The statement is similar to a cash budget, but considers actual cash flows and classifies into three main sections:
- Operating – relate to normal day-to-day activities (current assets + liabilities) (e.g. sales of G&S, cash received or paid)
- Investing (non-current assets) (e.g. buying/selling property, equipment, shares, etc.)
- Financing (non-current liabilities + equity) (e.g. borrowing and repaying money, dividends paid to shareholders)
Topic 6 – Business Analysis
What do users want to analyse?
Liquidity – can the company meet debts as they fall due?
§ Current (working capital) ratio = Current assets / current liability (higher the better)
§ Quick (acid-test) ratio = !"#$#%&
!' (higher the better) [current assets – inventory – prepaid expenses]
Market Performance – what returns are shareholders receiving? Are shareholders happy with the dividends they’re getting?
§ Dividend per share
§ Payout ratio = dividends paid/net earnings for the period x 100%
§ Net earnings = income - expenses
Capital Structure – Is the company financed by debts are equity? How is the company financed?
§ Interest coverage ratio = &()*+*,- (+*0123+*, +*45)5-4 (*3 4(65-)
$*45)5-4 5685*-5
§ Measures how many times a company can cover its current interest payment with its available earnings.
§ Debt ratio (higher number = more risk) = total liabilities/total assets
§ Equity ratio = shareholder’s equity/total assets (higher ratio = company is less risky)
§ Debt to equity ratio = total liabilities/total equity (lower ratio = better) Profitability – Is the company profitable?
§ Return on equity = net income/average stockholder’s equity (shows a company’s ability to generate profit without needing as much capital) (higher ROE = more efficiency)
§ Return on assets = net income/total assets (shows how profitable a company is relative to its total assets) (higher ROA = more efficiency)
§ Profit margin = (total sales – total expenses)/total sales
§ Gross profit margin = revenue – COGS / revenue Efficiency – Are the company assets being used efficiently?
§ Days’ inventory = (cost of inventory/COGS) x 365 days
§ Days’ debtors = (average accounts receivables/annual total sales) x 365 days
§ Shows the average number of days customers are taking to pay you
§ Asset turnover = net sales/average total assets Limitations
- Quality of data - Policy choices Benchmarks for comparison
- Prior periods
- Competitors - Industry averages
Topic 7 – Accounting Equation
- Business transactions = transactions the business undertakes that impact on the finances on the company.
– Business events = things that happen but aren’t related to business activities – Personal transactions
e.g. changing a logo, the business event is changing a logo and the business transaction is the cost of changing its logo.
e.g. Toys R us saying that they will open up shops in Australia, that’s a business event. It becomes a business transaction when the costs start to incur.
The accounting equation: Assets = Liabilities + Owner’s Equity + Income – Expenses Every business transaction is recorded twice in accounting i.e. its dual impact on the elements is considered. This is known as ‘double-entry’ accounting.
The income statement focuses on a company's revenues and expenses.
The statement of changes in equity shows the change in an owner's or shareholder's equity throughout an accounting period.
A company's cash flow statement (aka statement of financial position) measures the flow of cash in and out of a business, while a company's balance sheet measures its assets, liabilities, and owners' equity.
Topic 8 – Decision Making and Planning
Business plans help with decision making and planning.
Main sections include:
- Background - Marketing - Operations
- Financial projections - Timetable
Balanced scorecard views and measures performance from four business perspectives:
• Financial
• Customer (happy customers = more business)
• Internal operations
• Innovation and improvement
Divisional performance measurement is often based on the organisational structure adopted, which is an arrangement of lines of responsibility within the organisation.
Performance measurement is based on performance.
