Accounting Exam Notes PDF

- - - - - - - - - [**[Financial Indicators]**](https://file.notion.so/f/f/4a2c91fe-e059-4bc4-a27c-228e42ab0f49/aedf6da5-31ed-47ab-94cc-85b872e9d9ed/Financial_Indicators.pdf?table=block&id=1a8e4200-3931-4e60-887b-89a210740980&spaceId=4a2c91fe-e059-4bc4-a27c-228e42ab0f49&expirati...

- - - - - - - - - [**[Financial Indicators]**](https://file.notion.so/f/f/4a2c91fe-e059-4bc4-a27c-228e42ab0f49/aedf6da5-31ed-47ab-94cc-85b872e9d9ed/Financial_Indicators.pdf?table=block&id=1a8e4200-3931-4e60-887b-89a210740980&spaceId=4a2c91fe-e059-4bc4-a27c-228e42ab0f49&expirationTimestamp=1727863200000&signature=_c17Fc1TXwHR7-YIsjzYAYvY9--nd25Ls9-a20qBnuo&downloadName=Financial+Indicators.pdf) **Profitability** The ability of the business to make a profit compared against a base such as sales, asset or owner's equity. - - - - - - **Liquidity** ( level of liquidity) The ability of a business to meet its short-term debt as they fall due - - - **Efficiency** (speed of liquidity) and Asset turnover efficiency also connects to Profitability. The ability of a business to manage the use of its assets and liabilities. The ability to use its resources to earn revenue with little waste. - - - - - **STABILITY/GEARING** The ability of the business to meet its debts and continue its operations in the long term. - - #### #### Profitability **profitability indicators** measures that express an element of profit in relation to some other aspect of business performance **[Profitability]** - - **Assessing profitability / [increase profitability].** - - - - - - - - - - - - ##### ##### #### ##### **Net profit margin** (Profitability, Income Statement) - **The Net Profit Margin** (NPM) measures the percentage of Sales revenue that is retained as Net Profi**t. (expense control)** - - **How do we analyse / What might be considered a good or bad value?** - - **Strategies to improve / Reasons for trend** - - - - - - - - - Net sales = Sales - sales return Net Profit = end of Income Statement ##### Gross Profit Margin - - - - - **[GPM How do we analyse / What might be considered a good or bad value?]** - **Strategies to improve / Reasons for trend** - - - - - - - - **Net sales = Sales - sales return** **Gross profit = Net sales - less cost of good sold** ##### ##### ##### **Asset turnover** **Asset Turnover (ATO)** an efficiency indicator that indicates how productively a business has used its assets to earn revenue - - - - - **[ATO How do we analyse / What might be considered a good or bad value?]** For every dollar invested in assets, x cents of sales revenue as generated. - - **[ATO Benchmarks]** - - - - **[Strategies to improve / Reasons for trend ]** - - - - - - - - - ##### Return on Assets **Return on Assets (ROA)** a profitability indicator that indicates how effectively a business has used its assets to earn profit - **[ROA What does the indicator analyse?]** - - - **[ROA How do we analyse / What might be considered a good or bad value?]** When evaluating ROA, the usual benchmarks include analysis of trends, budgets & industry averages **[Strategies to improve / Reasons for trend ]** - - - - - - - - - - - ##### Return on Owner's Investment  **ROI What does the indicator analyse?** - - - **(ROI) How do we analyse / What might be considered a good or bad value?** - - **Strategies to improve / Reasons for trend** [(ROI) Increased (favourable) by:] - - - [(ROI) Decreased (unfavourable) by:] - - - - ##### Expense ratio #### #### Relationship between npm chapter Asset Turnover chapter #### #### #### Liquidity - For a trading business to survive, it must have sufficient 'liquid' funds available to meet certain needs. - - - - - ##### Working Capital Ratio **[WCR What does the indicator analyse?]** - - - - - **[WCR How do we analyse / What might be considered a good or bad value?]** Determine whether the WCR is less than 1:1 or greater than 1:1 - - - - - **[Strategies to improve / Reasons for trend]** - - - - - - - - - **[EVALUATING WORKING CAPITAL]**  **[CAN WORKING CAPITAL BE TOO HIGH?]** - ##### Quick Asset Ratio  QAR) **[What does the indicator analyse?]** - - - - - QAR) **[How do we analyse / What might be considered a good or bad value?]** - - **[Reasons for Trend]** - - - - - - - - - - ##### Cash Flow Cover **[CFC What does the indicator analyse?]** - - - - - **[CFC How do we analyse / What might be considered a good or bad value?]** - - - **[Reasons for Trend]** - - - - - - - - #### **Efficiency** The ability of a business to manage the use of its assets & liabilities. - - - - - **[Strategies to improve efficiency:]** - - - - - - - **[The following 3 are also known as the speed of liquidity ]** - ##### Inventory Turnover - ##### Accounts Receivable Turnover Accounts - ##### Payable Turnover - ###### Cash cycle = Inventory turnover + Accounts receivable turnover) - These are in the own doc. **[THE CASH CYCLE]** - - - -  #### **STABILITY/GEARING** STABILITY/GEARING: Dependence of a business on borrowed funds, compared to funds contributed by the business owner. - **Stability** looks at its long-term structure. - - **Gearing** is the dependence of an entity on outside funds, compared with internal funds contributed by the proprietor. - **[How to analyse stability & gearing?]** - - - **[Stability/Gearing Indicators]** - - - ##### Debt Ratio ##### **[What does the indicator analyse?]** - - - **[How do we analyse / What might be considered a good or bad value?]** - REMEMBER -- higher risk requires higher return **[Reasons for trend]** - - - - - - - - - ***[DEBT RATIO & RETURN ON INVESTMENT]***  *We need to compare debt ratio to return on investment and other return indicators as the more a businessborrows the higher the debt ratio and hence the higher the risk and financial pressure on the business..* *REMEMBER -- higher risk requires higher return.* ***[Why do businesses borrow money when it is such high risk?]*** *Many small business owners don't have the personal wealth to contribute capital AND typically you need to invest in your business to grow your business.*