FINANCIAL MANAGEMENT (PART-6) WORKING CAPITAL MANAGEMENT

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "FINANCIAL MANAGEMENT (PART-6) WORKING CAPITAL MANAGEMENT"

Transcription

1 FINANCIAL MANAGEMENT (PART-6) WORKING CAPITAL MANAGEMENT 1. INTRODUCTION Dear Student Welcome to the lecture series on Financial Management. Today in this lecture we shall cover the topic Working Capital Management. Under Working Capital Management, we shall cover the introductory part 1. Meaning of Working Capital 2. Purpose of Working Capital 3. The various types of Working Capital And 4. Operating Cycle

2 The objective of this lecture is to understand the conceptual framework of working capital management, the meaning of working capital based on concept i.e. balance sheet concept that is Gross working capital and Net working capital. We shall also learn the meaning of working capital based on Time that is permanent working capital and temporary working capital and the how the working capital is used in a stable firm and in a growing firm. We shall also learn the purpose for which the working capital is being used and finally we shall learn the meaning of operating cycle, the length of operating cycle, manner of computation of the operating cycle and the example to illustrate the operating cycle mechanism. 2. MEANING AND PURPOSE OF WORKING CAPITAL Working capital refers to the fund which needs to be invested in the short -term assets or current assets, meaning thereby, those assets which are required in running day to day business such as 1. Cash 2. Marketable Securities 3. Receivables 4. Inventories

3 It is a form of short term loan which we require to acquire the short term assets. Elaborating it we can say that any balance sheet item that represents the current liquidity position of the firm are being financed by a fund called working capital that is it is the dedicated fund which we require to use in our business. Let us learn the definition of the working capital. Working capital refers to that part of the firm s capital, which is required for financing short-term or current assets such as cash, marketable securities, receivables and inventories. Thus, funds invested in current assets keep revolving fast and are constantly converted into cash and this cash flow out again in exchange of other current assets. Working capital is also known as revolving or circulating capital.

4 Let us analysis this definition. This definition holds two parts 1. First part says that it is a dedicated fund which we are using for acquiring for the current assets. What are the current assets? Current assets are those assets are those balance sheet items which are represented on the asset side of the balance sheet. They are such assets which are being used for less than one year and they can be converted easily into money. They are also called earning assets because our day to day business activities are running on, on the basis of these assets. They are different from fixed assets because fixed assets are used for a longer period. For example, fixed assets are Plant and Machinery which can be acquired once and can be used for a longer period around 5 to 10 years while stock is a current asset because it is coming to an end as and when a production cycle is ending. This is the basic difference between current assets and fixed asset. Under working capital we are focusing our attention towards these assets which are easily converted into money.

5 2. It puts its emphasis on the revolving capital meaning thereby that the cash is being used for acquiring current assets i.e., stock. Again when this stock is being sold on credit and the receivables are generated. The time receivables are converted into cash again we are getting cash inflow. These cash flows will again be used in purchasing inventories. So what we are generating in current assets we are putting it back in the other form of current asset. This is called the revolving working capital or circulating working capital. Purpose of the Working Capital: We know that working capital is being used for financing the short- term assets.

6 Very specifically, working capital is required 1. To hold cash for acquiring the raw material. 2. To hold work in progress for the production process meaning thereby the period required for transforming the work in progress into finished product. For that particular period we are in need of fund which is being generated by working capital or financed by working capital. 3. To hold the finished goods up till it is reaching the final consumer for meeting their continuous demand or to meet a sudden demand or seasonal demand we are requiring working capital fund. 4. We require Working capital for the period receivables are being converted into cash. Primarily they are being used in following hierarchy;

7 This is the cycle moving in a working capital management. We know that stock has three elements. Under working capital, we are putting our putting our emphasis on Management of receivable, Management of cash Management of inventories Under management of inventories, we need to look at the aspect of raw material, work in progress and finished goods.

8 We can use different techniques like economic order quantities and other models by which ordering cost and carrying cost can be minimized and be controlled. The procurement can be controlled. We need to do this exercise so that there is uninterrupted flow of inventories in the production process. Working capital is required to ascertain the need of fund for our production process so that production may not get hampered because of the lack of fund. Secondly, we need working capital in a sufficient quantity. If we block the working capital in all short -term asset even then it is harmful to the business as we are not using or circulating the cash as it is being required. So this is the purpose for which working capital is needed in a business organization. How efficiently we can use this working capital is called the management of working capital. 3. TYPES OF WORKING CAPITAL There are broad two categories under which we will learn the concept of working capital. 1. Balance sheet concept 2. Operating Cycle concept.

9 Balance sheet Concept has recognized working capital as a. Gross Working Capital b. Net Working Capital

10 Gross Working Capital means - The total of all current assets or all short-term assets. Current assets here mean cash, marketable securities, inventories and receivables. They are meant for a lesser period. They represent liquid asset. - Gross working capital represents the liquidity position of the organization. That this much of the asset they are holding for Getting readily available as the cash in the business. Net Working Capital It is a broader concept. It works on the principle on solvency. It is more appropriate concept while analyzing the financial position of an organization. The corporate experts are using net working capital as a medium to evaluate the short-term financial position of the organization. What do we mean by Net working capital? Net working capital means excess of current assets over current liabilities. Current assets we all know are cash, marketable securities, receivables and stock. Assuming them to be Rs.100/- and our current liabilities that means trade creditors, outstanding expenses they all shall form part of current liabilities.

11 Assume them to be Rs. 70/- the working capital will come out to be This is the formula by which we can assess the net working capital of the organization. Going ahead it can be represented in another formula which is used for analyzing the ratios.

12 Its formula is Ideally it should be 2:1. That means the current assets should be double the current liabilities. An organization should have at least double the amount of readily convertible assets so that it can pay off its liabilities in a much better manner. These are the two types of working capital calculations based on Balance sheet concept. Next one is Operating Cycle concept Operating cycle means the time period between procurement of supplies and collection of cash through receivables and inventories. We will learn the concept of operating cycle in detail later on.

13 Let see this presentation of working capital. We have classified working capital broadly in two concepts. On the basis of Balance Sheet i.e. Gross Working and Net working CapitaLand another is based on Time. Let s learn what the working capitals which are based on time. It can be permanent working capital or it is also known as fixed working capital and other is Temporary working and it is also known as variable working capital.

14 Now permanent working capital also has two sub-categories first one is Regular working capital and other is Reserve Working capital. Similarly temporary/ variable working capital also has two parts 1. Seasonal Working 2. Special Working. Let us learn them one by one. First one we are elaborating is permanent working capital. a. Permanent Working Capital- It refers to a certain minimum level of current assets which is essential for the firm to carry on its business irrespective of its level of operation. For example, there is a bakery. The bakery requires minimum of 2 bags of flour every time in their stores. For this they need a permanent stock and they will dedicate fund for acquiring this fixed level of inventory. It is suggested that this inventory can be purchased or it should be financed by long term fund because it is a permanent requirement. We can say that permanent working capital is that source of fund which is invested in acquiring a minimum fixed level of inventory irrespective of level of operation. Irrespective of Level of operation means whether 100 units are being produced or 200 units are being produced or nil unit is being produced, this much amount of inventory should be maintained by the management in the organization. b. Variable Working Capital-is that requirement of fund which is Over and above the fixed minimum working capital. It is not that dedicated fund as that of permanent working capital.

15 4. USE OF WORKING CAPITAL IN STABLE FIRM AND GROWING FIRM In case of stable firm, the permanent working capital is stable over time and takes the shape of a horizontal line while temporary working capital is fluctuating sometimes increasing and sometimes decreasing. Both these kind of working capitals are shown in this graph. Let us see these colored lines on the graph. This blue line is presenting the permanent working capital to the X axis. This fluctuating line is showing temporary working capital, the arrows are showing how the difference in both the type of working capital is there.

16 In the case of growing firm, the graph has changed. The requirement of permanent working capital is sometime increasing or it is increasing with the increase in the production. Let us see how the mechanism of permanent working capital and temporary working capital is being managed in a growing firm with the help of the graph. The permanent working capital may also keep on increasing over time to support a rising level of activity and hence permanent working capital line may not always be horizontal. Both these kinds of working capitals are shown in the graph.

17 As level of activity is increasing that means earlier we were producing 100 units, now 200 units are being produced afterward 500 units are produced since this is a growing firm a fixed amount of working capital is blocked for the irreducible inventory with the passage of time while temporary working capital has a fluctuating line shown in the graph. 5. OPERATING CYCLE Operating cycle is the time lag between the procurement of supplies and collection of cash from receivables. How this operating cycle is managed? There are certain phases in which this operating cycle works. In the case of trading concern, the length of the operating cycle will be- Using of cash for procurement of trading goods, Then selling them on credit so receivable will be generated And when receivable will be converted into cash again we are getting the liquidity in our hand.

18 This cash will again be used in purchase of trading goods. LENGTH OF OPERATING CYCLE IN A TRADING CONCERN LENGTH OF OPERATING CYCLE IN A MANUFACTURING CONCERN When the concern is manufacturing, the phase in inventory cycle will increase. The inventory will hold three parts So in that case, the cash will be used first to procure raw material then we will be needing cash for procuring work in progress and then this work in progress is transformed into finished goods, then it is being sold on credit so receivables will be there and finally we will get back the cash.

19 So this time lag between conversion of finished goods and work in progress and finished goods and holding of raw material during this period whatever fund we are requiring is called working capital used in an operating cycle. This operating cycle will be computed in number of days. There are specific formulas requiring for computing the days in operating cycle. Now let us learn the components of operating cycle. The components of operating cycle are represented in symbolic manner they are called R W F D C

20 Components of Operating Cycle Adding R, W, F D we are getting Gross operating period. When we subtract C from it, we will get Net operating Cycle. C represents the credit period allowed by supplier. And it shall also include the time lag for the expenses. These outstanding expenses period will also be considered in C.

21 With this we have learnt how the computation of operating cycle will be done. Now there are certain formulas from which R, W, F D and C are computed. Let see them on screen.

22

23

24 Now we have to compute no of cycle i.e., how many operating cycles has to be run in a year. Net operating cycle has been computed using the equation. R+W+F+D-C

25 6. SUMMARY Let us summarize what we have learnt in today s lecture. We have learned meaning of Working capital, what is gross working capital,how the net working capital is being computed, what are purpose for which working capital is required, types of working capital based on time i.e., permanent working capital and temporary working capital. We have also learnt the mechanism of computing operating cycle. Thank You Students!

FINANCIAL MANAGEMENT (PART-7) WORKING CAPITAL MANAGEMENT PART 2

FINANCIAL MANAGEMENT (PART-7) WORKING CAPITAL MANAGEMENT PART 2 FINANCIAL MANAGEMENT (PART-7) WORKING CAPITAL MANAGEMENT PART 2 1. INTRODUCTION Dear Students, Welcome to the lecture series on financial management. Today in this lecture we shall cover the topic Working

More information

Working Capital Concept & Animation

Working Capital Concept & Animation Working Capital Concept & Animation Meaning A measure of both a company's efficiency and its short-term financial health. The working capital is calculated as: Working Capital = Current Assets Current

More information

Chapter- 3B Statement of Changes in Financial Position and Working Capital (Fund

Chapter- 3B Statement of Changes in Financial Position and Working Capital (Fund Chapter- 3B Statement of Changes in Financial Position and Working Capital (Fund BSNL, India For Internal Circulation Only 1 Statement of Changes in Financial Position and Working Capital (Fund) I. Statement

More information

Chapter. Working capital

Chapter. Working capital Chapter 10 Working capital 1 10.1 Working capital Working capital is the capital available for conducting the day-to-day operations of the business and consists of current assets and current liabilities.

More information

Learning Objectives: Quick answer key: Question # Multiple Choice True/False. 14.1 Describe the important of accounting and financial information.

Learning Objectives: Quick answer key: Question # Multiple Choice True/False. 14.1 Describe the important of accounting and financial information. 0 Learning Objectives: 14.1 Describe the important of accounting and financial information. 14.2 Differentiate between managerial and financial accounting. 14.3 Identify the six steps of the accounting

More information

Working Capital Management Nature & Scope

Working Capital Management Nature & Scope Working Capital Management Nature & Scope Introduction & Definitions Components of Working Capital Significance of Working Capital Operating Cycle Types of Working Capital Net Vs Gross Working Capital

More information

WORKING CAPITAL MANAGEMENT

WORKING CAPITAL MANAGEMENT CHAPTER 9 WORKING CAPITAL MANAGEMENT Working capital is the long term fund required to run the day to day operations of the business. The company starts with cash. It buys raw materials, employs staff

More information

Preparing a Successful Financial Plan

Preparing a Successful Financial Plan Topic 9 Preparing a Successful Financial Plan LEARNING OUTCOMES By the end of this topic, you should be able to: 1. Describe the overview of accounting methods; 2. Prepare the three major financial statements

More information

CHAPTER 27 PRINCIPLES OF WORKING CAPITAL MANAGEMENT

CHAPTER 27 PRINCIPLES OF WORKING CAPITAL MANAGEMENT CHAPTER 27 PRINCIPLES OF WORKING CAPITAL MANAGEMENT Q.1 Explain the concept of working capital. Are gross and net concepts of working capital exclusive? Discuss. A.1 Working capital signifies money required

More information

Financial Statements

Financial Statements Financial Statements The financial information forms the basis of financial planning, analysis & decision making for an organization or an individual. Financial information is needed to predict, compare

More information

Topic 4 Working Capital Management. 1. Concept of Working Capital 2. Measuring Working Capital and Net Working Capital. 4.

Topic 4 Working Capital Management. 1. Concept of Working Capital 2. Measuring Working Capital and Net Working Capital. 4. Topic 4 Working Capital Management 1. Concept of Working Capital 2. Measuring Working Capital and Net Working Capital 3. Optimization i i of Working Capital 4. Applications 80 Learning objectives This

More information

Construction Economics & Finance. Module 6. Lecture-1

Construction Economics & Finance. Module 6. Lecture-1 Construction Economics & Finance Module 6 Lecture-1 Financial management: Financial management involves planning, allocation and control of financial resources of a company. Financial management is essential

More information

CASH FLOW STATEMENT. MODULE - 6A Analysis of Financial Statements. Cash Flow Statement. Notes

CASH FLOW STATEMENT. MODULE - 6A Analysis of Financial Statements. Cash Flow Statement. Notes MODULE - 6A Cash Flow Statement 30 CASH FLOW STATEMENT In the previous lesson, you have learnt various types of analysis of financial statements and its tools such as comparative statements, common size

More information

7 Management of Working Capital

7 Management of Working Capital 7 Management of Working Capital BASIC CONCEPTS AND FORMULAE 1. Working Capital Management Working Capital Management involves managing the balance between firm s shortterm assets and its short-term liabilities.

More information

Financial Statement Ratio Analysis

Financial Statement Ratio Analysis Management Accounting 319 Financial Statement Ratio Analysis Financial statements as prepared by the accountant are documents containing much valuable information. Some of the information requires little

More information

BACKGROUND KNOWLEDGE for Teachers and Students

BACKGROUND KNOWLEDGE for Teachers and Students Pathway: Business, Marketing, and Computer Education Lesson: BMM C6 4: Financial Statements and Reports Common Core State Standards for Mathematics: N.Q.2 Domain: Quantities Cluster: Reason quantitatively

More information

7 Management of Working Capital

7 Management of Working Capital 7 Management of Working Capital UNIT I : MEANING, CONCEPT AND POLICIES OF WORKING CAPITAL Learning Objectives After studying this chapter you will be able to: Discuss in detail about working capital management,

More information

Understanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions

Understanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions Understanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions Chapter 6 Working Capital Management Concept Check 6.1 1. What is the meaning of the terms working

More information

A Simple Model. Cash Flow Statement

A Simple Model. Cash Flow Statement An introduction to the cash flow statement in the context of building a financial model. This series introduces the financial statements in the context of a financial model. Cash Flow Statement NOTES TO

More information

Ratio Analysis. A) Liquidity Ratio : - 1) Current ratio = Current asset Current Liability

Ratio Analysis. A) Liquidity Ratio : - 1) Current ratio = Current asset Current Liability A) Liquidity Ratio : - Ratio Analysis 1) Current ratio = Current asset Current Liability 2) Quick ratio or Acid Test ratio = Quick Asset Quick liability Quick Asset = Current Asset Stock Quick Liability

More information

Financial Statements and Ratios: Notes

Financial Statements and Ratios: Notes Financial Statements and Ratios: Notes 1. Uses of the income statement for evaluation Investors use the income statement to help judge their return on investment and creditors (lenders) use it to help

More information

9. Short-Term Liquidity Analysis. Operating Cash Conversion Cycle

9. Short-Term Liquidity Analysis. Operating Cash Conversion Cycle 9. Short-Term Liquidity Analysis. Operating Cash Conversion Cycle 9.1 Current Assets and 9.1.1 Cash A firm should maintain as little cash as possible, because cash is a nonproductive asset. It earns no

More information

Working Capital Management

Working Capital Management Working Capital Management Gitman and Hennessey, Chapter 14 Spring 2004 14.1 Net Working Capital Fundamentals In 2002, current assets accounted for 31.7% of non-financial Canadian corporations total assets.

More information

Working Capital Management

Working Capital Management Working Capital Management Gitman and Hennessey, Chapter 14 Spring 2004 14.1 Net Working Capital Fundamentals In 2002, current assets accounted for 31.7% of non-financial Canadian corporations total assets.

More information

Chapter 18 Working Capital Management

Chapter 18 Working Capital Management Chapter 18 Working Capital Management Slide Contents Learning Objectives Principles Used in This Chapter 1. Working Capital Management and the Risk-Return Tradeoff 2. Working Capital Policy 3. Operating

More information

You have learnt about the financial statements

You have learnt about the financial statements Analysis of Financial Statements 4 You have learnt about the financial statements (Income Statement and Balance Sheet) of companies. Basically, these are summarised financial reports which provide the

More information

Chapter 14. Working Capital Policy

Chapter 14. Working Capital Policy Chapter 14 Working Capital Policy 1 Learning Outcomes Chapter 14 Discuss why working capital is needed and how working capital accounts are related. Describe the cash conversion cycle and how it can be

More information

Chapter 002 Financial Statements, Taxes and Cash Flow

Chapter 002 Financial Statements, Taxes and Cash Flow Multiple Choice Questions 1. The financial statement summarizing the value of a firm's equity on a particular date is the: a. income statement. B. balance sheet. c. statement of cash flows. d. cash flow

More information

Your Guide to Profit Guard

Your Guide to Profit Guard Dear Profit Master, Congratulations for taking the next step in improving the profitability and efficiency of your company! Profit Guard will provide you with comparative statistical and graphical measurements

More information

Completing the Accounting Cycle

Completing the Accounting Cycle C H A P T E R 4 Completing the Accounting Cycle Financial Accounting 14e Warren Reeve Duchac human/istock/360/getty Images Flow of Accounting Information (slide 1 of 5) End-of-Period Spreadsheet (Work

More information

The Nature, Elements and Importance of Working Capital

The Nature, Elements and Importance of Working Capital C. WORKING CAPITAL MANAGEMENT 1. The nature, elements and importance of working capital 2. Management of inventories, accounts receivable, accounts payable and cash 3. Determining working capital needs

More information

CHAPTER 9. Ratio Analysis

CHAPTER 9. Ratio Analysis CHAPTER 9 Ratio Analysis Introduction The analysis of the financial statements and interpretations of financial results of a particular period of operations with the help of 'ratio' is termed as "ratio

More information

Having cash on hand is costly since you either have to raise money initially (for example, by borrowing from a bank) or, if you retain cash out of

Having cash on hand is costly since you either have to raise money initially (for example, by borrowing from a bank) or, if you retain cash out of 1 Working capital refers to liquid funds used to purchase materials and pay workers. This is in contrast to long term capital such as buildings and machinery. Part of working capital management is cash

More information

Income Measurement and Profitability Analysis

Income Measurement and Profitability Analysis PROFITABILITY ANALYSIS The following financial statements for Spencer Company will be used to demonstrate the calculation of the various ratios in profitability analysis. Spencer Company Comparative Balance

More information

WORKING CAPITAL MANAGEMENT

WORKING CAPITAL MANAGEMENT WORKING CAPITAL MANAGEMENT What is Working Capital Working capital management is the set of activities that are required to run day to day operations of the business to ensure that cash is adequate to

More information

In the chapters on Planning an SSI Unit and Business Plan, a discussion

In the chapters on Planning an SSI Unit and Business Plan, a discussion chp-14.qxd 10/18/05 12:48 PM Page 145 CHAPTER 14 Working Capital Management In the chapters on Planning an SSI Unit and Business Plan, a discussion was made on the fixed capital and the working capital.

More information

Understanding A Firm s Financial Statements

Understanding A Firm s Financial Statements CHAPTER OUTLINE Spotlight: J&S Construction Company (http://www.jsconstruction.com) 1 The Lemonade Kids Financial statement (accounting statements) reports of a firm s financial performance and resources,

More information

What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated?

What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? HOCK international - 2004 1 HOCK international - 2004 2 How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? HOCK

More information

UNIT FIVE MANAGEMENT OF WORKING CAPITAL

UNIT FIVE MANAGEMENT OF WORKING CAPITAL UNIT FIVE MANAGEMENT OF WORKING CAPITAL UNIT FIVE CHAPTER ONE WORKING CAPITAL MANAGEMENT Lesson 34 Chapter-11 Working Capital Management Unit 5 Management of Working Capital After reading this lesson you

More information

IJMIE Volume 2, Issue 6 ISSN: 2249-0558

IJMIE Volume 2, Issue 6 ISSN: 2249-0558 A Study on Liquidity, Profitability and Working Capital Management of Co- Operative Dudh Sangh Prof. R.G.Sathe* Abstract: Working capital management involves the management and control of the gross current

More information

Accounts Payable are the total amounts your business owes its suppliers for goods and services purchased.

Accounts Payable are the total amounts your business owes its suppliers for goods and services purchased. Accounts Payable are the total amounts your business owes its suppliers for goods and services purchased. Accounts Receivable are the total amounts customers owe your business for goods or services sold

More information

ACCOUNTING RATIOS I. MODULE - 6A Analysis of Financial Statements. Accounting Ratios - I. Notes

ACCOUNTING RATIOS I. MODULE - 6A Analysis of Financial Statements. Accounting Ratios - I. Notes MODULE - 6A Accounting Ratios - I 8 ACCOUNTING RATIOS I In the previous lesson, you have learnt the relationship between various items of the financial statements. You have also learnt various tools of

More information

Management of Working Capital

Management of Working Capital 7 Management of Working Capital UNIT I : MEANING, CONCEPT AND POLICIES OF WORKING CAPITAL Learning Objectives After studying this chapter you will be able to: Discuss in detail about working capital management,

More information

FINANCIAL ACCOUNTING TOPIC: FINANCIAL ANALYSIS

FINANCIAL ACCOUNTING TOPIC: FINANCIAL ANALYSIS SYLLABUS Compulsory part Basic ratio analysis 1. State the general functions of accounting ratios. 2. Calculate and interpret the following ratios: a. working capital/current ratio, quick/liquid/acid test

More information

WORKING CAPITAL MANAGEMENT (FINANCE) UNIT I

WORKING CAPITAL MANAGEMENT (FINANCE) UNIT I WORKING CAPITAL MANAGEMENT (FINANCE) UNIT I Q. Explain Working Capital. What do you mean by Gross Working Capital and Net Working Capital? Ans. Introduction:- Working capital plays the same role in the

More information

Current Assets. Current Liabilities. Quick Assets or Liquid Assets. Current Liabilities. 1. Liquidity Ratios 1 Current Ratio Formula.

Current Assets. Current Liabilities. Quick Assets or Liquid Assets. Current Liabilities. 1. Liquidity Ratios 1 Current Ratio Formula. 1. Liquidity Ratios 1 Current Ratio Current Assets Current Liabilities This ratio shows short-term financial soundness of the business. Higher ratio means better capacity to meet its current obligation.

More information

ICAP GROUP S.A. FINANCIAL RATIOS EXPLANATION

ICAP GROUP S.A. FINANCIAL RATIOS EXPLANATION ICAP GROUP S.A. FINANCIAL RATIOS EXPLANATION OCTOBER 2006 Table of Contents 1. INTRODUCTION... 3 2. FINANCIAL RATIOS FOR COMPANIES (INDUSTRY - COMMERCE - SERVICES) 4 2.1 Profitability Ratios...4 2.2 Viability

More information

Using Accounts to Interpret Performance

Using Accounts to Interpret Performance Using s to Interpret Performance ing information is used by stakeholders to judge the performance and efficiency of a business Different stakeholders will look for different things: STAKEHOLDER Shareholders

More information

For our curriculum in Grade 12 we are going to use ratios to analyse the information available in the Income statement and the Balance sheet.

For our curriculum in Grade 12 we are going to use ratios to analyse the information available in the Income statement and the Balance sheet. SUBJECT: ACCOUNTING GRADE 12 CHAPTER: COMPANIES LESSON: ANALYSIS AND INTERPRETATION-RATIOS LESSON OVERVIEW (KNOWLEDGE AREAS) LESSON 1. Introduction 2. Analysing of financial statements and its purpose

More information

Interpretation of Financial Statements

Interpretation of Financial Statements Interpretation of Financial Statements Author Noel O Brien, Formation 2 Accounting Framework Examiner. An important component of most introductory financial accounting programmes is the analysis and interpretation

More information

A Simple Model. Introduction to Financial Statements

A Simple Model. Introduction to Financial Statements Introduction to Financial Statements NOTES TO ACCOMPANY VIDEOS These notes are intended to supplement the videos on ASimpleModel.com. They are not to be used as stand alone study aids, and are not written

More information

A Study on Working Capital management in Public Enterprises Mr.Pushpakumar.B & Mr.Prabhath Kumar Yadhav

A Study on Working Capital management in Public Enterprises Mr.Pushpakumar.B & Mr.Prabhath Kumar Yadhav A Study on Working Capital management in Public Enterprises Mr.Pushpakumar.B & Mr.Prabhath Kumar Yadhav Abstract: A well designed and implemented working capital management is expected to contribute positively

More information

Understanding Cash Flow Statements

Understanding Cash Flow Statements Understanding Cash Flow Statements 2014 Level I Financial Reporting and Analysis IFT Notes for the CFA exam Contents 1. Introduction... 3 2. Components and Format of the Cash Flow Statement... 3 3. The

More information

LESSON 6 RATIO ANALYSIS CONTENTS

LESSON 6 RATIO ANALYSIS CONTENTS LESSON 6 RATIO ANALYSIS CONTENTS 6.0 Aims and Objectives 6.1 Introduction 6.2 Definition 6.3 How the Accounting Ratios are Expressed? 6.4 Purpose, Utility & Limitations of Ratio Analysis 6.5 Classification

More information

Institute of Certified Management Accountants of Sri Lanka. Operational Level November 2012 Examination

Institute of Certified Management Accountants of Sri Lanka. Operational Level November 2012 Examination Copyright Reserved Serial No Operational Level November 2012 Examination Examination Date : 11 th November 2012 Number of Pages : 08 Examination Time: 9.30 a:m. 12.30 p:m. Number of Questions: 07 Instructions

More information

SOLUTIONS. Learning Goal 30

SOLUTIONS. Learning Goal 30 S1 Learning Goal 30 Multiple Choice 1. d 2. d 3. b 4. a Earnings per share is also used directly for comparing profitability on a per-share basis. 5. d 6. c An airline would have a much greater investment

More information

What is a Balance Sheet?

What is a Balance Sheet? What is a Balance Sheet? A Balance Sheet is a financial statement which shows the ASSETS, LIABILITIES and CAPITAL of a business on a particular date. Assets Are Are items owned by by the the business or

More information

ABOUT FINANCIAL RATIO ANALYSIS

ABOUT FINANCIAL RATIO ANALYSIS ABOUT FINANCIAL RATIO ANALYSIS Over the years, a great many financial analysis techniques have developed. They illustrate the relationship between values drawn from the balance sheet and income statement

More information

FINANCIAL STATEMENTS ANALYSIS - AN INTRODUCTION

FINANCIAL STATEMENTS ANALYSIS - AN INTRODUCTION 27 FINANCIAL STATEMENTS ANALYSIS - AN INTRODUCTION You have already learnt about the preparation of financial statements i.e. Balance Sheet and Trading and Profit and Loss Account in the module titled

More information

Chapter 9 Solutions to Problems

Chapter 9 Solutions to Problems Chapter 9 Solutions to Problems 1. a. Cash and cash equivalents are cash in hand and in banks, plus money market securities with maturities of 90 days or less. Accounts receivable are claims on customers

More information

Ratio Analysis 0.75. Fixed Assets Fixed Assets + Net Working Capital =0.75 Fixed Assets

Ratio Analysis 0.75. Fixed Assets Fixed Assets + Net Working Capital =0.75 Fixed Assets Ratio Analysis CA Past Years Exam Answer Answer to Q.1: (Nov, 009) Fixed assets ` 18,00,000 Proprietor s funds ` 4,00,000 Note: 1 Ratio of fixed assets to proprietor s funds 0.75 Properietors Fund 0.75

More information

5.2 CONCEPT OF WORKING CAPITAL There are two concepts of working capital. These are:

5.2 CONCEPT OF WORKING CAPITAL There are two concepts of working capital. These are: Chapter-5 Introduction Concept of Working Capital Importance of Working Capital Requirement of Working Capital Working Capital Analysis of GSRTC 5.1 INTRODUCTION In financial management, two important

More information

Management of Working Capital

Management of Working Capital International Journal of Computer Science & Management Studies, Vol. 13, Issue 03, May 2013 Management of Working Capital Arti Rani Assistant Professor Kanya Mahavidhyalya, Kharkhoda, Sonepat, Haryana

More information

Ratios from the Statement of Financial Position

Ratios from the Statement of Financial Position For The Year Ended 31 March 2007 Ratios from the Statement of Financial Position Profitability Ratios Return on Sales Ratio (%) This is the difference between what a business takes in and what it spends

More information

Liquidity analysis: Length of cash cycle

Liquidity analysis: Length of cash cycle 2. Liquidity analysis: Length of cash cycle Operating cycle of a merchandising firm: number of days it takes to sell inventory + number of days until the resulting receivables are converted to cash Acquisition

More information

Ipx!up!hfu!uif Dsfeju!zpv!Eftfswf

Ipx!up!hfu!uif Dsfeju!zpv!Eftfswf Ipx!up!hfu!uif Dsfeju!zpv!Eftfswf Credit is the lifeblood of South Louisiana business, especially for the smaller firm. It helps the small business owner get started, obtain equipment, build inventory,

More information

Company Financial Plan

Company Financial Plan Financial Modeling Templates http://spreadsheetml.com/finance/companyfinancialplan.shtml Copyright (c) 2009-2014, ConnectCode All Rights Reserved. ConnectCode accepts no responsibility for any adverse

More information

ACC 255 FINAL EXAM REVIEW PACKET (NEW MATERIAL)

ACC 255 FINAL EXAM REVIEW PACKET (NEW MATERIAL) Page 1 ACC 255 FINAL EXAM REVIEW PACKET (NEW MATERIAL) Complete these sample exam problems/objective questions and check your answers with the solutions at the end of the review file and identify where

More information

LIQUIDITY AND WORKING CAPITAL MANAGEMENT

LIQUIDITY AND WORKING CAPITAL MANAGEMENT LIQUIDITY AND WORKING CAPITAL MANAGEMENT 5 Liquidity and working capital management imply the short-term management of a firm, which are very vital for maintaining adequate but not excessive liquidity

More information

Balance Sheet Accounts

Balance Sheet Accounts Page 1 of 6 Balance Sheet Accounts The Chart of Accounts is normally arranged or grouped by the Major Types of Accounts. The Balance Sheet Accounts (Assets, Liabilities, & Equity) are presented first,

More information

Article - Working Capital Management By Bernard Vallely FCCA MBA Examiner Professional 1 Managerial Finance & Professional 2 Financial Management

Article - Working Capital Management By Bernard Vallely FCCA MBA Examiner Professional 1 Managerial Finance & Professional 2 Financial Management Article - Working Capital Management By Bernard Vallely FCCA MBA Examiner Professional 1 Managerial Finance & Professional 2 Financial Management Working Capital An organisation s working capital refers

More information

Managing Working Capital by Strategic Choice

Managing Working Capital by Strategic Choice Managing Working Capital by Strategic Choice Sampat P Singh Managing working capital effectively requires an understanding of the processes underlying the cash cycle. Managers project and evaluate working

More information

Guide to Financial Statements Study Guide

Guide to Financial Statements Study Guide Guide to Financial Statements Study Guide Overview (Topic 1) Three major financial statements: The Income Statement The Balance Sheet The Cash Flow Statement Objectives: Explain the underlying equation

More information

Financial Statement Analysis: An Introduction

Financial Statement Analysis: An Introduction Financial Statement Analysis: An Introduction 2014 Level I Financial Reporting and Analysis IFT Notes for the CFA exam Contents 1. Introduction... 3 2. Scope of Financial Statement Analysis... 3 3. Major

More information

Working Capital Management

Working Capital Management Working Capital Management Helena SůvovS vová Guest lecture for the Czech University of Agriculture November,, 2009 1 Content of the lecture Working Capital Terminology Working Capital Decisions Cash Conversion

More information

Preparing Agricultural Financial Statements

Preparing Agricultural Financial Statements Preparing Agricultural Financial Statements Thoroughly understanding your business financial performance is critical for success in today s increasingly competitive agricultural environment. Accurate records

More information

National Black Law Journal UCLA

National Black Law Journal UCLA National Black Law Journal UCLA Peer Reviewed Title: An Introduction to Financial Statements for the Practicing Lawyer Journal Issue: National Black Law Journal, 4(1) Author: Edmonds, Thom Publication

More information

Management Accounting and Decision-Making

Management Accounting and Decision-Making Management Accounting 15 Management Accounting and Decision-Making Management accounting writers tend to present management accounting as a loosely connected set of decision making tools. Although the

More information

Bajaj Auto: Evaluating the Working Capital Requirements

Bajaj Auto: Evaluating the Working Capital Requirements Tea eaching Note Ref. No.: FM0021-1 Bajaj Auto: Evaluating the Working Capital Requirements Prerequisite Conceptual Understanding To understand the importance of working capital management Pandey I.M.,

More information

performance of a company?

performance of a company? How to deal with questions on assessing the performance of a company? (Relevant to ATE Paper 7 Advanced Accounting) Dr. M H Ho This article provides guidance for candidates in dealing with examination

More information

Return on Equity has three ratio components. The three ratios that make up Return on Equity are:

Return on Equity has three ratio components. The three ratios that make up Return on Equity are: Evaluating Financial Performance Chapter 1 Return on Equity Why Use Ratios? It has been said that you must measure what you expect to manage and accomplish. Without measurement, you have no reference to

More information

tutor2u Working Capital Introduction to the Management of Working Capital AS & A2 Business Studies PowerPoint Presentations 2005

tutor2u Working Capital Introduction to the Management of Working Capital AS & A2 Business Studies PowerPoint Presentations 2005 Working Capital Introduction to the Management of Working Capital AS & A2 Business Studies PowerPoint Presentations 2005 Introduction All businesses need cash to survive Cash is needed to: Invest in fixed

More information

Managerial Accounting Prof. Dr. Vardaraj Bapat Department of School of Management Indian Institute of Technology, Bombay

Managerial Accounting Prof. Dr. Vardaraj Bapat Department of School of Management Indian Institute of Technology, Bombay Managerial Accounting Prof. Dr. Vardaraj Bapat Department of School of Management Indian Institute of Technology, Bombay Lecture - 26 Cost Volume Profit Analysis Dear participations in our early session,

More information

6. Financial Planning. Break-even. Operating and Financial Leverage.

6. Financial Planning. Break-even. Operating and Financial Leverage. 6. Financial Planning. Break-even. Operating and Financial Leverage. Financial planning primarily involves anticipating the impact of operating, investment and financial decisions on the firm s future

More information

What is a business plan?

What is a business plan? What is a business plan? A business plan is the presentation of an idea for a new business. When a person (or group) is planning to open a business, there is a great deal of research that must be done

More information

The Basic Framework of Budgeting

The Basic Framework of Budgeting Master Budgeting 1 The Basic Framework of Budgeting A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period. 1. The act of

More information

E2-2: Identifying Financing, Investing and Operating Transactions?

E2-2: Identifying Financing, Investing and Operating Transactions? E2-2: Identifying Financing, Investing and Operating Transactions? Listed below are eight transactions. In each case, identify whether the transaction is an example of financing, investing or operating

More information

Working Capital. Learning Objectives. By the end of this chapter, you should be able to: List the five objectives of financial management.

Working Capital. Learning Objectives. By the end of this chapter, you should be able to: List the five objectives of financial management. Working Capital Learning Objectives By the end of this chapter, you should be able to: List the five objectives of financial management. Explain the operation of the operating cycle. Define the term net

More information

how to prepare a cash flow statement

how to prepare a cash flow statement business builder 4 how to prepare a cash flow statement zions business resource center zions business resource center 2 how to prepare a cash flow statement A cash flow statement is important to your business

More information

Total shares at the end of ten years is 100*(1+5%) 10 =162.9.

Total shares at the end of ten years is 100*(1+5%) 10 =162.9. FCS5510 Sample Homework Problems Unit04 CHAPTER 8 STOCK PROBLEMS 1. An investor buys 100 shares if a $40 stock that pays a annual cash dividend of $2 a share (a 5% dividend yield) and signs up for the

More information

Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods TABLE OF CONTENTS

Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods TABLE OF CONTENTS Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods 1.0 FINANCIAL FORECASTING METHODS 1.01 Introduction

More information

COST CLASSIFICATION AND COST BEHAVIOR INTRODUCTION

COST CLASSIFICATION AND COST BEHAVIOR INTRODUCTION COST CLASSIFICATION AND COST BEHAVIOR INTRODUCTION LESSON# 1 Cost Accounting Cost Accounting is an expanded phase of financial accounting which provides management promptly with the cost of producing and/or

More information

Gross Sales (Gross Revenue): the total amount of money received from customers

Gross Sales (Gross Revenue): the total amount of money received from customers Chapter 17 Financial Statements and Ratios 17.1: The Income Statement 17.1.1: Learn the terms used with income statements Income Statement: a financial statement used to summarize all income and expenses

More information

CHAPTER 23 WORKING CAPITAL FINANCING

CHAPTER 23 WORKING CAPITAL FINANCING CHAPTER 23 WORKING CAPITAL FINANCING Uses of Musharakah instrument in working capital financing Where finances are required for the working capital of a running business, the instrument of Musharakah may

More information

Planning & Financing of Working Capital

Planning & Financing of Working Capital Planning & Financing of Working Capital Objectives of Working Capital Elements of Working Capital Sources of Working Capital Working Capital Control and Banking Policy Tondon Committees Recommendations

More information

IGCSE Business Studies revision notes Finance Neil.elrick@tes.tp.edu.tw

IGCSE Business Studies revision notes Finance Neil.elrick@tes.tp.edu.tw IGCSE FINANCE REVISION NOTES Table of contents Table of contents... 2 SOURCES OF FINANCE... 3 CASH FLOW... 5 HOW TO CALCULATE THE CASH BALANCE... 5 HOW TO WORK OUT THE CASH AVAILABLE TO THE BUSINESS...

More information

This week its Accounting and Beyond

This week its Accounting and Beyond This week its Accounting and Beyond Monday Morning Session Introduction/Accounting Cycle Afternoon Session Tuesday The Balance Sheet Wednesday The Income Statement The Cash Flow Statement Thursday Tools

More information

CASH FLOW STATEMENT (AND FINANCIAL STATEMENT)

CASH FLOW STATEMENT (AND FINANCIAL STATEMENT) CASH FLOW STATEMENT (AND FINANCIAL STATEMENT) - At the most fundamental level, firms do two different things: (i) They generate cash (ii) They spend it. Cash is generated by selling a product, an asset

More information

Accounting, CPT Chapter 6 CA PRATHAP SS

Accounting, CPT Chapter 6 CA PRATHAP SS Accounting, CPT Chapter 6 CA PRATHAP SS INTRODUCTION Preparation of Final Accounts is the last phase of the Accounting Process. INTRODUCTION The process of accounting starts from Transaction then entered

More information