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25 Cards in this Set
- Front
- Back
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Financial Statements |
Financial statements are important for reflecting the financial health of a company. Two of them are the most important ones: -Income statement (or profit and loss account) -Balance sheet |
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Engineering accounting analogy |
A vector shows direction (income statement) and position (balance sheet or financial position). The balance sheet is a point in time where the income statement shows the earnings (expenses) or enrichment over time. So good/bad income increasing/decreasing financial posistion. |
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Describe what an income statement involves |
The purpose of the income statement is to show whether or not a companies business is profitable. It shows: -profit or loss over the financial year. -Usually there is a comparison between the figures of the most recent year and that of the year before. |
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Income statement in a nutshell |
Establish revenue, deduct the direct cost of making that revenue (cost of sales) to get the gross profit/gross margin. Further deduct the cost of being in business (operating expenses) to get the operating profit. Further deduct any financing costs or income to get the profit before income tax. Deduct tax to get net profit for the period. See example. |
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What does a balance sheet (statement of financial position) do ? |
Shows the companys financial posistion at a point in time (end of fiscal year). There are three major items in a balance sheet -Assets -Liabilities -Equity (net worth) |
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Define and discuss Assets |
Total assets is the sum of -Total current assets (cash, invetory,... liquid assets) -fixed or non-current assets, not very liquid or long term assets (property, plant, equiptment) Account for depreciation |
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Define and discuss Liabilities |
Liabilities are the sum of -Current liabilities (accounts payable opposed to receivable) -Non-current or long term liabilities (long term bank loans, mortgages of equipment. Obligations to third parties are called liabilities. Outstanding bills, outstanding goods etc. |
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Define and discuss Equity |
Equity is the sum of capital, stock and retained earnings. It is the capital invested by the owner of a company (Owners or stakeholders Equity) aka Net Worth. Sum up the capital the owners have invested and the profits that have been accumulated (after dividens) and retained up to the present moment since the business began. |
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Balance sheet, Total Assets = |
Total Liabilities + Total Equity |
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Discuss the example of Financial Position statements |
... |
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Working capital ratio |
Working capital = current assets - current liabilities -Working capital = measure of short term financial strength of a construction company. -Increase working capital by selling equipment or other assets, or long term lone. -Decrease working capital by losing money on a project or purchasing new equipment or making repayments. |
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In order to stay healthy in a construction company... |
the volume unfinished work of all projects in hand should be at most ten times the working capital. the volume of the biggest project in hand should be at most five times the working capital. |
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Current ration is |
Current Ratio = Current Assets / Current Liabilities -The ratio for a construction company's liquidity (or ability to fulfill short term financial obligations) |
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Overbilling and Underbilling ... |
- Underbilling is expressed in the balance sheet under current assets (estimated work done but not billed yet). - Overbilling is expressed under current liabilities (excess billings for work not done yet) Review example |
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Financial Analysis ratios include (PCLAW) |
-Profitability Ratios -Liquidity Ratios -Working Capital Ratios -Capital Structure Ratios -Activity Ratios |
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Explain the Profiability ratio (GNR) |
Profitability ratio measures a company's ability to earn profit from its operation. Commonly used profitability ratios are Gross Profit Margin Ratio = Gross profit / Revenue Net Profit Margin Ratio = Net profit before tax / revenue Return on Equity Ratio = Net Profit before tax / owners equity |
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Explain the liquidity ratio (CAC) |
Liquidity ratios indicate the companies ability to pay its obligations as they come due. Three common liquidity ratios are Current Ratio = Current Assets / Current Liabilities Acid Test Ratio = (Cash + Accounts Recievabiles)/Current Liabilities Current Assets to Total Assets Ratio = Current Assets / Total Assets |
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Explain working capital ratios (WN) |
These ratios measure how well the construction company is utilizing its working capital. Three commonly used working capital ratios are Working Capital Turnover = Revenue/Working Capital Net Profit to Working Capital Ratio = Net Profit before tax / working capital |
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Explain Capital Structure Ratios |
Capital structure ratios show the ability of the construction company to manage liabilities. They show how the company prefers to finance its operation. The two major capital structure ratios are Debt to Equity Ratio = total liabilities / owners equity Leverage Total assets/owners = Total liabilities + owner equity /Owners equity = debt equity ratio + 1 |
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Explain Activity ratios (MI, UB, AR) |
Activity ratios indicate whether or not the construction company is using its assets effectively, and if yes, how effective they are. Commonly used are Average Ager of Material Inventory = material inventory / material cost * 365 days Average Age of Under Billings = Under Billings / revenue Average Age of Accounts Recievable = Accounts Recievable / Revenue * 365 days |
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Futher explain Activity Ratios |
Cash conversion Period = Average age of material inventory + average age of under billings + average age of accounts payable. AA Accounts Payable = Accounts payable/ materials + subcontracts *365 days AA Over Billing = over billings / revenue * 365 days Cash Demand Period = Cash conversion period - AA Accounts Payable |
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Discuss results from the case study |
Income Statement- Financial Position - Ratios - Results - Conclusions |
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What is the break even analysis ? |
We sell good at a price, produsing them incucrred fixed and variable costs. How much/many do we need to sell to break even ? At the BEP the income from sales is equal to total expenses. What is the influence of the ratio, variable costs/fixed costs, on this point ? EXAMPLE |
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What is the Operating Leverage ? |
a measurement of the degree to which a firm or project incurs a combination of fixed and variable costs 3 different companies selling uni E. Each has a different setup, from low fixed costs to high fixed costs. Price of E is 4. Fixed costs are X:X:X resp and variable costs are X:X:X resp. What is the BEP ? |
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Degree of Operating Leverage is ? |
The percentage change in profit per percentage change in sold items. EG DOL = (%change in earning before interest+taxes)/(%change in sales) A higher value = more sensitive to price changes. |
