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Meaning Assets are the property or Liabilities refers to the debts, which
estate, which a company a company owes to a person or
owns, having monetary value entity.
What is it? These are financial resources These are the financial obligations,
which provide future which has to be paid off in future.
economic benefit.
Example:
B)
Definition of 'Balance Sheet'
Balance Sheet is the financial statement of a company which includes assets, liabilities, equity
capital, total debt, etc. at a point in time. Balance sheet includes assets on one side,and
liabilities on the other.
Balance sheet is more like a snapshot of the financial position of a company at a specified time,
usually calculated after every quarter, six months or one year. Balance Sheet has two main
heads –assets and liabilities.
Another important head in the balance sheet is shareholder or owner’s equity. Assets are equal
to total liabilities and owners’ equity. Owner’s equity is used when the company is a sole
proprietorship and shareholders’ equity is used when the company is a corporation. It is also
known as book value of the company.
Let’s understand reporting of a transaction on a balance sheet. If a company XYZ takes a five-
year loan from public sector banks for an amount of Rs 7,00,000, it means that the bank will pay
the money to XYZ Ltd.
The accounts department will increase the cash component by 7,00,000 on the assets front,
and at the same time increase the long term debt account with the same amount, thus
balancing both the sides.
If company raises Rs 10,00,000 from investors, then its assets will increase by that amount, as
will its shareholder’s equity.
Q-2
LIQUIDITY
RATIO
ABSOLUTE
CURRENT
LIQUID
RATIO
RATIO
FIXED ASSEST
TURNOVER DEBTORS
RATIO TURNOVER
RATIO
AVERAGE
DEBT SERVICE
PAYMENT
RATIO
PERIOD
CREDITORS
WORKING WORKING
CAPITAL TURN
TURNOVER CAPITAL OVER RATIO
RATIO RATIO
the term Debtor Collection Period indicates the average time taken to collect trade debts. In other
words, a reducing period of time is an indicator of increasing efficiency. It enables the enterprise to
compare the real collection period with the granted/theoretical credit period.
It is on the pattern of debtors turnover ratio. It indicates the speed with which the payments are made to
the trade creditors. It establishes relationship between net credit annual purchases and average accounts
payables. Accounts payables include trade creditors and bills payables. Average means opening plus
closing balance divided by two. In this case also accounts payables' figure should be considered at gross
value i.e. before deducting provision for discount on creditors (if any).
The working capital turnover ratio is calculated as follows: net annual sales divided by the
average amount of working capital during the same 12 month period.
The gross profit margin ratio, also known as gross margin, is the ratio of
gross margin expressed as a percentage of sales. Gross margin, alone,
indicates how much profit a company makes after paying off its Cost of
Goods sold. It is a measure of the efficiency of a company using its raw
materials and labor during the production process. The value of gross profit
margin varies from company and industry. The higher the profit margin, the
more efficient a company is. This can be assigned to single products or an
entire company.
Operating net profit ratio is calculated by dividing the operating net profit by sales. This ratio helps in
determining the ability of the management in running the business.
The net profit percentage is the ratio of after-tax profits to net sales. It reveals the
remaining profit after all costs of production, administration, and financing have been
deducted from sales, and income taxes recognized. As such, it is one of the best measures
of the overall results of a firm, especially when combined with an evaluation of how well it
is using its working capital. The measure is commonly reported on a trend line, to judge
performance over time. It is also used to compare the results of a business with its
competitors.
Net profit is not an indicator of cash flows, since net profit incorporates a number of non-
cash expenses, such as accrued expenses, amortization, and depreciation.
Earnings per share (EPS) ratio measures how many dollars of net income have been
earned by each share of common stock. It is computed by dividing net income less
preferred dividend by the number of shares of common stock outstanding during the
period. It is a popular measure of overall profitability of the company and is usually
expressed in dollars.
SHARE
GROSS
PROFIT
RATIO
RETURN ON
CAPITAL EARNING
EMPLOYED PER SHARE
RATIO
RETURN ON EARNING
INVESTMENT PER EQUITY
RATIO SHARE
PROFITIBILATY
OPERATING
PROFIT PRICE
RATIO EARNING
RATIO
NET PROFIT
OPERATING TO NET
COST RATIO WORTH
RATIO
DEBT EQUITY
RATIO
CAPITAL
DEBT SERVICE PROPRIETERY
RATIO STRUCTURE RATIO
RATIO
CAPITAL
GEARING
RATIO
In economics and government finance, debt service ratio is the ratio of debt service payments
(principal + interest) of a country to that country’s export earnings.[1] A country's international finances
are healthier when this ratio is low. The ratio is between 0 and 20% for most countries.
In contrast to the debt service coverage ratio, which is calculated as income divided by debt, this
ratio is inverse and is calculated as debt service divided by country's income from international trade,
i.e. export.
Gearing Ratio
Levels: AS, A Level
Exam boards: AQA, Edexcel, OCR, IB
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Gearing focuses on the capital structure of the business – that means the proportion of
finance that is provided by debt relative to the finance provided by equity (or
shareholders).
The gearing ratio is also concerned with liquidity. However, it focuses on the long-term
financial stability of a business.
Gearing (otherwise known as "leverage") measures the proportion of assets invested
in a business that are financed by long-term borrowing.
In theory, the higher the level of borrowing (gearing) the higher are the risks to a
business, since the payment of interest and repayment of debts are not "optional" in the
same way as dividends. However, gearing can be a financially sound part of a
business's capital structure particularly if the business has strong, predictable cash
flows.
Thus, the equity ratio is a general indicator of financial stability. It should be used in
conjunction with the net profit ratio and an examination of the statement of cash flows to
gain a better overview of the financial circumstances of a business. These additional
measures reveal the ability of a business to earn a profit and generate cash flows,
respectively.
To calculate the return on net worth, first compile the net profit generated by the
company. The profit figure used should have all financing costs and taxes deducted from it,
so that it accurately reflects the profit available to shareholders. This is the numerator in
the formula. Next, add together the capital contributions made by shareholders, as well as
all retained earnings; this is the denominator in the formula. The final formula is:
A5
Expense:
Cost of goods and other
operating expenses 22
Depreciation 4
Profit
before tax 4
Income tax
expense 1.16
Profit after
tax 2.84
INCOME STATEMENT FOR THE YEAR 2019-2020
RS
Income: 28
Revenue
Expense
:
Cost of goods and other
operating expenses 21
Depreciation 4
Profit
before tax 3
Income tax
expense .84
Profit after
tax 2.16
RS
Income:
Revenue 29
Expense
:
Cost of goods and other
operating expenses 22
Depreciation 4
Profit
before tax 3
Income tax
expense .84
Profit after
tax 2.16
RS
Income:
Revenue 25
Expense
:
Cost of goods and other
operating expenses 17
Depreciation 4
Profit
before tax 4
Income tax
expense 1.16
Profit after
tax 2.84
RS
Income: 30
Revenue
Expense
:
Cost of goods and other
operating expenses 22
Depreciation 4
Profit
before tax 4
Income tax
expense 1.16
Profit after
tax 2.84
Present value=inflow-outflow=7.589-18.33=(10.74)cr
Q5
q-6
wacc=[14000000/110000000]*(25000000+400000)+[(6000000
/110000000)*1800000*(1-0.29)]
=3302436.36
Where: