Professional Documents
Culture Documents
ACCOUNTING
AND
FINANCE
Klodian Sula
London, UK
September 2020
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MODULE 1
i. Define ‘Accounting’.
From the very beginning, Accounting has been considered as the language of business
communication and the art of recording transactions of an organization, NGOs, etc.,
summarizing, analyzing, interpreting and reporting transactions of a financial nature not
only that but in supervisory companies within enterprises and the tax department. The
recording of transactions is carried out in the Financial Statements used in accounting
during a reporting accounting period where the earned positions and cash flows are
determined by nature.
The main objective of Accounting in any business type is to systematically record all
financial, capital, etc. transactions, to evaluate and analyze them according to the
respective nature and to prepare financial statements in accordance with national and
international standards approved. To evaluate the financial positioning in certain
reporting periods, to control Assets and Liabilities, to ascertain the financial position of
the business by analyzing the cash flows, profit - loss realized and to reflect the Income
and Expenditures, coming to assistance to investors and / or the board of directors to
make decisions on the performance of the company in accordance with the Statute and
the Act of Establishment of the Company.
Accounting has been described as historical in its composition and reflects the actions
taken in the past and present of businesses and beyond. Accounting assesses the
financial performance of businesses and provides information that helps to determine
the achievements and development of companies, conducting systematic retention and
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Data evaluation is a special point of the business cycle providing information and
recommendations for long-term and medium-term planning for its growth and success.
The most efficient use and analysis of Financial Statements, Cash Flows, capital,
projects, budget forecasts, financial forecasts and analysis of detailed financial reports
by professional accountants are used to develop and provide data to measure business
performance. An integral part of data evaluation is the audit of transactions and financial
statements in accordance with national and international accounting standards by
certified accountants.
- Lenders
- Employees
- Customers
Please suggest information that each one is likely to need from accounting
The most important function in accounting is the systematic keeping and accounting of
financial documents and not only in the respective registers in accordance with the laws
and standards of accounting and according to the classes of income, expenses, capital,
etc. Accounting records and reports and balance sheets designed for the entire financial
situation in certain but also annual periods helps borrowers to assess their solvency and
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lenders to assess the situation and credibility that the organization / business has to
repay the loan on time defined between the two parties.
Accounting consists of various activities for data collection and analysis, where an
integral and informative part of the financial performance is the information to the clients
that the company cooperates with. Information for the company's current customers but
also for generating new customers is primary to predict cash inflows and financial
forecasts for the company's future performance.
Accounting has evolved over different periods of time adapting to the modern time of
business to achieve its goals and objectives, collecting, recording, organizing and
communicating information about its financial activity. In addition to accounting itself, the
role of an accountant or financial department has evolved into four distinct phases for its
development such as Administration and Management Accounting, Financial
Accounting and Cost Accounting, each of which occupies a distinct share in the
financial sector. Management and Management accounting are interconnected where
the administration sector deals with the accounting and daily recording of transactions,
the management sector deals with the preparation and presentation of accounting
information to provide information that influences decisions about the future of the
business.
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The accounting cycle is the process of recording and processing financial transactions
until the end of the fiscal year for closing accounts / balance sheets. The main tasks of a
financier are to supervise the accounting cycle from the beginning of the fiscal year until
its completion, such a cycle is repeated every year which includes all financial accounts,
diary entries, T-shaped accounts, debts and credits, etc. Below we are specifying the
basic steps of the accounting cycle which are necessary for any business that continues
to operate in the market, such a process starts with financial transactions which
includes the repayment of a debt, purchase of assets and other purchases, expenses
and income from sales of products or services and any other income. Once the
transactions have been identified, the next step, a necessary part of the accounting is to
record all transactions in the diary, then proceed with the process of posting all actions
in the main accounts. At the end of each fiscal period which can be monthly, quarterly,
six month or annually, a Trial Balance is drafted to control the situation and to process
with the relevant notes in the balance sheet to correct, record the balance sheet
accounts and make adjustments in order to be further processed with the Worksheet
where the respective corrections and adjustments should be made by registering them
in the accounting material account. An integral part of the accounting cycle which also
includes other materials (mentioned below) are Adjusting Journal Entries, Financial
Statements and Closing the Books, where after examining and extracting errors from
the balance sheet, profit and loss accounts are compiled. The final balance sheet will
include all correct accounts which will lead to the preparation opening of the new fiscal
year with zero balances carried in the account.
Activity
List the various accounting activities that an organization under takes and give
reasons for each as to why that particular activity is performed in the
organizations.
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Planning the core business that a company needs to undertake and hiring qualified
employees and co-operators is the key to business success. The progress of the
business and decision-making for its future progress should start with a Budget
Planning and Detailed Marketing Plan where all initial investments and employment of
financial managers and other employees in different sectors will be calculated. This will
influence the performance of the company and market entry in a dignified manner and
influence in the relationship with the customer for the products and services offered.
Accounting Management and Internal or External Audit of Financial Statements draws
the final conclusions in the calculation of taxes and the on-going progress of
investments.
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MODULE 2
i. Who is an accountant?
The accountant is the responsible person in a company that deals with the registration
of financial transactions and accounting of Sales Invoices, Purchase Invoices,
Employees’ Payroll and fulfillment of orders for employees, accounting and equalization
of banking transactions, issuance of financial reports accordingly superiors
requirements and reports on company management and performance.
Accountants are the mainstay of a company, where the main activity is focused on
recording, collecting, analyzing and reporting financial data. In addition to playing an
essential role in analyzing financial performance, various accountants also deal with
cost analysis and company performance. At the same time, accountants draft financial
statements to present to the board of directors and investors, lenders, employees also
have a concern for the interests of customers and public organizations.
Controllers manage all the accounting and internal audit activity of a company. Their
main focus is to take care of Management Accounting, Financial Accounting, Cost
Accounting and also has the authority to operate the company's internal and external
accounting in accordance with national and international standards by providing and
issuing reports to the company's board of directors.
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iv. What is a double entry system? Outline the steps involved in Double entry
system.
Transaction records have a dual effect on the system to keep the balance in the
business where assets must be equal to liabilities plus the owner's capital. All incoming
transactions are recorded in Debit but at the same time the same transaction value is
recorded in the Loan making which is easier to prepare financial statements and detect
errors in the future.
Debit and Credit are an integral part of Accounting and Financial Statements / Balance
Sheet for proper transaction registration and issuance of a company's financial result.
The registration of transactions in debit and credit accounts has to do with financial
inflows and outflows. Debit is the entry into accounting accounts affecting the increase
of an asset or expense account or reducing an account of its liabilities and equity, while
Credit is an entry into accounting affecting the growth of a liability or capital account of
itself or by reducing an account of assets or expenses.
vi. What is meant by ‘Hybrid basis’ accounting? How the entries are recorded
using this method?
The hybrid base is the accounting system that combines basic cost features with some
basic accrual features. The hybrid base is allowed for internal accounting purposes and
for tax purposes. By using the Hybrid Method we will not record receivables but will
record unpaid expenses.
vii. What is the difference between ‘Real Accounts’ and ‘Personal Accounts’?
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The primary difference between Real Account and Personal Account is in the period in
which they are used in accounting. Personal Account has a short-term nature and is
used only for the accounting period and Real Account continues during the next fiscal
year. Accounting entries in Personal Accounts report all financial transactions and
contain income and expenses as well as profit and loss of the company, while Real
Accounts report capital transactions such as owner's equity and liabilities.
viii. How do we record the entries using cash basis accounting method?
The cash calculation method is commonly used in small businesses and personal
finance. Revenues are reported in the income statement only where cash is deposited
or a cash transaction is made and collected and expenses are recorded only when the
need arises to repay an invoice or a cash payment.
2. What are the main objectives of book-keeping? How would you distinguish
book keeping from accounting?
Book-keeping is only an integral part of accounting which deals with the systematic
registration of transactions and financial data and the keeping of regular records, the
creation of trading accounts, profit and loss in a company.
- Book-keeping deals mainly with the registration and identification of transactions, while
an Accounting deals with the summary, interpretation, evaluation of the financial and
communal situation of financial data and the compilation of reports, budget forecasting
and planning loan proposals,
- Decisions by the Board of Directors cannot be made based on the data provided by
Book-keeping but by the data identified and reported by Accounting,
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i. Stock is?
The total value of all the goods purchased during the year
Creditors
Fixed assets
Cash
Debtors
Petty cash
Capital is?
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Income
Liabilities
Expenses
Drawings
Fixed assets
v. Debtors are?
The owner
The bank
Suppliers
Employees
Customers
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Activity
Please meet one or more of the following personnel in any organization and talk
to them about their respective roles within the organization.
Internal Auditor
Florian is a Manager within the Internal Audit department based in the London office.
Florian possesses 7+ of internal audit experience within the financial services industry
and focuses exclusively on banking, broker - dealer and capital market. Florian's
experience spans access a broad range of financial operations, compliance / regulatory
(e.g. IOSCO Benchmarking, MAR, etc.) and information technology focused
engagements. Major responsibilities are to support the IA function in providing
management and the board with an independent assessment on the adequacy and
effectiveness of the Firm's processes for controlling its activities and managing its risks
by:
- managing the work of project-specific teams and provide supervision and direction;
- assess control strengths and weaknesses and determine compliance with policies and
procedures
-draft and present comprehensive management action plans and audit reports as final
deliverables
- building and developing relationships with key business stakeholders (including CFO;
Head of Risk; Head of Compliance) Working in the Financial Audit Group of the EMEA
and Asia Pacific, will assist in the annual risk assessment process, perform and manage
operational, financial and regulatory audits, Sarbanes Oxley (SOX) testing, and
participate on special projects. Write and/or review detailed audit programs to test the
internal controls. Document findings and interface with line management to confirm
accuracy of observations and agree upon action plans. Write and / or review clear,
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concise and persuasive audit reports and other documents summarizing level of risk,
scope findings, recommendations and the current status of the issues. Direct and
participate in special audit or project reviews.
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MODULE 3
Dual aspect concept has to do with the registration of double entry transactions which is
the basis for a reliable financial statement. This concept is related to the accounting
equation which is reflected in the Balance Sheet where all Assets must be Equivalent to
the amounts of liabilities and net capital. Respectively the equation will be: Assets =
Liabilities + Equity.
Convention of materiality deals with the principles of accounting and the registration of a
purchased item which is of minimal value. They can be ignored if the impact is
negligible on the company's financial statements / balance sheet and where any
interested party, individual or manager of a company cannot be deceived if it is charged
as an expense in the respective financial transaction accounts.
The Accounting Equation is the basic accounting principle and a key element in
identifying the financial situation throughout the company and preparing the balance
sheet to take care of each of the equation values and how the financial situation
operates in a company. The most used equation is: (Assets = Liabilities + Owner
Equity) but we can also find it in other variants such as (Liabilities = Assets - Owner
Equity and Owner Equity = Assets - Liabilities).
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The main purpose of using GAAP is to provide transparent and stable financial reports
and analysis of any private or state / government entity. GAAP does not have any
universal standards but differs in its use from one state to another or from one
organization to another.
- Liabilities
- Assets
- Revenue
Liabilities are all deferred payments or have not yet been fulfilled between two
companies, individuals or other financial transactions in the form of (Bank Loans,
Liabilities to Suppliers, Employee Salaries, Taxes, etc.). Liabilities are recorded in the
balance sheet of a company. We usually have short-term liabilities where a transaction
can be closed for a period of 12 months or less and long-term liabilities that are more
than 12 months. Assets are every kind of possessions that a company owns, which can
be found in various forms such as Pre-Cash, Investments made by the company,
Inventories, Office and Informatics Equipment, Vehicles and properties. Revenue is the
monetary unit that benefits from the activity of a company by selling services, products
or goods. We find Revenue in two forms, Gross Income which includes taxes and duties
and Net Income which are received after payment of obligations.
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Business entity concept means that every business is separate from individuals /
shareholders who own or offer capital to the company and in terms of financial
transactions. Where first Private assets are used to repay private liabilities then they are
used to repay business liabilities or vice versa.
Cost Concept has to do with the registration of fixed assets that a business has based
on cost in the first year and after each year the registration is done by deducting
depreciation.
Accrual Concept is about recording income when it is earned and not when it is
accepted and the same situation for expenses is recorded when it happens and not
when it is paid.
Materiality Concept deals with the importance that we should pay on the registration of
high value materials and not of materials which have a negligible value in the financial
presentation in the Balance Sheet.
Consistency Concept deals with the rule of using accounting principles in the
registration of transactions where primarily is to follow the same standards each year to
calculate the profit and loss of the company.
Periodicity Concept has its main purpose in the internal relations of the company and
with a short interval usually up to three months in order to make necessary comparisons
for the progress of the company's finances.
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MODULE 4
Subsidiary books are books in which all daily transactions are recorded chronologically
according to the nature of the documents that are accounted for. At any time the
company will account for daily transactions, the first step to follow is to record them in
the journal and then these transactions are posted to the main accounts / books.
The journal is a detailed account or record of all necessary financial transactions that
take place in a company by date and nature. These transactions are used to create the
main accounting book and then to proceed with the creation of the financial statements /
balance sheet.
Petty cash books are the books that are used by companies to keep chronologically all
expenses at small values for daily use or expenses incurred by the office for purchasing
products, aids, stationery, cleaning supplies, etc. where these expenses are paid by
using the monetary balance which is available to the responsible person / cashier in the
company.
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person in charge of a company for the accounting of daily documents uses books
according to the nature of the documents as we can see below, to have an easily
controllable financial situation. The books used to account for the documents are:
Purchases Book is required for daily registration of purchase invoices that a company
realizes where they are included, services, goods, etc. having the maximum attention
that the transactions or descriptions are in the respective columns of the purchase book
but we cannot record company’s assets and purchases as they are registered in the
Proper Journal.
Sales Book is an integral part of accounting and deals mainly with the accounting of
sales of goods, services but not including the sale of company assets and any
necessary descriptions must be in the relevant column of the sales book.
Purchases Returns are for the internal use of the company and records of transactions
for the goods returned to the supplier by making the relevant notes and justifications for
the return of the goods, the name of the supplier and to set the dates and serial number
of the respective invoice.
Sales Returns Books are used to record the return of sales by the respective customer
with detailed note / reasoning, details of returned goods as well as return date and
invoice serial number.
Bills Receivable Books register all invoices received by customers and businesses in
favor of our company where the relevant amount of the invoice is detailed, the invoice
payment deadline, the bank / account where the liquidation will take place, etc. where
all these are done during the posting individual suppliers / businesses accounts.
Bills Payable Books record all invoices sent to customers where we have specified the
relevant amount of the invoice, the time we wait for the invoice to be liquidated, the
bank / account where we want the liquidation to be done, etc. and we post all these
transactions in individual customer accounts.
Proper Journal is commonly used to record transactions that cannot be recorded in the
books listed above, which do not have the nature of sales, purchases, company assets,
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expenses, etc. Below we specify some of the transactions that can be recorded in this
journal such as:
- Adjusting entries
- Rectification entries
Cash Book is used to record all daily transactions chronologically according to the
respective nature, when we make the daily receipts or payments we also make the
corresponding description according to the nature of the Transaction. These books are
used depending on the nature of the business and the way money is received or paid.
From the very meaning that this book carries, and as an integral part of the Financial
concept, Cash Book is the diary of the registration of monetary transactions in
chronological order of all collections, payments, deposits and bank withdrawals, etc.
The whole nature of the registrations and like any other accounting of financial
transactions, Cash Book also contains Debit and Credit depending on the nature of the
transaction being recorded.
In almost all businesses to maintain a satisfactory relationship between the two parties,
buyers and sellers apply a discount on the total invoice of purchased goods.
Commercial discount is realized by the seller for the buyer / customer who buys
wholesale goods or for specific customers whom the company considers as trusted
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Cash discounts are the discount offered by the Seller as an incentive and an effective
way to encourage Buyers to make the liquidation / transfer in a shorter time than the
agreed time between the parties from the moment of issuance of the invoice.
vii. What is the difference between trade discount and cash discount?
Trade Discount and Cash Discount, are discounts in monetary value that are applied
by sellers for a stable and stimulating relationship for current buyers or to attract new
buyers but the differences between these discounts will be seen as follows:
- Trade Discount is applied at the time of issuance of the sales invoice for trusted
customers or wholesale buyers, while cash discount is applied to stimulate the buyer in
order to liquidate the invoice before the agreed deadline;
- Trade Discount is applied for the total amount of purchased goods, while cash
discount is applied for receiving payment before the agreed deadline;
- Trade Discount affects the reduction of the price of the purchased goods, while cash
discount affects the reduction of the obligation / debt of a debtor;
- Trade Discount is applied only at the moment of realization of the sale, while cash
discount is applied at the moment of realization of the transfer / payment;
- Trade Discount depends on the policies of each company, and cash discount on the
debt / liabilities of the sellers.
Ledger Account is the diary that a company keeps a record of all transactions in a
concise manner, carried out during a fiscal period according to the relevant accounting
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accounts, and is therefore considered very important for any business. Ledger Account
summarizes all transactions related to Assets, Income, Expenses, Profit - Loss,
Accounts Receivable and Payable, Taxes, Funds, Loans, Employee Salaries, etc.
realized during the fiscal period. Some of such Accounts / Summaries accounts can be
seen below to have a clearer situation;
CASH ACCOUNT
DR CR
DATE DATE
By Salaries 2,500
1,000
SALES ACCOUNT
DR CR
DATE DATE
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15,000 15,000
CAPITAL ACCOUNT
DR CR
DATE DATE
10,000 10,000
- Saves time for the completion of accounting records and reduce cases of fraud and
identify human errors;
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MODULE 5
The Profit or Loss Statement is an integral and reporting part of the Balance Sheet for a
given fiscal period. In general, Profit or Loss Statements show / report on the financial
situation and whether the company has gained or lost during the period it has operated
in the market, usually such a statement is prepared in periods of one month, three
months, six months or annually. This statement is prepared in accordance with national
and international accounting standards. The Income and Expenditure Statement reports
on the total revenue inflows earned from sales of goods, products, services, etc. and
deduct all expenses related to income. Also prepare Statements of this gives
opportunity to finance managers to assess and calculate the taxes, which must be paid
by the company from the realized profit. The composition of this statement includes
Income / sales realized, costs of goods sold, administrative costs, Marketing Expenses,
Expenditures on interest paid, Taxes, gross profit margin and net profit of the company.
From the analysis and use of this statement, Financial Managers or Investors compare
income / expenses or profits / losses, and the costs of the current period with previous
years. Profit or Loss Statements all have the same reporting structure regardless of the
nature in which a company operates.
The moment that a Financier / Financier encounters the above equation, he or she
manages to understand the aspect in which the analysis of finance should begin. This
equation is the main basis of the balance sheet and double entry record where each
transaction will affect both sides of the equation such as the Assets and Liabilities of the
Company as well as the capital to have a clear and easily reportable situation in the
Company's Balance Sheet, as we know that the Balance consists of three main
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reporting sections such as Assets, Liabilities and Capital. To start with the preparation
of the balance sheet and the relevant accounts which are affected at the time of entry,
we must keep in mind that:
The assets have in its composition the analytical accounts of the value of cash,
accounts receivable from activity and other receivables, inventories and equipment.
The liabilities include the accounts payable to third parties, including employee salaries
and other unpaid liabilities, short-term and long-term loans and liabilities received from
banks or financial institutions.
The Capital consists of all tangible assets which are owned by the company which
includes buildings, machinery, various equipment, vehicles, etc. which are in operation
and in use by the company.
Realizations are the fundamental basis for assessing the income generated by financial
operations in the market during the fiscal reporting period. As we have learned in
previous lessons with the concepts used by companies to be in coherence with the
standards approved by the world accounting organizations, below we will present a
more detailed discussion / analysis on the use of 2 of the concepts which are most
useful for identifying transactions in profit and loss statements.
Realization concept coincides with the financial reporting year and highlights all
revenues and expenditures realized. So that all realized income and expenses are
recognized (accepted according to the principle of Realization concept) only at the
moment when the goods or services offered are delivered and payments are collected /
received, the same situation is for the realization of expenses. A consumer / buyer can
make advance payments to the company or can be agreed between the parties for a
later payment but this cash balance which is in the company's cash / bank account is
not considered a profit generated without previously delivering the goods / service. To
make the situation more understandable, we are taking an example of a financial
transaction made in a company;
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It has been agreed between the two parties (Klodi LLC Construction Company and Sula
LLC Architecture Company) that Klodi LLC will pay in advance to Sula LLC a value of £
2,000 for the implementation of a Bulding Architecture Project. The beneficiary company
has accepted the payment made, but this payment cannot be considered a "profit" until
the moment when the service requested by the company Klodi LLC will be delivered.
Matching concept helps us to analyze and understand better the nature and treatment
of income and expenses related to the same fiscal reporting period. The main purpose
of this concept is to avoid wrong income / profits during an accounting period without
first declaring the expenses that have affected the generation of income, as this
situation leads us to overvalued profits. So, to put it simply, in order to determine the
income of a company during a fiscal period, the expenses incurred during the same
fiscal year must be reported, regardless of whether these expenses have been paid or
not. From the above we can see that the use of this concept highlights the net value of
the realized profit.
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MODULE 6
1. What is Balance Sheet? Identify and explain any two purposes of a 'Balance
Sheet'.
From the term used "Balance" we understand that we are dealing with a statement that
presents the economic and financial situation at a certain point in time, according to the
needs of the company and stakeholders. The balance sheet presents a clear picture of
the company's finances, which includes every entry - exit from the company and every
profit - loss from the moment the company is established. The balance sheet is
compiled in certain periods of time, usually at the end of a certain period such as one
month, three months or one year, (From the Financial Specialists, it is proposed that the
newly established companies, the balance sheet be drafted in short periods of time one,
three or six months in order for investors to be clear about how the company is
performing in order to make important decisions and generate projected profits). The
balance sheet is drafted according to the proposals of the National and International
Accounting Standards for both Large and Small Businesses, and the same forms are
used that comply with these standards. From the above we understand that in itself the
Balance Sheet has some main goals for which it is drafted, but we are specifying two of
them which are the most important:
- Highlights and captures the financial positioning of the company at a given point in
time and uses the reported data to assess the financial situation of the company;
- Reflects all assets, liabilities and investor / investors’ capital to assess the liquidity and
financial condition in which the company is located.
2. Distinguish between fixed and current assets and describe current ratio.
Assets are the primary core of a business's performance and are reflected in a
company's balance sheet. There are several different types of assets that a company
owns, but the most important are Fixed Assets and Current Assets. In themselves, each
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of these assets is considered as current and non-current assets where each of them
occupies a special place in a company. Fixed “non-current” fixed assets have a long
shelf life of more than one year and may be tangible (buildings, properties, machinery,
office and computer equipment, etc.) and intangible where it includes (trademarks and
patents) that are owned. by the company. Current assets have a shorter lifespan which
is converted into monetary value / income for the company over a period of less than a
year where we can specify (cash available to a business, Accounts Receivable,
Inventories etc.). Referring to the analytical descriptions in the composition of these two
assets, we notice that there are changes in their composition, but both occupy a special
place in the balance sheet and are fundamental to the well-being of the company. From
the above we can say that Assets have to do with the purpose in which it is invested
and not with the type of activity that is exercised. If a Property is purchased by the
company for the purpose of resale and profit of cash then we are dealing with Current
Property and if the Property is purchased to come to the aid of the company in various
financial operations for a long period then we are dealing with Fixed Property.
The above formula is the key element that helps in the process of interaction to create a
company's balance sheet. When a stakeholder or Financial Professional starts
preparing a Balance Sheet to view the financial position, over a period of time, use the
above equation in order to have a clear and quick overview of the design of a value for
assets report where the essence of the calculation is the company's liabilities and the
net value obtained. The positioning of the constituent accounts in the formula are
recorded in the Company's Balance Sheet (Assets are Recorded in the Balance Sheet
and Liabilities in its Right and the Company's Net Value is recorded under liabilities) as
we can see in the illustration below;
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ASSETS £ LIABILITIES £
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MODULE 7
1. There are some expenses that are included in profit and loss accounts but
added back while preparing cash flow statements. List these expenses and
explain with examples 'why these expenses should be added back while
preparing cash flow statements'?
Referring to the concepts of Finance but also the recommendations from international
organizations for the drafting of financial statements "Balance Sheet" first we seem to
consider the reports that are part of the Balance Sheet. As we have studied in previous
lessons, for compiling the Balance Sheet and its components, we must first compile the
2 basic statements of its composition, which are the Profit and Loss Statement and the
Cash Flow Statement and the analysis of accounts.
The start of the preparation of the Profit and Loss Statement should include as a start all
the income generated by the company's market operation and then accounting by listing
all the realized expenses which are (costs of goods sold, operating expenses, expenses
tax "Taxes", interest expenses, Depreciation and Amortization, Repairs and
Maintenance, extraordinary expenses, etc.) and finally we account / record net income
referred to as Profit and / or Loss of the company.
With the completion of the Profit and Loss statement, we compile the Cash Flow
Statement where we must take into consideration the accounts included in this
statement, starting with the accounting / recording of income and then continuing with
the expenses which are (Accruable Accounts, Operating Expenditures, Repairs and
Maintenance, Marketing, Expenditures for Legal and Financial Services, Expenditures
for Taxes and Taxes, Depreciation and Amortization, etc.). From the above we
distinguish the expense accounts which are included in the statement of Profit and Loss
of the company and which are added again to the Statement of Cash Flow which are:
- Accounts payable
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- Accounts Receivable
- Operating Expenses
Expenditures that are deducted from the Profit and Loss Account are added again to the
Cash Flow statement as they do not include the actual expenditure of cash, as they
have not yet been paid for the reporting fiscal period or do not affect the company's
actual expenditure, as we can see below a simple illustrative example of these accounts
and the impact on these 2 statements;
Company X has realized an annual turnover in the amount of 600,000 £ and condition /
value receivable from customers (sale with subsequent liquidation) in the amount of
10,000 £. From the inventory at the end of the reporting period, an inventory value of
25,000. Higher than the cost of goods sold was observed. Depreciation expenses for
the Company's assets were in the amount of 50,000 £ but this value is not an expense
in the reporting period but from assets invested years ago. The total Expenses for
Employees 'Wages and Taxes were lower than the total value of expenditures reported
at the end of the year, more specifically Employees' Wages in the amount of 10,000 £
and Taxes in the amount of 5,000 £ below we are drafting relevant statements to have a
clear and understandable situation in reporting of these expenses.
Inventory 25,000 £
Amortization 50,000 £
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2. Why a company with very high net profits can still be in cash flow problems?
List and explain three main reasons using examples.
To analyse the financial situation of the company and to identify the cash flows but also
the profit generated during a fiscal period which is the fundamental basis for the long-
term sustainability of a company. There are some exceptions where a company, despite
being able to record significant / large net profits, may have problems with the cash
flow; such situations require attention as they are not directly related. The realized profit
has to do with the continuous stability of a company, while the flow of money has to do
with its solvency. To present a clearer situation below we will look at some of the
reasons why such a situation occurs in a company:
- Capital expenditures by creating assets for the company which depreciate over the
years;
- Dividends and new capital investments are not presented in the respective statements;
- The company may have completed a large part of the work / project realized but has
not received any payment in monetary value, despite the fact that the issuance of the
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invoice is still recognized as income but there is no cash flow recorded in the company's
accounts;
- The financial assets of the company have gained market value and this is recognized
as income in the statement of incomes and expenses despite the fact that there is no
cash flow;
Proper maintenance and management of working capital is necessary and essential for
a healthy financial well-being and a success for a company's liquid operations. The
distinguishing feature of a successful business is the maintenance and capability used
in working capital to have a stable balance in growth, benefits, liquidity sustainability
and improving the company's profits. Work capital is primary for long-term sustainability
and to meet the needs of the company in the short run to pay off short-term costs and
other liabilities. We measure the level of working capital using the formula (Working
Capital = current assets - current liabilities). If working capital is managed with great
care and handled with care, we will always have a reflection on the administration of the
company's inventories, accounts receivable / payable and cash-dependent cash. The
benefits that the company will have from maintaining and implementing work capital
strategies are:
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Also efficient performance of working capital has a great effect on the source of
domestic cash flow and strengthening the company. Some of these resources that
affect the flow of money are listed below;
- Activity / creation of funds from Business operations, which can be inflows from sales
of goods / products or services and interest on debt instruments and dividends received.
This money is used for operating activities in the purchase of inventories.
- Sale of non-current assets such as properties, factories and other equipment that the
company may own in large quantities which may have been depreciated over the years.
- Excessive existing capital which orients companies to issue shares and bonds to
generate money as it is less risky than financing through loans.
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MODULE 8
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of these three main decisions maximizes shareholders' assets, as any such decision is
closely related to each other have a common impact on the well-being of the company,
despite the fact that these decisions must be extended during 2021. As above, but,
also current information that there should be an opening / movement in all sectors of the
economy again the focus of Financial Management should be on the forecasts of the
company's budget and capital in the short as well as on long term to be free in liquidity
but also strong finances for the company.
Accounting plays a primary and fundamental role in the financial management of any
company operating in the market. Companies operate in the market by generating
income but also expenses, but if they are not properly controlled by the accounting
department, the Financial Management board but also the investors have no control
over their business. Due to the connections that exist between Accounting and Financial
Management, managers and investors manage to evaluate the financial performance of
the company and have a stronger potential for making decisions about the performance
and growth of the company. Accurate accounting of documents helps accountants to
strictly follow the tax and fiscal legislation and provides a clear picture for the Financial
Management to plan, control and make decisions for the future of the company. From
continuous communication between accounting and financial management it is possible
to understand the situation of expenditures and if they can be reduced, how many taxes
should be paid in a fiscal period, clear forecast for budget planning by analysing inflows
and outflows of money, is assessed the financial position of the company, facilitating
information for internal or external parties, etc. to create strategies and development
plans for a sustainability and financial stability for the success of the company. From the
above we can understand that the role of accounting in financial management is primary
and very necessary in every sector where companies operate. The role of a Financial
Manager begins where the Accountant ends, as this mutual relationship between them
is the key to any success.
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MODULE 9
1. What is the main difference between fixed and flexible budget? Why fixed
budgets are preferred in government departments? Discuss the benefits of both
types of budgets.
Budgeting is very necessary and important to run a company, and the work of Financial
Manager do not stop only at the analysis of financial statements but they must follow the
necessary steps for Budget forecasting, Financial Planning and control for a successful
progress` financial situation in a company. The decision to design / forecast the Budget
is an important process for understanding / evaluating the efficiency of the nature of
where its money is being spent. Also, professionals involved in drafting the Budget
should have accurate information about the company in order to understand its nature
and make decisions on how the budget will be implemented / used to design / forecast
the budget, which can be Fixed or Flexible Budgeting. Below we will present the main
changes between these two budgets, in order to have a clear way of using /
implementing them in a company:
- The Fixed Budget remains static regardless of the level of activity and its fluctuations
while the Flexible Budget varies according to the need, levels and fluctuations of the
activity;
- The Fixed Budget is simple to prepare / design and the Flexible Budget is difficult as it
designs all the situations that a business may have;
- The Fixed Budget has difficulties in the comparisons that can be made, as they are
different in the current level and the budgeted level, while the Flexible Budget is easily
comparable as they are very similar;
- Fixed budget does not take into account the fluctuations that the business may have
and the Flexible Budget is very flexible and business fluctuations are taken into account;
- The Fixed Budget is drafted / prepared in most cases on assumptions and forecasts
and the Flexible Budget is drafted / prepared on real situations.
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As for the above, but relying on the way they work, as well as the nature of use, both
from government departments and from the types of businesses or companies, we
manage to distinguish the advantages that these two budgets have, which we are
reconciling below:
Fixed Budget
- can provide a strong overview of the costs and profits of a company when conducting
an analysis by allowing companies to understand where the costs have been
underestimated and overestimated;
- Help companies control costs and make effective decisions to reduce / keep costs
under control;
Flexible Budget
- deviates the current production from the expected production and adapts easily to the
requirements;
- The current costs are easily compared with the current volume and the budgeted costs
with the current volume;
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2. What is zero based budgeting? Explain the process of zero based budgeting.
In this chapter we are familiar with the budgets that are most usable and the right ways
to implement them, in order to create efficiency in every sector such as public and
private, in companies, organizations, NGOs, etc. but now we will analyse the budget
with Base-Zero. The zero-budget in corporate management accounting includes drafting
from the beginning of the budget, re-evaluating each account in the cash flow statement
and justifying all expenses that will be incurred and where all expenses for the new
period are calculated based on of actual expenses. Zero-based budgeting is a
budgeting method in which all expenses for each new fiscal or reporting period are
justified. The purpose of the Base Zero Budget is to reduce all revenues minus
expenditures to zero by the end of the period by distributing the money to different
categories / sectors. The zero-budget budget comes to the aid of managers to justify old
expenses and repeated expenses in addition to new expenses and also aims to boost
the value for a company by optimizing costs and revenues. Zero-based budgeting first
identifies a project and then finances the costs step by step, for example;
- Project evaluation and also the sources of funds for this project are taken into account
and evaluated;
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Referring to the study materials on the financial and budgetary situation of companies
but not only, we can say that none is enough to make only plans but we must be in
coherence with everything about the company's activity and periodically check
everything given to analyse if everything is going according to plan and if it is necessary
to act in order to make the necessary corrections. In this way, companies compare
revenues, costs and profits at certain moments with pre-budgeted values to determine
whether to intervene in production processes, interventions in products, interventions in
marketing policies but also purchasing processes. After analysing the above processes,
analysis of variance is a necessary technique used by companies to analyse why
current revenues, costs and profits differ from budget values. Variety analysis helps the
company's processes to understand if steps have been performed as planned. Such an
analysis is very necessary to motivate employees as well as to improve decisions and
planning for the future of the company. To make the variances more understandable
and easily analysable budget budgets are used for further calculations of variances by
becoming a connecting bridge between the initial budget and current results. Simply
put, sales variance calculates the difference between budgeted profit and realized profit;
below we are making a simple example of budget variance as a necessary control tool
for a company.
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MODULE 10
- Expansion of the investment portfolio where financial resources would create the
opportunity to expand and invest in projects but also on new projects,
- Increasing Profitability by directly affecting the reduction of financial costs for the
administration of assets and short-term liabilities;
- Provides sufficient resources at all times using several different models for profit from
working capital and stock optimization;
- Significantly improves the efficiency and management of the company where the main
emphasis is on finances, so as not to present obstacles in terms of economic units;
- Affects the relationship between suppliers and creditors in order to increase trust in
order to have a stable relationship and be willing to do business for long periods;
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- Provides clear statements, where the main focus is on the company's finances giving
the possibility of closer control to all the company's finances, etc.
In accounting, the Rapid Ratio (CR) measures the ability to use its liquid assets “assets
that generate money faster within a reporting period” to liquidate all liabilities the
company has to third parties. To measure a quick report, financiers use the formula
(Quick Ratio (QR) = Liquid Assets / Current Liabilities) so that the result / indicator
report gives a clear picture of economic and financial indicators and how a company
manages actual assets and liabilities. The higher the result of the quick report, the
higher the chance of liquidity as well as finances are considered healthier and the
solvency is high and it is not required to sell its inventory or receive additional financing /
loans. The opposite happens if the result is lower than 1, this shows us that the
company does not have the necessary liquidity to repay the liabilities. From the above,
for the quick report we understand that such a report is necessary for the well-being of
the company in various economic situations but also more important is in a situation of
economic recession, as this way of measuring finances, the extraction that the
company's solvency / liquidity skills guide us to make decisions to improve the situation
in which a company finds itself or to orient us if the company needs to turn to a financial
institution / bank for loans in order to achieve liquidity sustainability . Also, through the
results of this report, the company can start renegotiating its Customer-Supplier
relations, where on the one hand it can negotiate the quick acceptance of payments /
obligations of the company, but also the relationship with suppliers can be renegotiated
so that back payments or defer current bill payments for another / subsequent moment.
By achieving renegotiation between these parties, the company can have a faster and
healthier relationship and achieve a positive feedback to stay in the market and have a
somewhat acceptable situation for subsequent liquidity.
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Referring to the nature of the business offered, working capital is one of the main
factors that should be used by some representatives of the departments of sales,
marketing, purchasing, warehousing, etc. and understand the current situation. Each of
the relevant departments operating in this business sector should analyze and create
opportunities / advantages for the product and the relationship with customers /
suppliers as well as measure results so that the company's performance is at a
satisfactory pace. But such companies should always focus on the use of working
capital and methods as follows;
- Fixed working capital as there is a constant need for current assets in most of the time
but also in unforeseen situations;
- Fluctuation of working capital as this situation affects the volume of sales and
productivity;
- The method of Forecasting cash, as this affects the way of estimating and forecasting
the generation of cash and forecasting liquidity for purchases, payments for digestions,
etc.
- The method of Profit and Loss with this method analyses the outstanding expenses,
deferred expenses, reducing the stock situation, reducing the debtors etc.;
- Sales percentage method as such a relationship between sales and working capital in
short periods gives a clear picture of turnover, percentage of sales, etc.
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MODULE 11
Taking into account the studies so far regarding the finances and investments of
companies to generate income / profits, we can say that finance managers are
supportive and fundamental points for proposals related to budgets and investments,
etc. Proper decision-making and proposals for capital investment and other long-term
investments, is the key to a firm success of the company but also a safer return on
investment. Analysis and evaluation of capital investments is very important to support
the company in its investments and future benefits. But to propose the capital
investments that the company has to undertake, managers in interaction with the
responsible persons of other departments in the company must analyze in advance the
main needs of the company, the possibility of expanding operations, research and
development, replacement or modernization of machinery / plants. , buildings, etc. that
the company currently has or should renew the investment from scratch in some
sectors. After analyzing the needs of the company and proposals from other
departments, the evaluation of capital investments is carried out taking into account the
proposals from the invested and managing parties of the company to prioritize the
investments that are most necessary and primary depending on the projects, marketing
campaigns, technology upgrades, etc. For safe company performance, capital
investments are evaluated using some very necessary techniques to measure and
evaluate these investments / projects, despite the fact that each of them has their
advantages / merits and disadvantages / reductions. Below we explain and analyze
some of the most useful techniques for capital investment;
The repayment period technique, this method has to do with the recovery, the
accumulation of cash inflows year after year from the capital investment project and the
benefits of this project are;
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- Suitable for a secure future investment where liquidity is short-lived and less risky.
- It does not include the calculation of interest rates and its disadvantages are;
- Return time, capital costs, investment value are not taken into account,
The return method technique is mainly concerned with achieving the rate of return on
accounting and initial investment. It is used instead of the average investment and also
takes into account projects with a higher rate of return on investment but its advantages
/ increases are;
- Considers the profits which are reflected in the annual accounts and not on cash flows,
- Considers all the years of repayment of the investment and the disadvantages of using
this technique will be, listed below:
- Does not take into account the calculation of the time value of the investment,
- It fails to measure the rate of return in the right way, uses the direct method of
calculating depreciation,
- Does not have the necessary capacity to identify the size of the investment required by
the proposed individual projects,
- Does not present any proposal whether the investment should be accepted or
rejected.
Net Current Assessment Technique, this technique mainly uses the status of existing
resources net profits and the expected value of profits from sales which will be realized
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to concretize an investment in the company but the advantages of using this technique
are;
- Selects exclusive projects and high return rates and the disadvantages of this
technique are;
- Uses the absolute measure for analyzing a project and finalizing the investment,
The deductible period technique, is mainly related to the assumption that every
turnover of invested money is reinvested in other projects, until the end of the current
project with predetermined interest rates and the use of this method has these
advantages which are taken in consideration;
And the disadvantages of this project as it does not take into account the benefits
realized if the project is used in a period of more than 15 years creating an erroneous
picture in the valuation process, money bubbles are predicted with high accuracy
without compensating the risk if it occurs in implementation of a project.
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MODULE 12
In previous lessons we have learned the ways and processes that every business
follows in order to generate revenue and maximize profits. But, in order to be in
coherence with technological changes and achieve the company’s objectives in the
most efficient way and have guaranteed success in the market, it must implement
strategies that directly affect the generation of profit by reducing costs. Traditional
accounting cannot answer in time to all the questions that arise over time. Thus, the
need for Variance Analysis arose and is used by financial controllers and corporate
managers who interpret changes in the outcome of operations by comparing results
with budget forecasts. Such an impact is necessary in every sector where businesses
operate, but below we will identify and analyse the variances which are most useful in
the production sector of a company which deals with the production of spare parts for
cars.
- Cost Variances
- Labour Variances
- Overhead Variances
- Sales Variances
Cost Variances refers to the difference between expenses incurred during a reporting
period and budgeted expenses, such a relationship between the calculation of this
variance includes the costs / expenses incurred for the goods sold and / or
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administrative expenses. The use of this variance is useful for a more accurate
calculation and monitoring of expenditures in accordance with the values set in the
budget.
Material usage Variances is related to the issuance of work orders for the use of
materials for the production process and with the closing of this order can also calculate
variance. Such a calculation is realized as the difference between the quantity currently
required and the standard quantity predicted multiplied by the cost of a production
component.
Labour Variances such a variance is very necessary for the well-being of companies
operating in this sector and not only, as it analyzes more accurately the time required /
spent by employees for various production operations to determine the effectiveness in
production conditions, equipment required and best practice to determine the standard
hours required to complete a work process and derive the costs required to perform a
work process.
The Sales Variance function of this variance is used to analyse sales performance in a
manner similar to the manner of costs and quantities produced. The use of this variance
analyses and gives a clear picture to executives / managers for the preparation of
operational statements in accordance with the current and projected purchase
requirements.
Profit Variance the use of this variance reflects / analyses the actual profit that a
company is realizing compared to the profit budgeted / projected by other sectors of the
enterprise. Such an analysis measures the ability of companies to generate profits from
sales and its productive capacity including all fixed costs and other necessary
expenses.
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2. How can the variance analysis identified above help the production department
meet its objectives?
- Identifies possible changes in the amount of materials provided to be used with the
current situation of how much material is being used for a product,
Referring to the terms used in this section of the study but also to the studies conducted
previously, we note that the use of variances is very necessary for the well-being of
companies and relevant departments. In the following we will analyse the main causes
of favorable and unfavorable variations in the sales department. The differences
between these 2 variances have to do with the projected budgets in the sales sector as
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not every problem that may be encountered in the coherent year could have been
foreseen in precision for the revenues that could be realized. A favorable variance in the
coherent reporting period where included; Expenditures lower than the planned budget,
lower production costs than foreseen in the budget and from what we notice, where the
most important in the sales department are Revenues realized are higher than foreseen
in the budget, which also leads us to a higher profit for the company. The opposite
happens in the unfavorable variance where costs are higher than budgeting, production
costs higher than budgeting and revenue / profit realization are at lower levels than
budgeted / projected. From what we see above and where the main emphasis in the
sales department is the realization and exceeding of the budgeted plan we will analyse
the main causes of these two variances in the fashion sector which are expressed
below. The causes listed below directly affect the sales sector but also the revenue
generated / earned for the company:
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MODULE 13
- Management
- Owners
- Lenders
Referring to the studies / lessons in the first chapters, we learned about the financial
situation, financial statements, concepts and financial reports, analysis of financial
reports, etc. The reports specified above are a part of the reports which are used in
different Companies and Departments to collect and analyse the financial situation of
the company but also have different uses for the parties who are interested in using /
analysing. Below we will look at / analyse why these reports are important and of
interest to Management, Owners and Lenders, regardless of the nature of the function /
department, reports are always drafted according to the requirements and needs of
each / company.
Management is always interested in analysing the reports related to the Cost of Goods
Sold, Gross Margin Analysis, Profit Analysis, Contributions, Working Capital Analysis
and Operating Income Analysis, as these reports / analyses are used to make
comparisons and to make decisions regarding the competition but also to make
comparisons for the performance of the company in different periods or different years
but also in different economic environments in order to make the right decisions for the
most efficient management of the company but also even the most important for
generating income at high levels.
Owners are predisposed to have financial information in order to help them in making
decisions about the future performance of the company but also with their investments /
shares in the company. Such a financial statement gives them the information they
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need to assess the potential of the company in terms of Benefits, Revenue and ongoing
success but also gives a clear picture of whether investors should buy or sell shares in
the company in which they are currently a shareholder.
Funds such as Banks and other Financial Institutions have an interest in analysing the
ratios to see the solvency after maturity or the ability of the assets to be converted into
cash in the short term but also to assess the current situation or future for debts /
obligations that the company has to third parties, employees, taxes and fees, etc.
2. List three ratios for each of the above mentioned groups in which they will
have more interest and explain why these groups will be more interested in those
ratios?
Management to be in coherence with the latest developments in the company but also
to make important and crucial decisions for the well-being of the company always has a
constant and primary interest in reports that come to our aid, such as:
From what we see above the use / information in these reports is always the primary
point for guaranteed success and timely company.
Owners are always interested in the performance and well-being of the company /
companies in which they have invested / have shares. In order to be in constant
coherence in order to have a clear picture of the shares whether they have decreased
or increased, but also the profit that the company realizes, they have a constant interest
in different time periods for reports which are a great help for information / situation in
which the company is located.
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Lenders are predisposed to obtain the appropriate information through the use of the
following reports. The use of these reports for Lenders is considered of great
importance to have a clear picture of the economy / financial situation in which the
company is located which will be financed by loans.
3. Give examples and explain one ratio for each of the following ratio
classification groups.
- Liquidity ratios
- Profitability ratios
- Activity ratios
- Liquidity ratios assess the financial situation and solvency of the company, in other
words the ability to return the Assets in monetary value in the shortest possible time in
order to have the ability to pay liabilities to third parties / Suppliers, Banks, Employees,
etc. Liquidity reports are useful and widely used to make preliminary assessments by
Suppliers, banks but also by company employees. One of the most important and fast
reports to make such an assessment for the company / enterprise is the Quick Ratio
Report which excludes the inventories and current assets of the company. Such a ratio
is measured by the formula:
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Where:
C + MS + AR
C = Cash & Cash Equivalents
Quick Ratio =
CL MS = Marketable Securities
AR = Accounts Receivable
CL = Current Liabilities
Particulars Amount
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We will use the above data for the analysis and benefit that we will get from the use of
formulas for calculating Profitability Ratios;
Return on Equity = Profit After tax / Net worth = 9,100 / 59,500 = 15.29%
Gross Profit = Gross Profit / Sales x 100 = 48,500 / 160,500 x 100 = 30.22%
Net Profit = Net Profit / Sales x 100 = 9,100 / 160,500 x 100 = 5.67%
- Activity ratio is also known as the turnover ratio which explains and analyses in detail
the progress and efficiency of the use of fixed and current assets in order to generate
income / cash. This report also measures the sustainability of using the company's
capacities efficiently. To analyse such a report, experts and other interested persons
use the following formulas;
Particulars Amount
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Particulars Amount
Sales £ 2,700,000
Particulars Amount
Sales £ 4,000,000
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