Unit
i i in05 iii
: Cash
til Flowit Statement &
sitic tie tie's
l l
Accounting
i e ni ti t Ratios
Iiii s i
s
IAS07 Preparation
ofcashflow
statements
AsperIASOT everyentityis requiredto providedetailsofitscashflows thisis because a
company's accounting profit is notthesoleindicatorof a company'sperformance cashflowstatem
providetheuserswithimportantinformation on a company's ability togeneratecashinflowsas we
as historicalinformation on thecashneedsofan entity
Itsmainobjectives are asfollows
understand liquidity solvencyofan entity
understand changes in netassets
flowswithnetprofit
comparecash
enhancescomparability as it isnotaffectedbydifferentstandards
provideshistorical information on cash cashequivalents to makefuture predictions
There are 2main methodsofcomputingcashflows
DirectMethod IndirectMethod
Cashflowiscomputed
bytakingnetof cashflow is computed
bymakingadjustm
operatingcash receiptsminusthe to ProfitbeforeTaxandclassifiedunder
operatingcashpayments 3heads Operatingactivities
Operatingactivitiesare theprincipal revenuegeneratingactivitiesofan enterprise
Investingactivitiesare concernedwiththeacquisitionanddisposal ofnon currentasse
fromwhich an entitygetsreturns
I if
Finactivities primaryvis
bing.it
i
ium
others ources
Financingactivities are concernedwiththereceiptsandpaymentsmade
external sources
byan entity's
offinance
cashflowratio net investing
yefim 100
, cash cashEquivalents
cash cashequivalents are shorttermhighly liquidinvestmentsthatare readilyconvertibleto
knownvaluesofcashandface an insignificantriskofchange Theyinclude
cashinHand Demand
investmentscash
cash inhand demanddeposits bankoverdraft shortterm
Deposits.marketable
securities TBills moneymarketfunds pettycash
withshort maturity
preference shares
investmentswith a maturityof3monthsorlessfromdateofacquisition
Accounting Ratios theirinterpretations
Accountingratios are quantitativetools derivedfromfinancialstatements to analyse acompan
financialp erformance Theyareclassified as
liquidityRatios shorttermhealth
CurrentR atio currenta ssets ideal2 1 ensures l iquiditybut
strong high
e xcessively
i nefficientuse resources showsr isk not
current shows
debts
of of p aying
liabilitiesQuick
Ratio current assets inventory ideal11Mensure b etter shortt erm
abilitytomeet
obligationswithout oninventory
q
cost sales
0
p inv purchases Cl inv currentliabilities relying
cash cashequivalents ensures l iquiditybut
strong highshows
e xcessively
Ratio
current debtscash
inefficientuse
of resources showsrisk not
of
p aying
liabilitiesInventory
turnover averageinventory X
3 as efficientinventorymanagement
shows
cost stockslow
obsolets sales
ofsales
AllReceivablecollectionperiod tradereceivablestimes
6
3
5 ishortere fficientmanagement quick
credits ales of
recovery receivables
AllPayablePaymentperiod top Psybles
X365 longerimprovesliquiditybut
affects
supplier
relationships
Ratios
Solvency Leverage longtermhealth
Debttoequity Ratio totall iabilities f unds risky
meansmorerelianceonborrowed
totalequity torepayloans
, DebttoAssetsRatio totaldebt moreriskasmoreassetsarefinancedthroughdebts
ratherthanowners
funds
totalassets
InterestcoverageRatio abilitytomeeti nteresto bligations
indicatesstrong
intents
pen
muchanetaresupportedby
FinancialleverageRatio
aue.gg iattiiiyteguity1sh igg
ProfitabilityRatios
GrossProfitR atio grossprofit 100 controloverc oas basicprofitability
better
revenue
overallprofitability
NetProfitRatio neti ncome 100 strong
revenue
OperatingProfitR atio 100 ofoperatingexpenses
bettermanagement control
GBI
better turntoshon
noiipiiaitiiiies
Returnon equity
snaintoiiifonces theirinvestments
Returnon capitalEmployed term
useslong to
funds
capital
mplayed p c
utilisation assetstogenerateprofits
ReturnonAssets efficient
of
inmg
Marketvalue InvestorsRatios
Earningspershare neti ncome prefd ividend forsh
greaterp rofitability
avgshares
weighted
Pricetoearnings Peratio marketpriceper
share stronginvestorexpectationsfor
share
earningsper futuregrowth
DividendYield dividend share better returnstosh
cash
per
share
marketpriceper
betterr eturns relativetoMP share
EarningsYield of
map price
i i in05 iii
: Cash
til Flowit Statement &
sitic tie tie's
l l
Accounting
i e ni ti t Ratios
Iiii s i
s
IAS07 Preparation
ofcashflow
statements
AsperIASOT everyentityis requiredto providedetailsofitscashflows thisis because a
company's accounting profit is notthesoleindicatorof a company'sperformance cashflowstatem
providetheuserswithimportantinformation on a company's ability togeneratecashinflowsas we
as historicalinformation on thecashneedsofan entity
Itsmainobjectives are asfollows
understand liquidity solvencyofan entity
understand changes in netassets
flowswithnetprofit
comparecash
enhancescomparability as it isnotaffectedbydifferentstandards
provideshistorical information on cash cashequivalents to makefuture predictions
There are 2main methodsofcomputingcashflows
DirectMethod IndirectMethod
Cashflowiscomputed
bytakingnetof cashflow is computed
bymakingadjustm
operatingcash receiptsminusthe to ProfitbeforeTaxandclassifiedunder
operatingcashpayments 3heads Operatingactivities
Operatingactivitiesare theprincipal revenuegeneratingactivitiesofan enterprise
Investingactivitiesare concernedwiththeacquisitionanddisposal ofnon currentasse
fromwhich an entitygetsreturns
I if
Finactivities primaryvis
bing.it
i
ium
others ources
Financingactivities are concernedwiththereceiptsandpaymentsmade
external sources
byan entity's
offinance
cashflowratio net investing
yefim 100
, cash cashEquivalents
cash cashequivalents are shorttermhighly liquidinvestmentsthatare readilyconvertibleto
knownvaluesofcashandface an insignificantriskofchange Theyinclude
cashinHand Demand
investmentscash
cash inhand demanddeposits bankoverdraft shortterm
Deposits.marketable
securities TBills moneymarketfunds pettycash
withshort maturity
preference shares
investmentswith a maturityof3monthsorlessfromdateofacquisition
Accounting Ratios theirinterpretations
Accountingratios are quantitativetools derivedfromfinancialstatements to analyse acompan
financialp erformance Theyareclassified as
liquidityRatios shorttermhealth
CurrentR atio currenta ssets ideal2 1 ensures l iquiditybut
strong high
e xcessively
i nefficientuse resources showsr isk not
current shows
debts
of of p aying
liabilitiesQuick
Ratio current assets inventory ideal11Mensure b etter shortt erm
abilitytomeet
obligationswithout oninventory
q
cost sales
0
p inv purchases Cl inv currentliabilities relying
cash cashequivalents ensures l iquiditybut
strong highshows
e xcessively
Ratio
current debtscash
inefficientuse
of resources showsrisk not
of
p aying
liabilitiesInventory
turnover averageinventory X
3 as efficientinventorymanagement
shows
cost stockslow
obsolets sales
ofsales
AllReceivablecollectionperiod tradereceivablestimes
6
3
5 ishortere fficientmanagement quick
credits ales of
recovery receivables
AllPayablePaymentperiod top Psybles
X365 longerimprovesliquiditybut
affects
supplier
relationships
Ratios
Solvency Leverage longtermhealth
Debttoequity Ratio totall iabilities f unds risky
meansmorerelianceonborrowed
totalequity torepayloans
, DebttoAssetsRatio totaldebt moreriskasmoreassetsarefinancedthroughdebts
ratherthanowners
funds
totalassets
InterestcoverageRatio abilitytomeeti nteresto bligations
indicatesstrong
intents
pen
muchanetaresupportedby
FinancialleverageRatio
aue.gg iattiiiyteguity1sh igg
ProfitabilityRatios
GrossProfitR atio grossprofit 100 controloverc oas basicprofitability
better
revenue
overallprofitability
NetProfitRatio neti ncome 100 strong
revenue
OperatingProfitR atio 100 ofoperatingexpenses
bettermanagement control
GBI
better turntoshon
noiipiiaitiiiies
Returnon equity
snaintoiiifonces theirinvestments
Returnon capitalEmployed term
useslong to
funds
capital
mplayed p c
utilisation assetstogenerateprofits
ReturnonAssets efficient
of
inmg
Marketvalue InvestorsRatios
Earningspershare neti ncome prefd ividend forsh
greaterp rofitability
avgshares
weighted
Pricetoearnings Peratio marketpriceper
share stronginvestorexpectationsfor
share
earningsper futuregrowth
DividendYield dividend share better returnstosh
cash
per
share
marketpriceper
betterr eturns relativetoMP share
EarningsYield of
map price
