","format-standard","hentry","category-posts","category-third-term-ss2-commerce"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/ecolebooks.com\/nigeria\/wp-json\/wp\/v2\/posts\/3391","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/ecolebooks.com\/nigeria\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/ecolebooks.com\/nigeria\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/ecolebooks.com\/nigeria\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/ecolebooks.com\/nigeria\/wp-json\/wp\/v2\/comments?post=3391"}],"version-history":[{"count":1,"href":"https:\/\/ecolebooks.com\/nigeria\/wp-json\/wp\/v2\/posts\/3391\/revisions"}],"predecessor-version":[{"id":3392,"href":"https:\/\/ecolebooks.com\/nigeria\/wp-json\/wp\/v2\/posts\/3391\/revisions\/3392"}],"wp:attachment":[{"href":"https:\/\/ecolebooks.com\/nigeria\/wp-json\/wp\/v2\/media?parent=3391"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/ecolebooks.com\/nigeria\/wp-json\/wp\/v2\/categories?post=3391"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/ecolebooks.com\/nigeria\/wp-json\/wp\/v2\/tags?post=3391"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}