Unit 5 - Finance Management (continued)
5.4 Final Accounts
Final Accounts
All the financial processes that happen within a time period
when working with finance, all monetary movements made within the company have to be recorded (called bookkeeping)
accounts are important because they allow you to see exactly where your money is going, allows you to get a critical view of the company's financial health
What does each stakeholder need from books?
managers: information about performance to monitor, control and make decisions
workers: information about whether their job and salaries are secure
customers: information about the security of the products/services and continuity
government: information to determine health of the business and its ability to pay taxes
banks: information about a company's ability to pay back their loans
investors: information about the value, profitability and growth potential of the business
creditors: information about a company's ability to pay their purchases
community: information about the security of the products/services and continuity
Limitations of account information
one set of accounts is of limited use
business accounts will only publish what is required by law
accounts don't measure items that can't be expressed in monetary terms
accounts are backwards-looking
accounts of some businesses don't allow for comparisons
window dressing can be a thing
Income Statement
revenue
cost of sales
gross profit
net profit
tax
dividends
overheads
retained profit
interest
pre-tax profits
Formulas for Income statement
profit + loss account
net profit before interest and tax = gross profit - expenses
net profit before tax = net profit before interest and tax - interest
net profit after interest and tax = net profit before tax - corporation tax
trading accounts
Cost of sales = opening stock + purchases - closing stock
The Balance Sheet
a complete look at the net wealth of the company at any given time
it compares wealth in terms of assets, liabilities and equity
sum of your assets and liabilities has to equal you equity
Assets
fixed assets: long-term assets that last in a business for more than 12 months. depreciation rate needs to be deducted from the fixed assets
current assets:short-term assets that last in a business for up to 12 months
long-term liabilities: long-term debts or borrowings payable after 12 months
current liabilities: short-time debts that are payable by the business within 12 months
Formulas used for assets and liabilities
working capital current assets - total current liabilities
total assets less current liabilities = (fixed assets + current assets) - current liabilities
net assets = (total assets less current liabilities) - long-term liabilities
5.5 Profitability Liquidity Ratio Analysis
Ratio Analysis
is a financial analysis tool used in the interpretation and assessment of a firm's financial statements.
It helps in evaluating a firm's financial performance by determining certain trends and exposing its various strengths and weaknesses.
Types of ratio analysis
profitability ratios
These ratios assess the performance of a firm in terms of its profit-generating ability.
gross profit margin (GPM)
GPM = gross profit/sales revenue x100
net profit margin
NPM = net profit before interest and tax/sales revenue x100
efficiency ratios
These ratios assess how well a firm internally utilizes its assets and liabilities.
capital employed (ROCE).
ROCE = net profit before interest and tax/capital employed x100
liquidity ratios
These ratios measure the ability of a firm to pay off its short-term debt obligations.
current ratio
acid test ratio
current ratio = current assets/current liabilities
Acid test ratio = current assets - stock/current liabilities