Archive about 'Interpretation of Financial Statements'

Answer To Accounting Question IFS Test No 1 On Interpretation of Financial Statements

Answer to Accounting Test Question IFS No 1:
Inventory turnover ratio
=  Cost of Goods Sold/ Average Inventory Value
= $3,000,000/(830,000+710,000)/2
=$3,000,000/$770,000
= 3.89 times
Receivables turnover ratio
= Net Turnover/(Average Accounts Receivable)
=$7,000,000/($810,000+620,000)/2
= 9.79 times
Therefore,
Average collection period
=365 days/ 9.79
=37.28 days
Asset [...]

Accounting Test Question No IFS: Interpretation of Financial Statements

Accounting Test Question No IFS 1 : Interpretation Of Financial Statements

Accounting Test Question No IFS 1:
Details of financial performance of Company XYZ
For year 2005 Income Statement:
Net Sales - $ 7 million,
Cost of Goods sold -$ 3 million
Net Income - $1.2 million
Balance Sheet ($’000):-

Assets

2005

2004

Cash

200

240

Accounts Receivable

810

620

Inventory

830

710

Property, plant and equipment ( net)

2,590

2,420

Total Assets

4,430

3,990

 

 

 

Liabilities & Shareholders’ Equity

 

 

Current liabilities

710

640

Notes payable

550

990

Paid-in [...]

Ratio Analysis: Cash Flow Efficiency Ratios

The vein of an organization is the cash flow. In earlier article, we understand that cash flow statement is an integral part of the financial statements.
We can derive useful ratios the cash flow statement so as to assist us to evaluate the cash sufficiency of the entity. When we say cash sufficiency of an entity, we [...]

Ratio Analysis: Cash Sufficiency Ratio

The vein of an organization is the cash flow. In earlier article, we understand that cash flow statement is an integral part of the financial statements.
We can derive useful ratios the cash flow statement so as to assist us to evaluate the cash sufficiency of the entity.
When we say cash sufficiency of an entity, we [...]

What Is Mark-Up And How Does It Impact Gross Margin Percentage

MARK-UP ON COST

 
Refers to profit expressed as a percentage of cost price.
 

FORMULA:

 
Mark-up = Gross profit /Cost of Goods Sold x 100
 

ILLUSTRATION:

 
Company sells two type of products A & B. Due to the high techelement in product A, the company is able to mark up higher on the product cost of A in relation to [...]

What is Capital Employed?

WHAT IS CAPITAL EMPLOYED?

 
Capital employed is basically the long term funds employed in a business.
 

Capital employed of a business is from the ordinary shareholders and from long term liabilities. Hence, it is the effective amount of money actually being used in a business, regardless of whether it is from the owners or creditor or banks.

The [...]

Undercapitalization or Overtrading And Its Tell-Tale Signs/Symptoms

WHEN DO YOU CONSIDER AN ENTITY BECOMES UNDERCAPITALIZE?

Opposite of overcapitalization. 

Undercapitalization would mean that the entity has not sufficient capital to provide for its own scale of operations.

Evidenced by high borrowings from trade creditors or bank borrowings

Undercapitalization can be a result of Overtrading:

      -can be due to over-ambitious expansion of business by increasing revenues but without  [...]

Overcapitalization and Its Tell-Tales Signs/Symptoms

WHEN DO YOU CONSIDER AN ENTITY BECOMES OVERCAPITALIZE?

Generally, an entity is said to be overcapitalized when it has fixed assets in excess of its actual needs

          and

A reasonable return is not being earned on the investments of these fixed assets

Sometimes, we might consider an entity overcapitalize when it has substantial amounts of [...]

Financial Ratio: Proprietary Ratio

The Proprietary Ratio represents the proportion of Proprietors’ Equity to Total Assets.
 
PROPRIETARY RATIO:

FORMULA

Shareholders’ Equity/Total Assets ( Current Assets+ Fixed Assets)

MEASURE WHAT

A test of Credit Strength. Is also a test of capitalization and a high or low ratio may indicate low or high earnings respectively per share.

SCORE/VALUE

A higher percentage denotes the stronger the financial position of [...]

Activity-Based Financial Ratio: Turnover Of Fixed Assets

TURNOVER OF FIXED ASSETS:

FORMULA

Net Sales / Fixed Assets

MEASURE WHAT

Measure the efficiency of the usage of fixed assets in generating sales

SCORE/VALUE

Varies.
The higher is the more effective

SALIENT POINTS TO NOTE

Comparing similar periods and similar industry statistics determines measures of efficiencies by which the assets in this case, fixed assets are employed in the business.

Using this turnover of [...]