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Lesson plan 17

Module: Finance Topic: Financial Ratio Analysis Year: 11 Period: one hour Ability: mixed

Aim: help students to understand how profitability ratio analysis helps to assess business profitability.

Objectives of the lesson: to understand the meaning of % net profit; to understand the meaning of % of gross profit; to learn how to calculate ratios; to understand how businesses can improve their profitability; to analyse and investigate business actions used to improve their profitability; to appreciate the interdependence of different functional areas in a business.

Phase 1

Introduction 5-7 minutes

1. State clearly the objectives of the lesson. 2. Link the new topic to students prior learning about how businesses are structured and its functional areas. Phase 2 Development 45-50 minutes how to use ratios 5 minutes

Stage 1 The profitability ratio diagram

H. Seliet Year 11 lesson plan 21st Nov 2003

Assessing a business profitability

Trading account

Profit & loss account

Gross profit

Net profit

% gross profit

% net profit

H. Seliet Year 11 lesson plan 21st Nov 2003

How to use ratios in the exam

Comparing ratios Interpreting ratios Calculating ratios Obtaining data which account?

Stage 2

obtaining the data which account? 7-10 minutes

Activity Where do I belong?

First, individually students are going to carry out this activity, and then have it discussed with by whole class. Stage 3 calculations of ratios

% Gross profit and % net profit 1. % Gross profit Remember Sales Revenue Cost of Sales = Gross profit/loss 1. Look closely at the following formula Gross profit -------------------------- X100 =Gross profit margin Sales revenue/turnover

H. Seliet Year 11 lesson plan 21st Nov 2003

For example, at the end of 2002, Roberts Ltds gross profit was 1000 and its sales revenue was 10,000, therefore its % gross profit is 10%. The higher this ratio is the better it is. 2. % Net profit Remember Gross profit other expenses + other sources of income = net profit Look closely at the following formula Net profit -------------------------- X100 = Net profit margin Sales revenue/turnover For example, if Roberts Ltd net profit at the end of 2002 was 500 and its sales revenue was 10,000, then its % net profit is 5%.

Stage 4

Interpretations of ratios

In the above example Robert Ltds % gross profit and % net profit were 10% and 5%, which indicate that the business profitability is poor/low. The higher the ratios are the better the business profitability position. Stage 5 comparisons of ratios

Look at Roberts Ltds % gross profit and % net profit over a period of time. Year % gross profit % net profit 1998 45% 30% 1999 35% 20% 2000 25% 15% 2001 15% 10% 2002 10% 5%

Comparison means working out a trend over a period of time.

Stage 6
H. Seliet Year 11 lesson plan 21st Nov 2003

Suggestions to improve gross profit margin (reflection) 4

Scenario 1 James Woods sells quality dinning table furniture. At the end of 2002 the gross profit James Wood business was 10,000, and the total sales revenue was 100,000. 3. Work out James Woods Gross Profit Margin at the end of the year. 4. Suggest how James could improve his percentage gross profit. 5. Choose the right strategies from the ones below and explain your reasons in the table below.

Improve James Woods Advertising Strategy Use less heating Launch a new marketing campaign Move to a cheaper location Reduce cost of sales Improve the quality of furniture. Buy cheaper raw materials Employ less workforce Use better below the line promotion Use better technology Reduce wastages in raw materials Increase the selling price

6. Students are going to be encouraged to come up with suggestions to improve % gross profit or gross profit margin. For a few minutes students are going to work individually to suggest ways to improve James Woods gross profit margin. This will be followed by a whole group discussion.

Strategies to improve % gross profit

Reasons

H. Seliet Year 11 lesson plan 21st Nov 2003

Scenario 2 If James Woods other expenses in 2002 were as follows: Wages 2000 Heating and lighting 1000 Transportation 500 Advertising 500 Depreciation 300 Bad debts 700 Insurance 500 Rent 2500 1. Work out James Woods Net Profit Margin at the end of the year. 2. Compare Jamess % net profit with his percentage gross profit. 3. Suggest how James could improve his percentage net profit. 4. Choose the right strategies from the ones above and explain your reasons in the table below. Strategies to improve % net profit Reasons

H. Seliet Year 11 lesson plan 21st Nov 2003

Phase 4 and end

Home work/conclusion 5 minutes

Where Do I belong?

Fill in the empty gaps in the table below.

Information figure/ratio Sales revenue Gross profit Net profit Operating profit Net profit margin Gross profit margin

I belong to .

H. Seliet Year 11 lesson plan 21st Nov 2003

Capital/ assets employed Cost of Stock Current assets Current liabilities Working capital Dividends Retained profit Depreciation Wages Bad debts Tax

H. Seliet Year 11 lesson plan 21st Nov 2003

Answer Sheet
Information figure/ratio I belong to . Sales revenue Profit and loss account (trading account) Gross profit Profit and loss account (trading account) Net profit Profit and loss account Operating profit Profit and loss account Net profit margin Profit and loss account Gross profit margin Profit and loss account (trading account) Capital/ assets employed Balance sheet (long term liabilities) Stock Profit and loss account (trading account) Balance sheet. Current assets Balance sheet Current liabilities Balance sheet Working capital Balance sheet Dividends Profit and loss Balance sheet (liabilities) Retained profit Profit and loss and balance sheet Depreciation Profit and loss account Wages Profit and loss account Bad debts Profit and loss account Tax Profit and loss account

H. Seliet Year 11 lesson plan 21st Nov 2003

Activity Scenario 1

James Woods sells quality dinning table furniture. At the end of 2002 the gross profit for James Woods business was 10,000, and the total sales revenue was 100,000. 7. Work out James Woods Gross Profit Margin at the end of the year. 8. Suggest how James could improve his percentage gross profit. 9. Choose the right strategies from the ones below and explain your reasons in the table below.

Improve James Woods Advertising Strategy Use less heating Launch a new marketing campaign Move to a cheaper location Reduce cost of sales Improve the quality of furniture Buy cheaper raw materials Employ less workforce Use better below the line promotion Use better technology Reduce wastages in raw materials Increase the selling price 10

H. Seliet Year 11 lesson plan 21st Nov 2003

10. Come up with suggestions to improve % gross profit or gross profit margin. For few minutes students are going to work individually to suggest ways to improve James Wood gross profit margin. This will be followed by a whole group discussion.

Strategies to improve % gross profit

Reasons

H. Seliet Year 11 lesson plan 21st Nov 2003

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Scenario 2

If James Woods other expenses in 2002 were as follows: Wages 2000 Heating and lighting 1000 Transportation 500 Advertising 500 Depreciation 300 Bad debts 700 Insurance 500 Rent 2500 5. Work out James Woods Net Profit Margin at the end of the year. 6. Compare James % net profit with his percentage gross profit. 7. Suggest how James could improve his percentage net profit. 8. Choose the right strategies from the ones above and explain your reasons in the attached table.

H. Seliet Year 11 lesson plan 21st Nov 2003

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Strategies to improve % net profit

Reasons

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