Post on 07-Apr-2018
8/6/2019 Accounting for Managers - Module 2
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ACCOUNTING FOR
MANAGERS MODULE 2
By: Abhishek Jain
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Financial Analysis - Objectives
Identify the Strengths and Weaknesses of the Firm
Establish Relationship between Various Components
Decision Making
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Financial Analysis - Types
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Financial Analysis - Procedure
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Comparative Statement
Comparative Balance Sheet
Comparative Income Statement
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Ratio Analysis
What is a Ratio?
What is Analysis?
Modes in which ratios can be presented: Percentage
Proportion
Rate or Times
Nature of Ratio Analysis
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Interpretation of Ratios
Single Absolute Ratios
Group Ratios
Historical Comparison Projected Ratios
Inter Firm Comparison
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Liquidity Ratios
Current Ratio
Formula: CA/CL
Acid Test/Quick/Liquid Ratio
Formula: Quick Assets/CL
Quick Assets = CA (Prepaid Exp. + Inventory)
Absolute Liquid Ratio
Formula: Absolute Liquid Assets/CL
Absolute Liquid Assets = Cash in Hand/Bank +
Marketable Securities
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Efficiency Ratios
Inventory/Stock Turnover Ratio
Formula: COGS/Average Inventory at Cost
Average Inventory = (Opening Stock + Closing
Stock)/2
If COGS data is not available Net Sales can be used
Inventory Conversion Period
Formula: Days in a year/Inventory Turnover Ratio
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Efficiency Ratios
Debtors/Receivables Turnover Ratio
Formula: Net Credit Annual Sales/Average Debtors
Average Debtors = (Opening Debtors + Closing
Debtors)/2 Debtors = Sundry Debtors + Bills Receivables +
Accounts Receivables
Average Collection Period
Formula: No. of Working Days/Debtors Turnover Ratio
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Efficiency Ratios
Creditors/Payables Turnover Ratio
Formula: Net Credit Annual Purchases/AverageCreditors
Average Creditors = (Opening Creditors + ClosingCreditors)/2
Creditors = Sundry Creditors + Bills Payables +Accounts Payables
Average Payment Period Formula: No. of Working Days/Creditors Turnover Ratio
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Efficiency Ratios
Working Capital Turnover Ratio
Formula: Cost of Sales/Average Net Working Capital
Average Net Working Capital = (Opening NWC +
Closing NWC)/2
Net Working Capital (NWC) = Current Assets Current
Liabilities
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Leverage/Capital Structure Ratios
Repayment of Principal
Payment of Interest Due
Debt-Equity Ratio: Approach 1: Formula:
Long-Term Debt/Shareholders Equity
Approach 2: Formula:
Total Debt/Shareholders Equity
Preference Share Capital Debt OR Shareholders
Equity
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Leverage/Capital Structure Ratios
Debt to Total Capital Ratio
Approach 1: Formula:
Long-Term Debt/Permanent Capital
Current Liabilities are not included in Permanent Capital
Approach 2: Formula:
Total Debt/Total Assets
Total Debts = Long-Term Debt + Current Liabilities
Total Assets = Permanent Capital + Current Liabilities
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Leverage/Capital Structure Ratios
Proprietary Ratio
Formula: Proprietors Fund/Total Assets
Also Known as Capital Gearing Ratio
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Coverage Ratios
Computed from information available in P&L
Account.
Interest Coverage Ratio
Formula: EBIT/Interest
Dividend Coverage Ratio
Formula: EAT/Preference Dividend
Debt Service Coverage Ratio Formula: (EAT + Interest + Depreciation + Other Non
Cash Expenses)/Instalment
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Profitability Ratios Related to Sales
Measures Profitability of a Firm
Interested Parties (Major):
Management
Investors/Shareholders
Creditors
Owners
Types: Profit Margin Ratios
Expenses Ratios
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Profitability Ratios Related to Sales
Gross Profit Margin
Formula: (Gross Profit/Net Sales) X 100
Operating Profit Margin
Formula: EBIT/Net Sales
Pre-tax Profit Margin
Formula: EBT/Net Sales
Net Profit Margin Formula: EAT/Net Sales
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Profitability Ratios Related to Sales
Expenses Ratios
COGS Ratio
Formula: (COGS/Net Sales) X 100
Operating Expenses Ratio
Formula: (Operating Expenses/Net Sales) X 100
Operating Expenses = Administrative Expenses + Selling
Expenses
Operating Ratio Formula: (COGS + Operating Expenses/Net Sales) X 100
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Profitability Ratios Related to
Investment
Return on Investment (ROI)
Return on Shareholders Equity (ROE)
Return on Capital Employed (ROCE)
Return on Assets (ROA)
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Profitability Ratios Related to
Investment
Dividend Per Share (DPS)
Formula: Dividend Paid to Ordinary Shareholders/No.
of Ordinary Shares Outstanding
Dividend Pay-out Ratio
Formula: (Total dividend given to equity
shareholders/Total net profit belonging to equity
shareholders) X 100
Formula 2: (DPS/EPS) X 100
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Profitability Ratios Related to
Investment
Earnings Yield
Formula: (EPS/Market Value per Share) X 100
Dividend Yield
Formula: (DPS/Market Value per Share) X 100
Price Earnings Ratio:
Formula: Market Price per Share/EPS
Book Value Per Share: Formula: Net Worth/No. of Equity Shares Outstanding
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Profitability Ratios Related to
Investment
Price to Book Value Ratio
Formula: MPS/BPS
Return on Assets (ROA)
(Net Profit After Tax/Average Total Assets) X 100
Average Tangible Assets and Average Fixed Assets can also
be used as a variant
Return on Capital Employed (ROCE)
Formula: EBIT/Average Capital Emloyed
Capital Employed = Long term Liablilities + Owners Capital
OR Net Working Capital + Net Fixed Assets
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Assets/Investment Turnover Ratios
Total Assets Turnover
Formula: COGS or Sales/Average Total Assets
Fixed Assets Turnover
Formula: COGS or Sales/Average Fixed Assets Capital Turnover
Formula: COGS or Sales/Average Capital Employed
Current Assets Turnover
Formula: COGS or Sales/Average Current Assets Working Capital Turnover
Formula: COGS or Sales/Net Working Capital