Notesale: Turn your study into money

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Assessing financial health:
Financial statements:

12
3

9
6

The Balance Sheet - shows the
situation in terms of Assets
Liabilities at a point in time

financial
&

The Profit & Loss Account - shows the
financial situation in terms of
Revenues & Outflows over a
period of time
Different companies use different accounting
practices, and accounting rules vary from
one country to another
ITC

M5:U7:7
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2-2

LIABILITIES
Item

At the end of

Description

200X

200Y

200Z

Creditors

1,100

1,400

1,780

Tax owing

270

250

230

Money owed to the government

Dividends owing

100

120

60

Dividends owed to shareholders

Bank overdrafts

-

-

90

Short term bank loans repayable
on demand

1,470

1,770

2,160

400

500

630

800

1,000

1,300

Money owed to shareholders for
their initial investment
...
2-3

ABC Limited – Profit and Loss Account (in $)
Item

Description

200X

200Y

200Z

6,100

6,500

6,750

Cost of sales

(5,400)

(5,850)

(6,025)

Gross profit

700

650

725

Net operating expenses

(60)

(75)

(95)

Net profit before interest &
taxation

640

575

630

Net interest payable /
receivable

(45)

(68)

(76)

The net balance between
interest paid and received
...

Costs directly attributable to
sales (e
...
production costs)
...


Taxes paid
...

To be reinvested by the
company
...

M5:U7:7
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3-1

Financial ratios:
Ratios for profitability (II)
Turnover as a
percentage of capital
employed
(net asset turnover)

Net profit x 100
Capital employed

Turnover x 100
Capital employed

Return on capital
employed (ROCE)

Capital employed = shareholders’ equity
+ long-term loans
ITC

M5:U7:7
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3-2a

Financial ratios:
Ratios for solvency (I)

Current ratio

Current assets - stocks
Current liabilities

ITC

Current assets
Current liabilities

Acid ratio
(quick ratio)
M5:U7:7
...
3-4

Financial ratios:
Ratios for solvency (III)
Debtor
collection period

Debtors x 365
Turnover

Trade debtors x 365
Credit sales

ITC

M5:U7:7
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4-1

Action Point

7
...

Answer the following questions:
1
...
4-2

Action Point

7
...
a) Calculate the following short-term solvency ratios for Years 1
and 2

Year 1

Year 2

Current Ratio
Acid Ratio
b) What does this trend say about the company’s short-term
liquidity?
c) What do these short-term liquidity ratios say about the
management of this company?

ITC

M5:U7:7
...
4-1 (Cont’d)

Calculating financial ratios
3
...
4-4



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