Lecture 13. Company Finance I Flashcards
Why are financial statements important?
The reflect the financial health of a company.
What are the two most important financial statements?
Income statement (or profit and loss) Balance sheet
What is a balance sheet?
Point in time where the income statement shows the earning (and expenses) or enrichment over time.
What is an income statement?
Show whether or not a company’s business is profitable.
What does an income statement show?
Profit or loss over financial year
Steps to an income statement?
- Establish revenue
- Minus direct cost of making that revenue giving gross profit/margin
- Minus operating expenses giving operating profit
- Minus financial costs giving profit before income tax
- Minus tax to get net profit for period
What are the three major items in a balance sheet?
Assets
Liabilities
Equity (net worth)
What are total assets a sum of?
- Total current assets (and cash, investments, account receivables and estimated work done but not billed)
- Fixer or non-current assets, not very liquid or long term assets (?)
What are liabilities a sum of?
- Current liabilities (accounts payable to subs/suppliers, accured expenses, excess billings for work not done yet, bank overdraft etc ???)
- Non-current or long term liabilities (long term bank loans, mortgages or equipment, building, land, cars etc)
Liabilities in short?
Obligations to third parties.
Current = debts has to pay of during a year.
Long term = payback period of more than a year.
What is equity the sum of?
Capital, stock and retained earnings.
What is equity?
The capital investment by the owners of a company (owners or stockholders equity or net worth)
Accounting equation for equity?
Equity + total liabilities = total assets
What is working capital a measure of?
Short term financial strength
What is the equation for working capital?
Working capital = Current assets - current liabilities
How do you increase working capital?
- Making profit
- Selling assets
- Long term bank loans
How do you decrease working capital?
- Losing money on a project
- Purchasing equipment
- Repaying long term loans
What is ‘current ratio’?
Ratio for companies liquidity.
Current ratio = current assets/current liabilities
What number should the ‘current ratio’ be?
1.3 or higher
Where is underbilling expressed?
Balance sheet under current assets or cost and estimated earnings in excess of billings on work in progress.
Where is overbilling expressed?
Under current liabilities or billings in excess of cost and estimated earnings on work in progress.
What are the relevant financial ratios?
- Profitability ratios
- Liquidity ratios
- Working capital ratios
- Capital structure ratios
- Activity ratios
What are profitability ratios?
Measure of a companys ability to earn profit from its operations.
What are liquidity ratios?
Indicate the companys ability to pay its obligations as they come due.
What are working capital ratios?
Measure how well the construction company is utilising its working capital.
What is capital structure ratio?
Show the ability of the construction company to manage liabilities. (shows how the company prefers to finance its operations)
What are activity ratios?
Indicate whether or not the construction company is using its assets effectively, if yes, how effectively.
What is break even analysis
How many goods do we have to sell to break even. At B.E.P the income from sales = total expenses.
