Accounting
Content
The purpose of accounting- recording, analyzing and summarizing
Business (sole traders, partnerships and limited liability comp)
financial statem statements ents(Income Statement, Statement, Balance Sheet, Cash Flow Statement)
Users of fs/acc info {managers of comp; shareholders of comp[owners]; Trad ade e contac acts ts(s (su upp ppllier ers, s, cu cusstom omer ers) s);; Pr Prov ovid ider erss of financ fina nce e to th the e comp mp(b (ban ank) k) ; Taxati tion on au auth thor oriiti ties es((MR MRA A) ; Em Empl ploy oyee eess of the th e com omp p ; Fi Fina nanc ncia iall an anal aly ysts an and d ad advi vise serrs ; Th The e pub ubllic
Accounting Standards
Concept of accounting(accrual concept)
Income Statement, Balance Sheet, Cash Flow Statement
Ratio Analysis
profitability and return long-term solvency solvency and stability short-term solvency and liquidity shareholders’ investment investment ratios
•
•
Balance Sheet: It lists the assets and liabilities of the business on a particular day. Income Statement
The income statement is not a static picture like the BS, but it is a record of income generated and expenditure incurred over the relevant accounting period.
» 1. Profitability ratios » return on capital employed ROCE = PBIT CE Where PBIT: profit before interest and taxation(eg 342130plus 18115= 360 245) CE: capital employed > Shareholders’ equity plus non- current liabilities or total assets less current liabilities(20X8: 1 870 630 – 881 731 = 988 899) » Profit margin x Asset turnover = ROCE » PBIT
x
Sales
Sales
= PBIT
CE
CE
»2.Long-term solvency(debt ratio, gearing/leverage ratio, interest cover, cash flow ratio) » Debt ratio = total debts total assets » Capital gearing=
total long-term debt
Shareholders’ equity + total long-term debt Leverage
=
Shareholders’ equity Shareholders’ equity + total long-term debt
Interest Cover=
PBIT
<2 = low; >3 acceptable
Interest Charges Cash flow ratio =ratio of a company’s net cash inflow to its total debts
» 3. short-term solvency
» Current ratio = Current assets
>1 should be expected(comfortable)
current liabilities quick ratio = Current assets less inventory
<1 should be expected(slow
current liabilities
inventory turnover)
» Accounts receivables collection period = trade receivables x 365 sales » Inventory turnover period =
inventory x 365 cost of sales
Accounts payable payment period =trade accounts payable x 365 purchases » 4 . Shareholders’ investment ratios
» Earnings per share = profit for period___________ number of equity shares in issue » Dividend cover =
______EPS________________ net dividend per(ordinary) share
» P/E=
company current share price EPS
;
Dividend Yield = dividend on the share for the yr x100% current market value of the share(ex div)
The purpose of accounting- recording, analyzing and summarizing
Business (sole traders, partnerships and limited liability comp)
financial statem statements ents(Income Statement, Statement, Balance Sheet, Cash Flow Statement)
Users of fs/acc info {managers of comp; shareholders of comp[owners]; Trad ade e contac acts ts(s (su upp ppllier ers, s, cu cusstom omer ers) s);; Pr Prov ovid ider erss of financ fina nce e to th the e comp mp(b (ban ank) k) ; Taxati tion on au auth thor oriiti ties es((MR MRA A) ; Em Empl ploy oyee eess of the th e com omp p ; Fi Fina nanc ncia iall an anal aly ysts an and d ad advi vise serrs ; Th The e pub ubllic
Accounting Standards
Concept of accounting(accrual concept)
Income Statement, Balance Sheet, Cash Flow Statement
Ratio Analysis
profitability and return long-term solvency solvency and stability short-term solvency and liquidity shareholders’ investment investment ratios
•
•
Balance Sheet: It lists the assets and liabilities of the business on a particular day. Income Statement
The income statement is not a static picture like the BS, but it is a record of income generated and expenditure incurred over the relevant accounting period.
» 1. Profitability ratios » return on capital employed ROCE = PBIT CE Where PBIT: profit before interest and taxation(eg 342130plus 18115= 360 245) CE: capital employed > Shareholders’ equity plus non- current liabilities or total assets less current liabilities(20X8: 1 870 630 – 881 731 = 988 899) » Profit margin x Asset turnover = ROCE » PBIT
x
Sales
Sales
= PBIT
CE
CE
»2.Long-term solvency(debt ratio, gearing/leverage ratio, interest cover, cash flow ratio) » Debt ratio = total debts total assets » Capital gearing=
total long-term debt
Shareholders’ equity + total long-term debt Leverage
=
Shareholders’ equity Shareholders’ equity + total long-term debt
Interest Cover=
PBIT
<2 = low; >3 acceptable
Interest Charges Cash flow ratio =ratio of a company’s net cash inflow to its total debts
» 3. short-term solvency
» Current ratio = Current assets
>1 should be expected(comfortable)
current liabilities quick ratio = Current assets less inventory
<1 should be expected(slow
current liabilities
inventory turnover)
» Accounts receivables collection period = trade receivables x 365 sales » Inventory turnover period =
inventory x 365 cost of sales
Accounts payable payment period =trade accounts payable x 365 purchases » 4 . Shareholders’ investment ratios
» Earnings per share = profit for period___________ number of equity shares in issue » Dividend cover =
______EPS________________ net dividend per(ordinary) share
» P/E=
company current share price EPS
;
Dividend Yield = dividend on the share for the yr x100% current market value of the share(ex div)
