Lecture 13 Flashcards
Why is NZ productivity low?
- weak international connections
- underinvestment in knowledge, innovation and ideas
- other, including low skills
Two of the most important financial statements
- income statement (or Profit & Loss Account)
- balance sheet
Purpose of income statement
- to show whether or not a company’s business is profitable
- shows profit or loss over a period of time
- usually comparison between figures of most recent year and year before
Steps of Income Statement
- Establish the revenue
- Deduct direct cost of making that revenue (cost of sales) to get Gross Profit or Gross Margin
- Further deduct the cost of being in business (operating expenses) to get Operating Profit
- Further deduct any financing costs or income to get the Profit before Income Tax
- deduct tax to get Net profit for the period
Purpose of Balance Sheet
shows a company’s financial position at a point in time (end of fiscal year), a snap shot
3 major items in a balance sheet
- assets
- liabilities
- equity (or called net worth)
Total Assets is the sum of
- total current assets
- fixed or non-current assets
Examples of total current assets
- cash
- inventory (materials)
- investments
- accounts receivable
Examples of fixed or non-current assets
-total value (depreciable assets) of property, plant equipment etc. minus the accumulate depreciation to get ‘net’ fixed assets
Liabilities is the sum of
- current liabilities
- non-current or long term liabilities
examples of current liabilities
- accounts payable
- accrued expenses
- excess billings for work not done yet
- bank overdraft and short term loan
examples of non-current or long term liabilities
- long-term bank loans
- mortgages of equipment, buildings, land, cars/trucks
Current liabilities
debts a company has to pay within a year
long term liabilities
obligations with a payback period of more than a year
Accounting Equation
Equity = Assets - Liabilities
Working Capital equation
= current assets - current liabilities
working capital definition
- a measure of the short term financial strength of a construction company
- liquidity of working capital is high
increase working capital by:
- making profit, selling equipment, long term loans
decrease working capital by:
- losing money on a project
- purchasing equipment
- repaying long term loans
To stay a healthy company, volume of unfinished work:
- of all projects in hand should be at most ten times the working capital
- of the biggest project in hand should be at most five times the working capital
current ratio equation
= current assets / current liabilities
current ratio definition
ratio for a construction company’s liquidity or its ability to fulfil short term financial obligations
- should be 1.3 or higher
underbilling
- expressed in balance sheet under current assets
- estimated work done but not billed yet
overbilling
- expressed under current liabilities
- excess billings for work not done yet
