the key terminology Flashcards
liquidity ratio
- Current/liquidity/working capital ratio
o ( current assets/current liabilities)
o 1.12:1
o 1.54:1
o $1 in current liabilities…. In current assets
o Short term financial obligations - Importance in liquidity :
o Creditworthiness
o Stability
o Good signal to creditors
solvency ratio
o (total liabilities/total equity)
o 2.41:1
o 2.74:1
o $1 owner’s equity… in total liabilities/borrowed funds
o Long term financial obligations
GROSS profit ratio
o GP/sales x 100
o 38.34
o 37.82
o $1 sales, (100-GP) in COGS, ___ in GP
o High ratio = COGS low
o Obtain stock at lower price
o Raise sales; raise prices on products
o Compensate for lower profit margins
net profit ratio
o NP/sales x 100
o 22.4%
o 21.2%
o $1 sales… ___ in NP
o Reduce expenses
o Increase sales
returnon equity ratio
o NP/owner’s equity x 100
o 55.6c
o 61c
o $1 in equity, returns are ___
o Return on investments
o Effective funds contribution to profit
o Indication to potential shareholders
o Investments^
expense ratio
o lower ratio =more efficient
o expenses/sales x 100
o control of expenses
o for every $1 in sales rev, ___ C was absorbed by expenses
accs receivable turnover
- Sales / Accounts Receivable = times
o 2.365 / turnover times = turnover days
o effectiveness of a business’s credit policy?
o efficiently collect their debts?
o Liquidity of debtors
o Less days= more efficient in collecting debts
o It takes about __ days to collect the accs receivable
cash flow management (general)
- Coming in-out
- Movement of cash
- Basis of sustainable
- Breaking even effect
- Temporary downfall overdue feespotential business failure
- Monitoring n implementing corrective actions
- Eliminating needs for late fees
cash flow statement
- Identifies cash shortages + surpluses
distribution of payments
- Large bills – monthly payment system
- Less dramatic outflows
- Negotiating
- Don’t occur simultaneously
discounts for early payments
- Offering 2 debtors accounts
- Cash flow
factoring
- Sale of accounts receivable
working cpaital management (general)
- Funds available
- Needed for day-day operations
- Vulnerable and insolvent – not liquid
control of current assets (general)
- Optimal amount of current assets
- Costs/benefits w each asset
cash - current asset
o Preparation of cash budget
o Detailed plan
o Cash inflows = customer demands
o Cash outflows= expenses
o Shortage of cash
o Overspending/borrow funds
o Cash lost, theft, fraud, mismanagement
o Appropriate reserve of cash
accounts receivables -current assets
o Maintain adequate cash
o Need funds to meet own commitments
o Credit policy
Extend credit – customers
credit ratings of prospective customers
reasonable repayment period
charging fees 4 late
credit collection policy
inventories - current assets
o stored resources, raw materials
o holds stock = to meet consumer demand
o not enough stock= customer goes another competitor
o JIT system
o Inventory policy – checked against stock
o Rate of inventory turnover – calculate suitable management
current liabilities- accounts payable
o Debts owed to suppliers
o Danger= damaging business credit rating
o incur late fees
o stretching acc payable = paying late, reduce damage for credit rating
o adv of discounts
loans - current liabilities
o hold costs of variable interest rate
o investigating alternative sources of funds
o extremely costly
o comparing lenders
o negotiating lower interest
o reworking loan terms
overdrafts
o overdraw agreed limit
o variable interest
o charge establishment fees & interest
o monitoring
o ensuring cash received promptly deposited
strats (leasing)
o rent, fixed price
o borrowed
o depreciation, tax deductible , renovations are a no
sales n leaseback (strat)
o owned assets to lessors
o fixed payments
o immediate funds
o depreciation, tax deductible
o may affect long term profitability, leasing expenses indefinitely
profitabulity - cost control
o minimise costs, avoid unnecessary spending
fixed costs
dont depend on level of operating activity
variable costs
o depend on level of operating activity
o increase/decrease in proportion to production
negotiating bulk production
reduction in suppliers/cheaper supplier
multiskilling staff
self-service tech
cost centres
o departments associated w cost
o budget
o monitor expenses – minimise waste & max use of resources
o take the total cost of making and supplying a good and calculate the percentage contribution of each cost centre.
o Comparison of costs- budgets, standards
expense minimisation
o Reduce to min possible
o Expense budget
List main activities
Allocate amount
Increase competitive position
Guidelines/policies
marketing objectives
o Fixed/variable costs
o Cost volume profit analysis
o Revenue sufficient – fixed/variable costs – break even?
changes to sale mix
o Low profit margins
o Products generate largest revenue
o Eliminating
o market research
pricing strategy
o cost based pricing
o calculating cost of product then adding a % mark up
o market share maintained
normalised earnings
- removal of unusual influence (special circumstance)
- economic upswing/downswing
- BALANCE SHEET
- Provides more realistic assessment
- Earning performance
- Example : removal of a land sale, which would achieve a large capital gain but also distort the true earnings of the business.
capitalising expenses
- Capital expense= asset
- True financial condition?
- Undervalue/understates expenses
- BALANCE SHEET
- Mislead shareholders/potential buyers
valuing assets
- Estimate market value -assets
- Distorting accuracy – distorting worth of assets-depreciating
- Intangible assets-not recorded accurate
timing issues
- Current position of business not accurate
- ASX required publish half year financial report
- Manipulation of timing of transactions
- for example, adding revenue of current reporting period into that of the previous or recording a current cost as being outside the financial year so it does not appear on the current reports.
debt repayments
- no specifics
- debt finance on balance sheet as historic costs
- Debt finance not an expense on revenue
- Do not disclose specific info about nature of debt
ethical issues
- Abide by legislation
- Stakeholders must feel assured
o Misrepresentation of financial reports
o Misuse of funds
o Tax minimisation
reducing unethical - auditing accs
- Independent check of accuracy
- Examine financial affairs
- Check control procedures – physical check assets
reduce unethical - record keeping
o Source documents
o Request of aus gov – every transaction
o ATO regularly monitors
o 5 year of financial records
o Prosecution 4 tax evasions= harm reputation
reporting practises
o Legally as well as ethically obliged
o Produce accurate reports
o ASX highlights importance
