Professional Documents
Culture Documents
Topics Covered
Financial ratios
Limitations of ratio analysis
Fund flow statement
Components of balance sheet
Sources and uses of working capital
Fund flow statement
Objects of fund flow statement
Preparation of fund flow statement
MCQs
d) Investment centres
Where outputs are compared with the assets employed in
producing them, i.e. ROI.
Types of Budget
Firstly, determine the principal budget factor. This is also
known as the key budget factor or limiting budget factor
and is the factor which will limit the activities of an
undertaking. This limits output, e.g. sales, material or
labour.
a) Sales budget: this involves a realistic sales forecast. This
is prepared in units of each product and also in sales
value. Methods of sales forecasting include:
sales force opinions
market research
statistical methods (correlation analysis and examination
of trends)
mathematical models.
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Financial Analysis
Assessment of the firms past, present and
future financial conditions
Done to find firms financial strengths and
weaknesses
Primary Tools:
Financial Statements
Comparison of financial ratios to past,
industry, sector and all firms
Ratio Analysis
Ratio Analysis
1. Liquidity the ability of the firm to pay its way
2. Investment/shareholders information to enable
decisions to be made on the extent of the risk and the
earning potential of a business investment
3. Gearing information on the relationship between the
exposure of the business to loans as opposed to share
capital
4. Profitability how effective the firm is at generating
profits given sales and or its capital assets
5. Financial the rate at which the company sells its
stock and the efficiency with which it uses its assets
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Liquidity
Acid Test
Current Ratio
Current Ratio = Current Assets : Current Liabilities
Ideal level 2 : 1
A ratio of 5 : 1 would imply the firm has 5 of assets to
cover every 1 in liabilities
A ratio of 0.75 : 1 would suggest the firm has only 75p in
assets available to cover every 1 it owes
Too high Might suggest that too much of its assets are
tied up in unproductive activities too much stock, for
example?
Too low - risk of not being able to pay your way
Investment/Shareholder
Profitability
Financial Ratio
Assets Turnover
Asset Turnover = Sales turnover / assets
employed
Using assets to generate profit
Asset turnover x net profit margin = ROCE
Stock turnover = Cost of goods sold / stock expressed as times
per year
The rate at which a companys stock is turned over
A high stock turnover might mean increased efficiency?
But: dependent on the type of business supermarkets might have
high stock turnover ratios whereas a shop selling high value
musical instruments might have low stock turnover ratio
Low stock turnover could mean poor customer satisfaction if
people are not buying the goods (Marks and Spencer?)
a.
b.
c.
Term Loan
300 Cash
Bank C/C
200 Receivables
Trade Creditors
50 Goodwill
Provisions
50
800
400
150
50
150
50
800
LIABIITIES
ASSETS
Equity Capital
800
Preference Capital
100 Inventory
300
Term Loan
600 Receivables
150
Bank CC (Hyp)
Sundry Creditors
Total
1400
50
100
1400
Exercise . From the following financial statement calculate (i) Current Ratio (ii) Acid test
Ratio (iii) Inventory Turnover (iv) Average Debt Collection Period (v) Average
Creditors payment period.
C.Assets
Sales
1500
Inventories
125
Cost of sales 1000
Debtors
250
Gross profit
500
Cash
225
C. Liabilities
Trade Creditors
200
(i) Current Ratio : 600/200 = 3 : 1
(ii) Acid Test Ratio : Debtors+Cash /Trade creditors = 475/200 = 2.4 : 1
(iii) Inventory Turnover Ratio : Cost of sales / Inventories = 1000/125 = 8 times
(iv) Average Debt collection period : (Debtors/sales) x 365 = (250/1500)x365 = 61 days
(v) Average Creditors payment period : (Trade Creditors/Cost of sales) x 365
(200/100) x 365 = 73 days
Benchmark with
Past for the company
Industry
COMPONENTS OF
BALANCE-SHEET
1. NON-CURRENT LIABILITIES
Meaning of Flow
The term Flow means changes incoming and
outgoing. When this term is used with funds, it
means the changes taking place in funds during
a certain period. Whenever there is change in
the funds, it is presume that flow in funds has
taken place.
Transactions that bring working capital into the
firm are sources of funds and on the contrary, if
the working capital decreases, it is an
application of funds.
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Objects of Fund
Statements
Following questions are answered by Funds Flow
Statement 1. Where the profit is put up?
2. Why net current assets are low even though
there is an increase in net profit? In other
words, why cash balance has not increased.
3. Why excess dividend was distributed when
there were low profits?
4. How is the amount realized from the sale of
assets used?
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STATEMENT OF CHANGES IN
WORKING CAPITAL
Particulars
Current Assets :
Previous Current
Changes
Year Fig. Year Fig. in current
Rs.(2008) Rs.(2009) assets
and
liabilities
Increase
Cash
Debtors
Stocks
Bill Receivables
Advance payment
Accrued income
Marketable Securities or
Short-term Investment
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Decre
-ase
Contd..
Particulars
Current Liabilities:
Creditors
Bills Payable
Bank Overdraft
Outstanding Expenses
Short-term
Loan etc.
Increase or
Decrease in Working
Capital
Dec.
(-)
Contd.
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Sources of Funds:
The following are the sources from which funds
come:
1.Funds from operations
2.Income from investments
3.Issue of shares and debentures
4.Raising a loan
5.Sale of fixed assets and long-term investments
6.Receipt of interest on non-trade investment,
dividend, refund of tax etc.
7.Decrease in working capital etc.
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and
Amount
Rs.
Amount
Rs.
MCQs
Q1 Management accounting analyses accounting data with
the help of:a) Auditors
b) Statutory forms
c) Tools & Techniques
d) None of these
Thank You
Please forward your query
To: aarora@amity.edu
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