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TOPIC
GAAP
The guide lines used to prepare and maintain financial records & reports are known as GAAP
The Public Company Accounting Oversight Board (or PCAOB) is a private-sector, non-profit corporation created by the SarbanesOxley.
1. The mission of the Securities and Exchange Commission (SEC) is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. 2. Unlike the banking world, where deposits are almost always guaranteed by the federal government, stocks, bonds and other securities can lose value.
stockholders
Income Statements A historical financial report that indicates sources and amounts of revenues, amounts of expense accounts, and profit or loss.
Balance sheet
1. The second financial statement that you'll encounter in the annual report is the balance sheet. 2. The basic concept underlying a balance sheet is simple enough: total assets equals total liabilities plus equity.
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Statement of Stockholder's Equity is a portion of the balance sheet which contains the amount of capital earned by the company in exchange to the stock.
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It also records the capital that is donated by the company and the retained earnings.
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The Statement of Retained Earnings is the second financial statement that should be prepared in the accounting cycle after the income statement. Retained earning are the portion of net income not paid out to investors in the business as dividends. Retained earnings are reinvested in the business firm.
statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.
MBA
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Ratio Analysis Ratio Analysis is a form of Financial Statement analysis. It is used to obtain a quick indication of a firm's financial performance in several key areas.
FINANCIAL RATIOS
INTERESTED PARTIES 1. Financial statement analysis is useful to different parties to obtain the required information about the organization. 2. Following are the parties interested in financial statement analysis.
Shareholders Shareholders are interested in financial statement analysis to know the profitability of the organization. b. Investors And Lenders i. Investors and lenders are interested to know the solvency position of an organization. ii. They analyze the financial statement position to know about the safety of their investment and ability to pay interest and repayment of principle amount on due date.
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CREDITORS Creditors analyze the financial statement to know either the organization is enable to pay the amount of short term liabilities on due date. Management Management is interested to analyze the financial statement for measuring the effectiveness of its policies and decisions. Government Government is interested to analyze the financial position in determining the amount of tax liability.
Assessment of relationships among a cross-section of firms, countries, or some other variable at one particular time.
Benchmarking
1. A benchmark is a reference or measurement standard used for comparison. 2. Benchmarking is the continuous activity of identifying, understanding & adapting best practice and processes that will lead to superior performance. 3. Benchmarking measures an organization's products, services and processes, to establish targets, priorities.
Time Series Analysis 1. In financial analysis the dire ction of changes over a period of years is of crucial importance. 2. Time series or trend analysis of ratios indicates the direction of change.
COMBINED ANALYSIS
Combined analysis simply uses a combination of both time series analysis and cross-sectional analysis.
1. It is the ratio of gross profit to net sales express as a percentage 2. It shows the relationship between GP and sales gross. FORMULA: profit ratio = gross profit/net sales *100
OPERATING RATIO
1. It is the ratio of cost of goods sold plus operating expenses to net sales 2. This ratio shows the operational efficiency of the business
FORMULA operating ratio=CGS + operating expenses /net sales * 100
EXPENSE RATIO
1. It indicate the relationship of various expenses to net sales 2. It reveals the average total in expenses FORMULA:
expense ratio= expenses/ net sales * 100
STOCK TURNOVER RATIO It shows the relationship between CGS and average stock during certain time period It measure the velocity of conversion of stock into sale. FORMULA Stock turnover ratio= CGS/ avg. stock
It indicates the number of times, the debtors are turned over during a year It measure the velocity of debt collection of a firm FORMULA Debtor turnover ratio = total credit sale/avg. debtors
When debtors turnover ratio is calculated in terms of days called average collection period. FORMULA Average collection period = average debtors/total credit purchase * 360
It compares the creditors with credit purchase It signified the credit period enjoyed by the firm in paying creditors FORMULA creditors turnover ratio=credit purchase / avg. creditors
It shows the number of days taken by a firm to pay its creditors. FORMULA Average payment period= average creditors / credit purchase * 360
It measure the efficiency with which the working capital is being used by a firm
This ratio measures the efficiency and profit earning capacity of the concern.ss FORMULA fixed asset turnover ratio= CGS / fixed assets
It indicates the efficiency with which the firm uses its assets to generate sale. FORMULA Total asset turnover ratio= CGS / total assets
LIQUIDITY RATIOS
Liquidity Liquidity is the amount of capital that is available for investment and spending
Current Ratio:A liquidity ratio that measures a company's ability to pay short-term obligations. The Current Ratio formula is:
The acid test ratio (or quick ratio) is a measurement of a company's ability to pay short term liabilities without selling inventory. The acid test ratio can be calculated as follows: Acid test ratio = (Accounts receivable + Cash equivalents + Cash) / Current liabilities
INVENTORY TURNOVER RATIO The inventory turnover ratio measures the number of times a company sells its inventory during the year. Formula Inventory Turnover Ratio = cost of goods sold / average inventory
For example, assume that average inventory is $47,500 and cost of goods sold is $500,000. The average age of inventory is ($47,500/$500,000) X 365 days = 34.7 days
The average amount of time needed to collects accounts receivable Collection Period =
Accounts Receivable X 365 days Credit Sales
Collection Period =
365 days
Debt Ratios
Financial Leverage The financial leverage ratio indicates the extent to which the business relies on debt financing. FORMULA:Financial Leverage Ratio = total debt / shareholders equity. The financial leverage ratio indicates the extent to which the business relies on debt financing.
PROFITABILITY RATIOS
Common Size Income Statement An income statement in which each account is expressed as a percentage of the value of sales. Gross Profit Margin(formula):-
FORMULA:-
Market ratio relate the firms value, as measured by its current share price, to certain accounting values .
PRICE/EARNING RATIO
The P/E ratio measures the amount that investors are willing to pay for each dollar of a firm' earnings FORMULA:Price Earnings Ratio = Market price per equity share / Earnings per share EXAMPLE:The market price of a share is $30 and earning per share is $5. Calculate price earnings ratio? CALCULATION:Price earnings ratio = 30 / 5=6
Market book ratio provides an assessment of how investors view the firms performance . 2. Firms expected to earn high returns relative to their risk typically sell at higher m/b multiples.
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MARKET RATIOS