Professional Documents
Culture Documents
Assets
Installing, testing etc is all included in asset value (eg. Transport,
building, installation, interest costs-IF manufactured OVER 12
months)
o In a home and land purchase, they must be valued
separately, so that land stays put and house can be
depreciated.
o Fair Value
Where a valuation is scaled back (percentage wise)
due to mismatch between valuation and purchase
price.
Intangible Assets
Some software (office package yes, operating system no)
Patents
Trademarks
Franchises
Purchased Goodwill (ONLY when purchased difference between
net assets and purchase price [when $$$ is OVER net assets])
Licenses eg. Fishing license
Liabilities
A present obligation to another party, requiring the sacrifice of
future economic benefits, resulting from past transaction
o Recognised only when we can measure accurately
Non-Current Liabilities
o Loan
o Bonds
o Long Service Leave Payable
o Warranties Payable
o Finance Leases
Debtors, Creditors, Accurals and Prepayments10/20/2014 1:20:00
Difference between write-off method (when they go bad) and allowance
method (allowance set aside per sale or aged debtors method) for bad
debts
The matching principle. One allows for revenue/expence to be
matched in the same period, the write-off method does not
match sale and expense in the same period.
Allowance for doubtful debts is a contra-asset account as it reduces the
value of assets accounts receivable stays the same until debt is written
off, then goes down by amount
Prepayment an outlay you have not yet received the benefits from
Account is an asset paid through cash at bank or accounts
payable account, when used, asset goes down, appears in
expenses
Internal Control of Cash Statement of Cash Flows
and Other Issues 10/20/2014 1:20:00 AM
ACCRUAL ACCOUNTING
Accrual - expenses incurred and not yet paid
Unearned revenue paid in advance, without supplying goods/services
Statement of cash flow required as profit does not equal the cash
CASH FLOW STATEMENT Shows where the money came from and
where its going. (net cash flow will be positive or negative)
Indicates companys ability to:
Meet obligations (liabilities etc)
Prosper and grow
Obtain external financing
If unable to keep this, business fails
Bills paid with cash not profit, profitable business can struggle to pay bills
Cash represents cash on hand and demand deposits (something to be
converted into cash within 3 months)
Owed $10 at start
Buy $20
Owed $15 at the end
Acc. Rec has gone up $5, so they paid $5 less then what they bought
10 + 20 -15 = 15
Same in reverse
Cash collected = sales revenue increase in acc. Rec.
OR
Cash collected = sales revenue + decrease in acc. Rec.
Profit and Loss as well as Balance Sheet required to calculate Cash Flow!!!
OPERATING ACTIVITIES Strictly Cash
Normal activities of the business ie. Sales of goods, dividends received,
taxes, supplier payments, rent etc.
INVESTING ACTIVITIES
Buying/selling assets (plant, equipment)
FINANCING ACTIVITIES
Issue of shares, debentures share buybacks, dividends paid,
redemption of debentures etc.
Cash Flow Statement = Change in Cash at Bank Account on Balance
Sheet
Cash paid to suppliers
Inventory = cost of goods sold + increase in inventory OR
= cost of goods sold decrease in inventory
Cash paid for inventory
Cash paid = inventory purchased + decrease in accounts payable OR
= inventory purchased increase in accounts payable
Handling of cash and recording of said cash should be kept separate and
completed by different people
EXAMPLES
Cash from Customer Operating
Paid wages Operating
4 Year lease car non cash
paid interest operating
issued debentures financing
issued shares financing
sold long term investments investing
paid dividends financing
receive dividends operating
redeemed debentures financing
issued preference share financing
sold equipment for gain investing (buying/selling non-current assets is
investing)
purchased patents investing
loss on disposal of non-current asset loss (non-cash)
When selling the extra cash comes in, so you have a cash
transaction, when making a loss this is a non cash transaction
Increase in inventory operating
Ar start 200000
Ar end 250000
Sales - 500000
Cash paid 450000
Vertical
List total assets then express everything as a percentage of total assets
Trend Analysis
When 3 or more years exist, trend is used to show growth prospects
Ratios
Profitability
o Net profit margin before interest and taxes
Measures profits PRIOR to tax and debts
Net profit margin = (net profit before interest and
taxes x 100) / sales
o Net profit margin
(Net profit x 100) / Sales
o Gross profit margin
Efficiency of management turning over goods for
profit
((Net sales cost of goods sold) x 100) / net sales
o Interest cost as a percentage of sales
(Interest expense x 100) / sales
o Asset turnover
How efficient assets used to generate sales
Assets turnover = sales / average total assets
Returns (on assets, shares etc.)
o Return on assets
o Return on equity
Net profit after tax preference dividend x 100 /
average ordinary shareholders equity
o Earnings per share
Efficiency
o Debtors turnover
Net sales /average debtors
o Average days sales uncollected
Net sales / debtors turnover
Liquidity shows ability to pay debt
o Current ratio
1.5 to 1 or 2 to 1 are good ratios (rule of thumb)
= current assets / current liabilities
o Quick ratio (acid test)
Excludes inventory as this cannot be quickly turned
into cash
= (current assets inventory) / current liabilities
1 to 1 is ok, as inventory will increase that in time
o Cash flows from operations to current liabilities
= operating cash flows / current liabilities
Solvency ratios measures risk associated with how the
business is financed
o Debt to equity
Total liabilities / total shareholders equity
50/50 is not bad
o Debt to total assets shows assets financed by debt
Total liabilities / total assets
o Leverage Ratio
Total assets / total shareholders equity
o Interest coverage
(Net profit + income tax + interest) / interest
expense
o Cash flow from operations to total liabilities shows ability
to pay debt from operating cash flow
Operating cash flow / total liabilities
Market based ratios
o Price/Earnings ration
Market price per ordinary share / earnings per share
o Earnings yield
Earnings per share / market price per ordinary share
o Dividend yield
Dividends per ordinary share / market price per
ordinary share
Others
o Net tangible asset backing
Net tangible assets / number of ordinary shares
issued
Gearing
Investment
LIMITATIONS
Quality of information can be average
Ratios shown from balance sheet will not represent period as
balance sheet is at not at end
Too summarized
Looking at past data
PROBLEMS
Price changes
Tech changes
Commercial environment
Accounting policies
Base year
Equity Finance
Sole Traders
o Limited equity
o Debt financing if owner doesnt have the equity, if
downturn situation is very risky
Partnership
o More owners, more access to equity
o If one partner cannot pay, other partners pay
Limited Companies
o
MANAGEMENT ACCOUNTING
Present Value Tables
Bring future $$$ back to what its worth today
Future Value Tables
Take todays $$$ into futures value
Annuity
Where each year payments are brought back
Single Amount
One single value (lump sum payment)
Cost Information and Decision Making10/20/2014 1:20:00 AM
Use of Cost Information
Why???
o Control Costs
o Aid Planning
o Value Inventories
o Aid the setting of product prices
Issues with Costing
Two Main issues
o
Cost Objects
Objects can be
o Product
o Customer
o Department
o Project
o Activity (eg. Setting up equipment)
Direct and Indirect Costs
Direct Cost
o Can be traced easily and accurately to a product/service
Indirect Cost
o Not accurately and easily traced to a product/service, eg.
Factory equipment used for multiple products, electricity,
rent etc.
Period Costs and Product Costs
Period Cost
o All costs that are not part of the product costs, eg. Selling,
marketing, electricity of office etc.
Product Costs
o Direct Labour, materials etc. that are all required for the
product directly.
Absorption of Overheads
All of our costs (indirect as well) into our product, aims to share
all the costs across all the products equally.
Traditional Volume-Based v. Activity-Based Costing (ABC)
TVB
o Volume based drivers such as machine hours or labour
units.
ABC
o Looks at finer detail with regard to the activities and
relating back to that.
o Usually requires computer software as rather complex!
Absorption v. Variable Costing
Absorption
o Includes variable and fixed costings into product
Variable
o Only variable production costs included
Summary
10/20/2014 1:20:00 AM
Fixed Cost
Cost is fixed and does not change in response to changes in the
level of activity
o EG. Rent, depreciation, salaries etc.
Variable Cost
Cost changes in response to change in activity
o EG. Commissions, hourly labour rates, raw materials
P = Sx [FC + VCx]
P = Expected Profit
S = Selling Price Per Unit
x = Number of Units Sold
FC = Fixed Costs
VC = Variable Costs per Unit
Cash Flows
Budgets
Cost Volume Profit
Allocating Overheads
Activity Based Costing
Investment