SHORT ANSWER SECTION

Management Accounting
According to Robert Anthony “Management accounting is concerned
with accounting information which is useful to management.”
Financial Analysis
Financial analysis simply refers to analysis of financial statement of a
company.
Financial statement
These are formal records of the financial activities and position of a
business.
Analysis and interpretation of financial statement
It is an attempt to determine the significance and meaning of financial
statement data.
Internal analysis
These are those analysis done by internal parties. It is a detailed
financial analysis.
External analysis
These are those analysis done by external parties. It is not a detailed
financial analysis.
Long term analysis
These are those analysis for ascertaining long term profitability,
solvency, and stability of the firm.
Short term analysis
These are those analysis for ascertaining short term solvency of the
firm.
Horizontal analysis
It refers to comparison of financial data of a company for several years.
Vertical analysis
It refers to the study of relationship of the various items in the financial
statements of one accounting period.
Comparative Statement
It is a statement used to compare a particular financial statement with
prior period statements.
Comparative balance sheet
It is a statement that shows the financial position of an organisation
over different periods.
Comparative income statement
It is a statement that present the result of multiple account periods in
separate columns.
Common size statement
It is a tool of financial managers to use analysis of financial statement.
These are expressed in percentage form.
Common size income statement
It is an income statement in which each line item is expressed as a
percentage of the value of revenue or sales.
Common size balance sheet
It is a balance sheet that display both the numerical value and relative
percentage for total assets, total liabilities and equity accounts.
Trend Analysis
It is an analysis of trend of the firm by comparing its financial
statements to analyses the trend of the market or future.
Income statement
Income statement is one of the financial statement of a company and
shows the revenues and expenses during a particular period.
Inter- firm comparison
It means a comparison of two or more similar business units with the
objective of finding the competitive position to improve the
profitability and productivity of those units.
Intra- firm comparison
It means a comparison among different units, products or business
units of a firm.

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Ratio
Ratio is the simple arithmetic expression of the relationship of one
number to another.
Ratio analysis
It is a technique of analysis and interpretation of financial statements.
Accounting Ratio
Ratio calculated in the basis of accounting information are called
accounting ratio.
Liquid Ratio
It refers to ability of a concern to meet its current obligations.
Current Ratio
It is the ratio of current asset to current liabilities. It shows the
relationship between total current assets and current liabilities. It is
also known as working capital ratio or banker’s ratio.
Quick Ratio
It is the ratio of quick asset to current liabilities. It is the measure of the
instant debt paying ability of a business. It is also called acid test ratio
or liquid ratio.
Window Dressing
It is a practice of improving current ratio through manipulation of
accounts.
Debt Equity Ratio
It is a type of ratio which expresses the relationship between debt and
equity. This ratio is also known as security ratio or external internal
ratio.
Total Asset to Debt Ratio
It is a type of ratio which expresses the relationship between total asset
and total liabilities of a business. It is also called solvency ratio.
Proprietary Ratio
It is a ratio which establishes the relationship between shareholders
fund and total asset. This ratio is also known as equity ratio or net
worth ratio.
Fixed Asset Ratio
It is a ratio of fixed asset to long term funds or capital employed.
Capital Gearing Ratio
It is a ratio which indicates the relationship between fixed interest
bearing securities and equity shareholders fund.
Interest Coverage Ratio
It is a ratio which establishes the relationship between operating profits
and interest charges.
Dividend coverage ratio
It is a ratio which measures the ability of a company to pay dividend or
preference shares carrying a fixed rate of dividend.
Overall coverage ratio
It measures the ability of a company to service all fixed obligations out
of its earnings.
Activity ratios (Turnover ratios)
It shows how effectively a firm uses its available resources or assets.
These ratios indicate efficiency in asset management.
Inventory turnover Ratio
It is a type of ratio which shows the relationship between costs of
goods sold and average inventory. It is also known as stock turnover
ratio.
Stock Velocity
Stock turnover ratio expressed in time. It can also be expressed in days
or months. It is called stock velocity or stock turnover period.
Debtor’s turnover ratio
It is a ratio which explains the relationship between net credit sales and
average debtors. It is also known as receivable turnover ratio.
Average collection period
Debtor’s turnover ratio expressed in days or months. It is called average
collection period or debtors velocity.
Creditor’s turnover ratio
It shows relationship between net credit purchases and average
creditors. It is also called payable turnover ratio.
Average payment period
Creditor’s turnover ratio expressed in days or months. It is known as
average payment period or creditors velocity.
Working capital turnover ratio
The relation between sales and working capital is called working capital
turnover ratio.
Fixed asset turnover ratio
It is a ratio which establishes the relationship between net sales and
fixed assets.
Profitability Ratios
It refers to ability of a firm to earn income.
Gross profit ratio
This is the ratio of gross profit to sales expressed as percentage. It is
also known as gross margin.
Operating ratio
It is a ratio expresses the relationship between operating cost and sales.
It indicates overall efficiency in operating the business.
Operating profit ratio
It is a ratio which explains the relationship between operating profits
and net sales.
Net profit Ratio
It is a ratio of net profit earned by business and its net sales. It
measures overall profitability.
Return on investment (ROI)
ROI measure the overall profitability. It establishes the relationship
between profit and return on investment
Market Test Ratios
Market test ratios are used for evaluating shares and stock which are
traded in the market. Market test ratios are also known as investor’s
ratios or stock market ratios or market valuation ratios.

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Earnings per Share (EPS)
This ratio indicates the profits available for each equity share. It is
calculated by dividing the earnings (profits) available to equity
shareholders by the number of equity shares issued.
Dividend per Share (DPS)
It is the amount of profit distributed to equity shareholders divided by
the number of equity shares outstanding.
PE Ratio
It is the ratio of a company’s share price to the company’s earning per
share.
Du Pont control Chart
Du Pont Chart shows the analysis of profitability that breaks down ROI
between profit margin and capital turnover. It shows the interaction of
operating net profit ratio and capital turnover ratio. It helps the
management to visualize the different forces affecting profits.
Fund
Fund means working capital of the excess of current assets over current
liabilities.
Fund flow (Flow of fund)
Inflow and outflow of fund in a business is called fund flow.
Fund flow statement
It is a statement showing sources and applications of fund in a business.
Fund from operation
It is the fund generated from business operation. It is an internal source
of fund. Sales are the main source of inflow of fund.
Schedule of changes in working capital
It is a statement which is prepared by recording changes in current
assets and current liabilities during the accounting period.
Sources and applications of fund
Sources of Fund Applications of fund
Issue of shares Redemption of shares
Issue of debentures Redemption of debentures
Medium and long term loan. Repayment of loans
 Sales of fixed assets. Purchase of fixed assets
Sale of investment Purchase of investment
Cash
Cash comprises of cash in hand and demand deposits with bank.
Cash Equivalents
These are short term, highly liquid investment that are readily
convertible into cash.
Non-cash items
It refers to those entries on a cash flow statement that do not involve
actual cash transactions. It include capital depreciation, investment
gains or losses etc.
Cash Flow
Inflow and outflow of cash and cash equivalents in a business is called
cash flow.
Cash flow statement
It is a statement which describes the inflow and outflow of cash and
cash equivalents in an enterprise during a specified period of time.
Cash flow from operating activities
These are cash flows from regular course of operations of a business.
Examples:
a) Cash sales
b) Cash received from debtors
c) Cash purchase of goods
Cash flow from investing activities
Investing activities includes purchase and sale of fixed assets.
Examples
a) Cash payment to purchase fixed asset.
b) Cash receipts from sale of fixed assets.
c) Cash payment to purchase shares, debentures etc.
Cash flow from financing activities
The financing activities of a firm include issuing or redemption of share
capital, debentures and raising and repayment of loans.
Examples
a) Cash proceeds from issue of shares.
b) Cash proceeds from issue of debentures.
Variable Cost
Variable costs are those costs which vary in proportion to change in the
volume of production or level of activity.
Fixed Cost
Fixed costs are those costs which do not change as the volume of
production or level of activity changes.
Marginal Cost
It is the additional cost of producing an additional unit.
Marginal Costing
It is the ascertainment by differentiating between fixed cost and
variable cost.
Absorption costing
It is a technique whereby fixed costs as well as variable costs are
allotted to cost units.
Direct costing
It is a specilaised form of cost analysis that only uses variable costs to
make decisions.
Cost Volume Profit Analysis (CVP Analysis)
CVP analysis is the study of the effect on future profit of changes in
fixed cost, variable cost, sales price, quantity and mix.
Contribution
Contribution is the excess of sales over variable cost. It is the marginal
profit. It is also known as gross margin.
Break Even Point
It is the point at which total sales revenue is equal to total cost. It is the
point of no profit no loss.
Break Even Analysis
It is a method of studying the relationship amongst sales, revenue, fixed
costs and variable costs to determine the level of activities at which
costs are equal to sales revenue.
Break Even Chart
It is the graphical presentation of break-even point. It shows
relationship between sales, volumes, variable and fixed cost.
Angle of incidence
It is the angle caused by the intersection of the total sales line and total
cost line at the break-even point.
Margin of Safety
It is the difference between actual sales and break-even sales.
Cash break-even point
It is the number of units to be produced to give a contribution equal to
cash fixed cost.
Cost break-even point
It is the point where the costs of operating two alternatives is equal.
Simple break-even chart
It is the most popular break even chart. Its preparation is simple. It
shows total cost line, fixed cost line and sales line.
Profit Volume Chart (P/V Chart)
It is a chart which shows the amount of profit or loss at different levels
of output.
Make or Buy Decision
Marginal costing helps the management in deciding whether to make a
component part within the factory or to buy it from outside suppliers.
Key Factor
A factor which restricts the volume of operation of the firm is knowns
as key factor. Key factor is also called limiting factor or critical factor.
Shut down Cost
Shut down cost are those cost which have been incurred even if
production or operation of an undertaking are discontinued
temporarily due strike or other reasons.
Shut down point
It is the point where the operating losses are equal to shut down cost.
Profit planning
In marginal costing, profit planning means determination of profitability
at different level of production and sales.

PREPARED BY
JUBAIR MAJEED

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