Trading efficiency

The aim of businesses in the private sector is to make a profit. Profit is important in three ways:

1. It rewards the owners of the business who have taken risks to run it, eg shareholders or sole traders
2. It provides the funds to develop the business further
3. It is a source of cash, which allows the business to meet its debts

A firm produces accounts to calculate its assets and liabilities. The purposes of the Trading account and the Profit and Loss account are to calculate and show the gross profit [Gross profit: The difference between sales revenue and the cost price of these sales. ] and net profit [Net profit: Gross profit minus expenses (eg wages, rent, rates, advertising etc) leaves net profit. ].

You may be expected to answer questions in the exam about information given in a Trading and Profit and Loss account, like Go Faster Sports below. You may have to provide information about the average stock [Average stock: The value of stock held on average. ] held by the firm, or show the examiner an indication of how well trading is going, by calculating the rate of stock turnover [Rate of stock turnover: How often the average stock is sold. ].

A company's published accounts provide investors with indicators about the business' profitability and managers with information about its efficiency. This will influence their future decisions.