Final Financial Principles & Techniques Full

7/28/2019 Final Financial Principles & Techniques Full

1/51

C343

1

Managing Financial Principles

And

Techniques

SUBMITTED TO: SIR EDWARD ANYAEJISTUDENT ID: C343

EXTENDED DIPLOMA IN STRATEGIC

MANAGEMENT AND LEADERSHIP (QCF)


2/51

C343

2

1.1Explains the important of cost in the pricing strategy of the organizationof your choice.

Organization is worked with competitive and continually environment so that time

every decision is very crucial even if that organization is to survive or even be profitable so

collection of past cost and projection of future costs is an important area in management

accounting. Management account classify cost into different categories according to the nature

of the cost as following 1) Production cost 2) Administration cost 3) Selling and Distribution.

Production cost divided in three elements like material cost which include cost of the raw

material than labour cost including wages, salaries and bonuses and last one direct expenses

which include like some equipment which is hire. Total three elements are called the prime

cost of production. There is another cost which is indirect cost which does not fall into the

category of direct cost. As well as the nature of cost it is necessary to consider cost behavior

there are three classes of behavioral classification: fixed cost which include incurred by the

organization, variable cost that means which is opposite from fixed cost that always change by

activity, and semi-variable costs which change when level of output change but not directly.

Another is Revenue which is similar way as a variable cost. And the other cost classification

which are committed, controllable, discretionary, irrelevant, incremental etc...And last thing

which is influences on pricing strategy that means that take into view factors such as a firms

overall marketing objective, consumer demand, product attributes, competitors pricing. Andhere main pricing policies are Premium pricing which include us high rate where there is a

uniqueness about the product and service, Penetration pricing that means you change price

temporary for gain market share and Economy pricing that means this is a low price for the

lower end of the market.


3/51

C343

3

1.2 Design a job costing system for use within the organization that youhave chosen. Your job costing system must also show your required

mark up and margin.

Opportunity cost represents income which is forgone by deciding to specific

alternatives. In the process of Decision making to consider any income that will be lost by

rejecting a specific alternative. Job costing is about to where work takes from of individual

jobs undertaken to a customers requirement. Here we divide cost into direct cost,

manufacturing overheads and administration, selling and distribution overheads.

Now from the following example provides us with the information we need to

construct a job costing statement in which we calculate prime cost, factory cost and total cost.

Lets see practical exam from Ratnamani Metals & Tubes LTD. And evaluate the job

costing system for it. For that we also have relevant data about that.

Now the cost operating system first step to find out direct material.

A) Direct materials:

Cost for material: 27 kgs * 3.90 = 105.3

RELEVANT DATA : ESTIMATED 1800

PREPARATION FINISHING PACKAGING

DIRECTLABOUR time 18 hours 9 hours 3 hoursRate ph 5.40 4.50 3.60

DIRECTMATERIAL

27 kg at 3.90 per kg

ANNUALOVERHEADBUDGET

TOTALLABOURHOURS

5400 2700 1800

OVERHEAD

9000 7200 4500


4/51

C343

4B) Direct wages:

Preparation: 18 hours *5.40 = 97.2

Finishing : 9 hours*4.50 = 40.5

Packing : 3 hours*3.60 = 10.8

C) Overhead:

Preparation: Overhead / total hours *hours

= 9000/5400 = 1.67 , 1.67 * 18 = 30.06 per unit

Finishing: 7200 / 2700 = 2.67, 2.67 * 9 = 24.03 per unit

Packing: 4500 / 1800 = 2.5 , 2.5 * 3 = 7.5 per unit

D) Operating statement:

Workingnote

Direct Material A 105.3

Direct labourPreparationFinishingPacking

B97.240.510.8 148.5

253.8

Prime costPreparationFinishingPacking

C30.0624.037.5

61.59

Total factory cost 315.39

Administration o/h (10%of 315.39)Selling and distributiono/h(25% of 253.8)

31.54

63.45 94.99

Total cost 410.38

Selling Price615.57

Profit 205.19


5/51

C343

5

E) MarkUp and Margin:

As we decide to make 50% of profit so as mark - up

Cost price: 410.38

Mark-up (50% *410.38) : 205.19

Selling price : 615.57

The selling price is 615.57 and if the margin is 33.33% then cost price will be 410.41

Cost price : 410.41Margin (33.33% of 615.57) : 205.16

Selling price : 615.57

F) Batch costing :

Cost per unit: The total batch cost / total no. of units produced in batch

G) Process Costing:

Cost per unit: total cost of period / total production of period (liters or kilos)


6/51

C343

6

1.3 Proposing improvements to the costing and pricing system used in theorganization of your choice. Justify your recommendation by stating thebenefits that your proposed improvements would bring to the

organization.

Its very important to improve cost and pricing in any organization. For that there

are some criteria to see which effect to bring change in our organization. There are number of

factor which effect to our organization. First factor is responsibility and control of system in

this factor you have to understand how much cost to runs various factor. Another factor is cost

center is about location which you select and cost units are sub-division of the cost centre.Third one is profit centers here you have to separate your profit part to another part which

dont make profit. Next one is accountable management is a theory of management which is

centre of company which have all responsibility and all decision power. And last factor which

bring change is planning and control in this method you have to do financial control that helps

to find out your income and expense like balance sheet and income statement. And financial

audit that ratio of your company like liquidity ratio, profitability ratio, debts ratio, activity

ration. And budget control that is one type of expects to spend and earn over a time period.


7/51

C343

7

2.2 Assess the sources of funds available to your company for a specific

project. Your response should demonstrate that you have researched a

range of possibilities for funding.

Source of finance has three ways to come finance.

1. Venture Capital

2. Business Growth

3. Business Angels

1. Venture capital:

It means when you money provide by investors to establish up firms and smallbusiness with perceived long term growth potential. Its very key source of funding for bring

into being that does not have access to capital markets. Its naturally high risk for the investor,

but it has the potential for above-average returns.


8/51

C343

8

2. Business Growth:

Business growth is about any firm whose business generates significant positive

cash flows or earnings, which increase at significantly faster rates than the overall economy.

There is two type of factor one is Internal and another is External. In internal factor there is

generating increasing sales, use of retained profit, sales of assets. And another hand in external

factors has Long Term which is ordinary shares, preference shares, new share issue, right issue,

loan, debenture etcin short time bank loans, overdraft, trade credit, factoring etc

3. Business Angels:

Business owners often report that company finance can be very difficult to obtain

even from traditional source such as bank and venture capitalists. Here they do merger and tack

over.

Ratnamani Metals & Tubes LTD. Want to increase his business in metals and tubes

so first of all in 1985 company start production of Stainless Steel Welded Pipes & Seamless

Tubes, as twin small-scale units. In 1991 they Established facilities for manufacturing Stainless

Steel Electric Fusion Welded Pipes. After that they want to increase him strength of production

so they listed in BSE and ASE. Its big milestone for company after that they increase himstrength. That time they want to start him production so they issued 4, 63, 74,959 share in

market. Its listed on 10 Rs. Per share. (http://www.ratnamani.com)
http://www.ratnamani.com/http://www.ratnamani.com/http://www.ratnamani.com/http://www.ratnamani.com/


9/51

C343

9

3.1Select appropriate budgetary targets for an organization.Cash budget means an estimation of the cash inflow and outflow for a business or

individual for specific period of time. Its used to assess the entity has sufficient cash to fulfill

regular operation otherwise too much cash in being left in unproductive capacities.

A cash budget is extremely important, especially for small businesses, because itallows a company to determine how much credit it can extend to customers before it begins tohave liquidity problems. (http://www.investopedia.com )

A) Purpose of budgets:

Department managers in a business make decisions every day that affect the

profitability of the business. In order to make effective decisions and coordinate the decisions

and actions of the various departments, a business needs to have a plan for its operations.

Planning the financial operations of a business is called budugeting.

IN BUDGETARY PLANNING, IT NEEDS THE FOLLOWING

Communication:

In the budgeting process, managers in every department justify the resources they

need to achieve their goals. They explain to their superiors the scope and volume of theiractivities as well as how their tasks will be performed. The communication between superiorsand subordinates helps affirm their mutual commitment to company goals

Planning:

A budget is ultimately the plan for the operations of an organization for a period oftime. Many decisions are involved, and many questions must be answered. Old plans andprocesses are question as well as new plans and processes. Managers decide the most effectiveways to perform each task. They ask whether a particular activity should still be performedand, if so, how.

Control:

Actual results are compared against the budget and action is taken to controlexpenses and to allocate resources effectively.


10/51

C343

10

Evaluation:

One way to evaluate a manager is to compare the budget with actual performance.

Did the manager reach the target revenue within the constraints of the targeted expenditures?Such as market and general economic conditions, affect a managers performance. Whether amanager achieves targeted goals is an important part of managerial responsibility.

Motivation:

The budget can be used as a target for managers to aim for. Rewards can be givenfor operating within the budgeted expenditure or exceed the budgeted revenues.

B)Budgeting targets:

Budgeting targets will assist motivation if they are at the right level. One isexpectation budget that means this budget is set at current achievable levels. It does improvemanagers to improve but can give more accurate forecast. And another hand there isaspirations budget that means this is a budget set at a level which exceeds the level currentlyachieved. This may motive managers to improve financial performance.

C) Cash budgetingA cash budget shows

Cash revenue

Cash expenses

Opening balances

Closing cash balances

Cash budgets are usually prepared on a monthly basis. They are also used to forecast theamount of cash available or the overdraft required.


11/51

C343

11

3.2 Participate in the creation of a master budget for an organization.

Importance of budgeting to management:

In this time of economic hardship, small businesses and micro-businesses areamong those being hardest hitparticularly with their inability to access lines of credit to helpmaintain effective cash-flow. Therefore, it is imperative that these business owners take thesteps necessary to budget and effectively manage the funds they do have available.

Ratnamani Metals & Tubes LTD. plan to start trading on 1st March and a bankaccount will be opened with an initial opening balance of 1,00,000.

March April May

Sales 9,000 24,000 40,000

Purchases 4,500 12,000 20,000

Ratnamani Metals & Tubes LTD. Makes estimates for the first 3 months ofbusiness:

In March, the company will rent a small office. The rent is 2,200 per month and ispaid in cash each month.

Equipment costing 60,000 is required and will be paid for in three equal monthlyinstalments in March, April and May.

Company car costs 9,000, paid in three instalments from April. Wages of 1,500 a month will be paid.

Prepare a cash budget for Ratnamani Metals & Tubes LTD. The threemonths to 31

stMay and comment on it.


12/51

C343

12

Cash Budget: Jones & Son March April May Total

Cash Receipts:

Cash Sales 9,000 24,000 40,000 73,000

Total Receipts 9,000 24,000 40,000 73,000

Cash Payments:

Rent 2,200 2,200 2,200 6,600

Equipment 20,000 20,000 20,000 60,000

Car 3,000 3,000 3,000 9,000

Stock Purchases 4,500 12,000 20,000 36,500

Wages 1,500 1,500 1,500 4,500

Total Payments 31,200 38,700 46,700 1,16,600

Net Cash Flow -22,200 -14,700 -6,700 43,600

Opening Balance 1,00,000 77,800 63,100

Closing Balance 77,800 63,100 56,400

Comments on resource utilisation within Jones & Sons budget:

Receipts are less than payments in March, April and May. Possibly look for cheapersuppliers of stock.

Spread the repayment of the equipment over 6 or 12 months instead of the 3 monthswithin the cash budget.

Obtain a loan for first few months to assist with negative cash flow. Buy second hand equipment, which could end up cheaper.


13/51

C343

13

3.3 Compare actual expenditure and income to the master budget of an organisation.

Zero-based budgeting:

A method of budgeting in which all expenses must be justified for each newperiod. Zero-based budgeting starts from a zero base and every function within anorganization are analyzed for its needs and costs. Budgets are then built around what is neededfor the upcoming period, regardless of whether the budget is higher or lower than the previousone.

Advantages of zero-based budgeting:

Forces budget setters to examine every item. Allocation of resources linked to results and needs. Develops a questioning attitude. Wastage and budget slack should be eliminated. Prevents creeping budgets based on previous years figures with an added on

percentage. Encourages managers to look for alternatives.

Disadvantages of zero-based budgeting:

It a complex time consuming process

Short term benefits may be emphasized to the detriment of long term planning Affected by internal politics - can result in annual conflicts over budget allocation

Implementation of zero-based budgeting:

Identify two alternate funding levels for each activity (decision package). The fundinglevels that we will choose would be a zero based level and the current funding level.

Determine the impact of these funding levels on the decision packages Rank the decision packages


14/51

C343

14

Ratnamani Metals & Tubes LTD.Zero based budget

PurchasesWe have chosen a supplier of better quality products than the previousone in LO 3.2. This will cost 20% more but we can sell the product for 2.5x the saleprice, instead of 2x the sale price within the previous budget.

Equipment - We decide the alternative option to repay over 12 months instead of the 3months as previously budgeted

CarWe decided to buy an alternative 6,000 car and pay within the first month oftrading.

WagesWe decide to stick with our staff instead of reducing our staff, because of

their skills. RentWe decide to stay in our current premises instead of renting a cheaper premisesof 800 per month. The cheaper premises is not in a good location, which may reduceour sales

CashBudget: Ratnamani

Metals & Tubes LTD. (LO

3.2)

March April May Total

Cash Receipts:

Cash Sales 9,000 24,000 40,000 73,000

Total Receipts 9,000 24,000 40,000 73,000

Cash Payments:

Rent 2,200 2,200 2,200 6,600

Equipment 20,000 20,000 20,000 60,000

Car 3,000 3,000 3,000 9,000

Stock Purchases 4,500 12,000 20,000 36,500

Wages 1,500 1,500 1,500 4,500

Total Payments 31,200 38,700 46,700 1,16,600

Net Cash Flow -22,200 -14,700 -6,700 43,600

Opening Balance 1,00,000 77,800 63,100

Closing Balance 77,800 63,100 56,400


15/51

C343

15

Zero Based CashBudget:

Ratnamani Metals & Tubes

LTD.


Cash Receipts:

Cash Sales 12,500 37,500 62,500 1,12,500

Total Receipts 12,500 37,500 62,500 1,12,500

Cash Payments:

Rent 2,200 2,200 2,200 6,600

Equipment 5,000 5,000 5,000 15,000

Car 9,000 9,000

Stock Purchases 5,000 15,000 25,000 35,000

Wages 1,500 1,500 1,500 4,500

Total Payments 22,700 23,700 33,700 1,16,600

Net Cash Flow -10,200 13,800 28,800 32,400

Opening Balance 1,00,000 89,800 76,000

Closing Balance 89,800 76,000 47,200


16/51

C343

16



LTD.


Cash Receipts:

Cash Sales 12,500 37,500 62,500 Times 2.5 ofpurchases

Total Receipts 12,500 37,500 62,500

Cash Payments:

Rent 2,200 2,200 2,200 Same

Equipment 5,000 5,000 5,000 by 4

Car 9,000 Cheaper

Stock Purchases 5,000 15,000 25,000 Times 20%

Wages 1,500 1,500 1,500 Same

Total Payments 22,700 23,700 33,700

Net Cash Flow -10,200 13,800 28,800Opening Balance 1,00,000 89,800 76,000

Closing Balance 89,800 76,000 47,200


17/51

C343

17

3.4 evaluate budgetary monitoring processes in an organization

Basic variance analysis:

Variance analysis is the process by which the total difference between standard and

actual results is analyzed.

A number of basic variances can be calculated. If the results are better than expected,

the variance is favorable (F)

If the results are worse than expected, the variance is adverse (A)

It is important to explain the meaning of the variance and identify possible causes forthe variance.

Basic variances can be calculated for sales, material and salaries.

2a. Sales variances:

Variance Favourable (F) Adverse (A)

Sales price Unexpected price increase due to: Unexpected price decrease due to:

Higher than anticipated customer

demand

Lower than anticipated

customer demand

An improvement in the quality of the

product

A reduction in the quality

of the product


18/51

C343

18

2b. Variance of Ratnamani Metals & Tubes LTD.

CashBudget: Ratnamani

Metals & Tubes LTD. (LO

3.2)


Cash Receipts:

Cash Sales 9,000 24,000 40,000 73,000

Budgeted sales = 73000

Actual sales = 112500

Variance 39500 (F)



LTD.


Cash Receipts:

Cash Sales 12,500 37,500 62,500 1,12,500


19/51

C343

19

3a Materials variances

Causes of materials price variances


Material price Unexpected price increase due to: Unexpected price decrease due to:

Poor quality materials Higher quality materials

Change to a cheaper supplier Change to an expensive supplier

Discounts given for buying in bulk Unexpected price increase

3b. Variance of Jones & Sons materials purchases

(a) Previous Cash Budget:


LTD.


(LO 3.2)

Cash Receipts:

Stock Purchases 4,500 12,000 20,000 36,500

(b) Actual Zero-based Cash

Budget: Ratnamani Metals &

Tubes LTD.


(LO 3.3)

Cash Receipts:

Stock Purchases 5,000 15,000 25,000 35,000


20/51

C343

20

Budgeted purchases = 36500

Actual purchases = 35000

Variance 1500 (A)

4a. Salary variances

Causes of salary rate variances:


Salary rate Lower skilled staff: Higher skilled staff

Cut in overtime /

bonuses Increase in overtime / bonus

Unforeseen wage increase

4b. Variance of salaries rates

(a) Previous Cash Budget:


LTD.


(LO 3.2)

Cash Receipts:

Wages 1,500 1,500 1,500 4,500


21/51

C343

21

Budgeted salaries = 4500

Actual salaries = 4500

Variance 0

5. Prompt and corrective action

Adverse sales variancesTo counter this, you can increase sales prices, advertising,sales incentives etc.

Adverse materials price variancesTo counter this, you can choose a cheaper supplier,

purchase in bulk, choose alternative products etc.

Adverse salary rate variancesyou could reduce staff, reduce salaries / bonuses /

commission, recruit cheaper staff etc.

(b) Previous Cash Budget:


LTD.


(LO 3.3)

Cash Receipts:

Wages 1,500 1,500 1,500 4,500


22/51

C343

22

4.1 recommend processes that could manage cost reduction in an organization.

Standard costing:

An estimated or predetermined cost of performing an operation or producing a good

or service, under normal conditions. Standard costs are used as target costs (or basis for

comparison with the actual costs), and are developed from historical data analysis or from time

and motion studies. They almost always vary from actual costs, because every situation has its

share of unpredictable factors.

Budgetary control:

Methodical control of an organization's operations through establishment of

standards and targets regarding income and expenditure, and a continuous monitoring and

adjustment of performance against them.

Difference between standard costing and budgetary control

1. Budgetary control deals with the operation of a department or the business as a whole

in terms of revenue and expenditure.

Standard costing is a system of costing which makes a comparison between standard

costs of each product or service with its actual cost.

2. Budgetary control covers as a whole in terms of revenue and expenditures such as

purchases, sales, production, finance etc.Standard costing is related to a product and its cost only.

Value analysis

here two different things about value analysis which are different in different place.

1. Manufacturing: Systematic analysis that identifies and selects the best value

alternatives for designs, materials, processes, and systems. It proceeds by repeatedly asking

"can the cost of this item or step be reduced or eliminated, without diminishing theeffectiveness, required quality, or customer satisfaction?" Also called value engineering, its

objectives are (1) to distinguish between the incurred costs (actual use of resources) and the

costs inherent (locked in) in a particular design (and which determine the incurring costs), and

(2) to minimize the locked-in costs.


23/51

C343

232. Purchasing: Examination of each procurement item to ascertain its total cost of

acquisition, maintenance, and usage over its useful life and, wherever feasible, to replace it

with a more cost effective substitute. Also called value-in-use analysis.

Value engineering

Value Engineering can be defined as an organized approach to providing therequired functions at the lowest cost. From the beginning the idea of value engineering wasseen to be cost validation exercise, which did not affect the quality of the product. The straighterror of an improvement or finish would not be considered value engineering.

As another definition: Value Engineering can be defined as an organized approach to the

identification and removal of unnecessary cost. Unnecessary cost is Cost which providesneither use, nor life, nor quality, nor appearance, nor customer features.

Difficulties with introducing cost reduction programmers

Lowered worker assurance-Employees are alternate feeling that their enterprises are

unappreciated

Lack of arranging-can in fact the price lessening practice more unreasonable.

Harm to value-Serious decreases in prices can genuinely mischief an outfit's capability to

keep handling value items or utilities.

Quality costs

A product that meets or exceeds its design specifications and is free of defects that

spoil its appearance or degrade its performance is said to have high quality of conformance. If

an economy car is free of defects, it can have a quality of conformance that is just as high as

defect-free luxury car. The purchasers of economy cars cannot expect their cars to be as richly

as luxury cars, but they can and do expect to be free of defects.

Quality costs can be broken down into four broad groups. These four groups arealso termed as four (4) types of quality costs. Two of these groups are known as prevention

costs and appraisal costs. These are incurred in an effort to keep defective products from

falling into the hands of customers. The other two groups of costs are known as internal failure

costs and external failure costs. Internal and external failure costs are incurred because defects

are produced despite efforts to prevent them therefore these costs are also known as costs of

poor quality.
http://www.accountingformanagement.com/quality_costs.htm#Prevention%20Costshttp://www.accountingformanagement.com/quality_costs.htm#Prevention%20Costshttp://www.accountingformanagement.com/quality_costs.htm#Appraisal%20Costshttp://www.accountingformanagement.com/quality_costs.htm#Internal%20failure%20Costshttp://www.accountingformanagement.com/quality_costs.htm#Internal%20failure%20Costshttp://www.accountingformanagement.com/quality_costs.htm#External%20Failure%20Costshttp://www.accountingformanagement.com/quality_costs.htm#External%20Failure%20Costshttp://www.accountingformanagement.com/quality_costs.htm#Internal%20failure%20Costshttp://www.accountingformanagement.com/quality_costs.htm#Internal%20failure%20Costshttp://www.accountingformanagement.com/quality_costs.htm#Appraisal%20Costshttp://www.accountingformanagement.com/quality_costs.htm#Prevention%20Costshttp://www.accountingformanagement.com/quality_costs.htm#Prevention%20Costs


24/51

C343

24

Quality costs

(a) Prevention & appraisal costs

Generally the most effective way to manage quality costs is to keep away from

having defects in the first place. It is much less costly to prevent a problem from ever

happening than it is to find and correct the problem after it has occurred. Prevention

costs support activities whose purpose is to reduce the number of defects. Companies employ

many techniques to prevent defects for example statistical process control, quality engineering,

training, and a variety of tools from total quality management (TQM).

Some companies provide technical support to their suppliers as a way of preventing

defects. Particularly in Just in time systems, such support to suppliers is vital. In a Just in timesystem, parts are delivered from suppliers just in time and in just the correct quantity to fill

customer orders. There are no stockpiles of parts. If a defective part is received from a

supplier, the part cannot be used and the order for the ultimate customer cannot be filled in

time. Hence every part received from suppliers must be free from defects. As a result,

companies that use Just in time often require that their supplier use stylish quality control

programs such as statistical process control and that their suppliers certify that they will deliver

parts and materials that are free of defects.

(b) Appraisal costs

Any defective parts and products should be caught as early as possible in theproduction process. Appraisal costs, which are sometimes called inspection costs, are incurredto identify defective products before the products are shipped to customers. Unfortunatelyperforming review activates doesn't keep defects from happening again and most managersrealize now that maintaining an army of inspectors is a costly and ineffective approach toquality control.

Employees are increasingly being asked to be responsible for their own qualitycontrol. This approach along with designing products to be easy to manufacture properly,allows quality to be built into products rather than relying on inspections to get the defects out.
http://www.accountingformanagement.com/total_quality_management.htmhttp://www.accountingformanagement.com/total_quality_management.htm


25/51

C343

25

(c) Internal & external failure costs

Failure costs are incurred when a product fails to conform to its designspecifications. Failure costs can be either internal or external. Internal failure costs result fromidentification of defects before they are shipped to customers. These costs include scrap,rejected products, alteration of defective units, and downtime caused by quality problem. Themore effective a company's appraisal activities the greater the chance of catching defectsinternally and the greater the level of internal failure costs. This is the price that is paid toavoid incurring external failure costs, which can be devastating.

(d) External failure costs

When a defective product is delivered to customer, external failure cost is theresult. External failure costs include warranty, repairs and replacements, product recalls,liability arising from legal actions against a company, and lost sales arising from a reputationfor poor quality. Such costs can decimate profits.

External failure costs usually give rise to another intangible cost. These intangiblecosts are hidden costs that involve the company's image. They can be three or four timesgreater than tangible costs. Missing a deadline or other quality problems can be intangiblecosts of quality. Internal failure costs, external failure costs and intangible costs that impair thegoodwill of the company occur due to a poor quality so these costs are also known as costs ofpoor quality by some persons.


26/51

C343

26

4.2 Evaluate the potential for the use of activity-based costing

To compete successfully, companies must change the way they report and managecosts. This means replacing old institutions of cost accounting and inventory valuation.Activity Based Costing (ABC) is a managerial accounting system which determines the cost ofactivities without distortion and provides management with relevant and timely information. Itdoes not represent just a new set of overhead allocation rules or techniques to value inventory.ABC represents a way to look at operating costs and provides methods to dissect theunderlying activities, which cause costs to exist.

Activity Based Management (ABM) is a natural extension of ABC. It allowsleaders to examine non-value-added activities and make rational decisions to eliminate them.

ABM relies on the Activity Based Costing system to specify where non-value-added activitiesexist and to value the monetary benefits associated with their elimination.

A method of budgeting in which activities that invite costs in every functional areaof an organization are recorded and their relations are defined and analyze. Activities are thentied to strategic goals, after which the costs of the activities needed are used to create thebudget.

Activity based budgeting stands in contrast to traditional, cost-based budgetingpractices in which a prior period's budget is simply adjusted to account for inflation or revenuegrowth. As such, ABB provides opportunities to align activities with objectives streamline

costs and improve business practices.

Method of Activity-based costing:

Methodology of ABC focuses on cost allocation in operational management. ABChelps to separate

Fixed cost

Variable cost

Overhead cost
http://en.wikipedia.org/wiki/Cost_allocationhttp://en.wikipedia.org/wiki/Fixed_costhttp://en.wikipedia.org/wiki/Variable_costhttp://en.wikipedia.org/wiki/Overhead_costhttp://en.wikipedia.org/wiki/Overhead_costhttp://en.wikipedia.org/wiki/Variable_costhttp://en.wikipedia.org/wiki/Fixed_costhttp://en.wikipedia.org/wiki/Cost_allocation


27/51

C343

27

The split of cost helps to identify cost drivers, if achieved. Direct labor and

materials are quite easy to trace directly to products, but it is more difficult to directly allocateindirect costs to products. Where products use common resources in a different way, some sortof weighting is needed in the cost allocation process. The cost driveris a factor that creates ordrives the cost of the activity. For example, the cost of the activity of bank tellers can becredited to each product by measuring how long each product's transactions (cost driver) takesat the counter and then by measuring the number of each type of transaction. For the activity ofrunning machinery, the driver is likely to be machine operating hours. That is, machineoperating hours drive labour, maintenance, and power cost during the running machineryactivity.

Reasons for implementing activity-based costing.

Better Management

Budgeting, performance measurement

Calculating costs more exactly

Ensuring product /customer success

Evaluating and justifying investments in new technologies

Improving product quality by better product and process design

Increasing competitiveness or coping with more competition

Management

Managing costs

Providing behavioral incentives by creating cost awareness among employees Responding to an increase in overheads

Responding to increased pressure from regulators

Supporting other management innovations such as TQM and JIT systems
http://en.wikipedia.org/wiki/Cost_driverhttp://en.wikipedia.org/wiki/Cost_driverhttp://en.wikipedia.org/wiki/Cost_driverhttp://en.wikipedia.org/wiki/Cost_driverhttp://en.wikipedia.org/wiki/Cost_driverhttp://en.wikipedia.org/wiki/Cost_driver


28/51

C343

28

Benefits of Activity-based costing (ABC)

More accurate costing of products/services, customers, SKUs, distribution channels. Better understanding overhead. Easier to understand for everyone. Utilizes unit cost rather than just total cost. Integrates fit with Six Sigma and othercontinuous improvement programs. Makes visible waste and non-value added activities. Supports performance management and scorecards Enables costing of processes, supply chains, and value streams Activity Based Costing mirrors way work is done Facilitates benchmarking

Limitations of activity-based costing

Implementing an ABC system is a major project that requires substantial resources.Once implemented an activity based costing system is costly to maintain. Data relatingto numerous activity measures must be collected, checked, and entered into the system.

ABC produces numbers such as product margins, which are odds with the numbersproduced by traditional costing systems. But managers are used to to using traditionalcosting systems to run their operations and traditional costing systems are often used inperformance evaluations.

Activity based costing data can be easily misinterpreted and must be used with carewhen used in making decisions. Costs assigned to products, customers and other costobjects are only potentially relevant. Before making any significant decision usingactivity based costing data, managers must identify which costs are really relevant forthe decisions at hand.

Reports generated by this system do not conform to generally accepted accountingprinciples (GAAP). Consequently, an organization involved in activity based costingshould have two cost systems one for internal use and one for preparing external reports
http://www.accountingformanagement.com/six_sigma.htmhttp://www.accountingformanagement.com/improvement_programs.htmhttp://www.accountingformanagement.com/non_value_added_activities.htmhttp://www.accountingformanagement.com/benchmarking_definition.htmhttp://www.accountingformanagement.com/generally_accepted_accounting_principles_gaap.htmhttp://www.accountingformanagement.com/generally_accepted_accounting_principles_gaap.htmhttp://www.accountingformanagement.com/generally_accepted_accounting_principles_gaap.htmhttp://www.accountingformanagement.com/generally_accepted_accounting_principles_gaap.htmhttp://www.accountingformanagement.com/benchmarking_definition.htmhttp://www.accountingformanagement.com/non_value_added_activities.htmhttp://www.accountingformanagement.com/improvement_programs.htmhttp://www.accountingformanagement.com/six_sigma.htm


29/51

C343

29

Activity-based budgeting

Activity based budgeting is a modern approach to financial planning connecteddirectly to organizational strategy. It requires you to establish all activities that earn costs ineach function of your business and then define the relationships between those activities. Theinformation you get will guide your decision on how much resource you should allocate toeach activity.

ABB provides you with greater detail, particularly about overheads, because itpermits the identification of value-adding activities and their cost drivers. This page will showto you the difference between ABB and other commonly used forms of financial forecasting,and also let you appreciate its strategic role as a cost and management tool, in as far as running

your business more efficiently is concerned.

Benefits of activity-based budgeting (ABB)

Can identify opportunities for improvement and cost reduction Relates costs to performance data Enables assessment of processes that are effective in serving customers

Limitations of activity-based budgeting

Time consuming to set up have to understand the activities that drives the budget Costly buying, implementing and maintaining an activity based system

Managers may be overwhelmed with information may be de-motivating, rather than

looking at the bigger picture

More effective methods such as, zero based budgeting and continuous budgeting


30/51

C343

30

5.1& 5.2Apply financial appraisal methods to analyse competing investment projects in

the public and private sector make a justified strategic investment decision for anorganization using relevant financial information.

A method of assessing the potential profitability of two or more competingstrategies; based on the assessment of the period of time required before the financial returnsfrom the strategy recoup the original investment.

Decision rule

Only select projects which pay back within your required time period

Choose between your options on the basis of the fastest payback

Payback methodQuestion 1

An investment of 3,100,000 is expected to generate the Following net cash flows for the next

five years.

Year Cash Flow

1 (4,10,000)

2 1,00,000

3 90,000

4 80,000

5 50,000

6 50,000

What is the payback period for the project?


31/51

C343

31

Payback methodAnswer 1

Year Cash Flow Cumulative cashflow

1 (4,10,000) (4,10,000)

2 2,00,000 (2,10,000)

3 1,90,000 (20,000)

4 1,00,000 80,000

5 1,00,000 1,80,000

Payback is between the end of year 3 and the end of year 4.

The payback will be 3 years, plus 20000/100000 of year 4, which is 3.2 years.

0.2 years = 2.5 months (0.8 x 12).

Therefore, paybackof the investment is 3 years 2.5 months

3. Return on capital employed (ROCE):This is also known as accounting rate of return. The return on capital employed compares

earnings with capital invested in the company. This is expressed as a percentage

ROCE = Average annual profits before interest & tax / Initial capital costs *100

Decision rule

If the expected ROCE for the investment is greater than the target rate (as decided by

the management) then the project should be accepted.


32/51

C343

32

ROCEQuestion 2

A projects requires an initial investment of 90,000 and then earns the following net cash flows:

In addition, at the end of the seven-year project, the assets initially purchased will be sold for 20,000

ROCEAnswer 2

(a) Average annual cash flows: 210,000 7 = 30,000

(b) Average annual depreciation: (90,000 - 20,000) 7

(70,000 is written off over 7 years) = 10,000

Average annual profit (ab): 30,000 - 10,000

= 20,000

ROCE = Average annual profits/Initial capital costs X 100%

ROCE = 20,000/90,000 X 100% = 22.22%

YEAR 1 2 3 4 5 6 7

CASH

FLOW

10,000 20,000 20,000 50,000 70,000 20,000 20,000


33/51

C343

33

3. Compounding

A sum invested today will earn interest. Compounding calculates the future value of a given

sum invested today for a number of years.

To compound a sum, the figure is increased by the amount of interest it would earn over a

period. The formula is as follows:

FV = PV(1 + r) n

FV = Future value after n periods

PV = Present or initial value

r = Rate of interest per period

n = Number of periods

CompoundingQuestion 3

An investment of 200 is to be made today. What is the value of the investment in four years if

the interest rate is 6%?

CompoundingAnswer 3

Value after one year: 200 x 1.06 = 212

Value after two years: 212 x 1.06 = 224.74

Value after three years: 224.74x 1.06 = 238.20

Value after four years: 238.20 x 1.06 = 252.49

FV = PV(1 + r) n 200(1 + 0.06) 4 = 252.49

The 200 is worth 252.49 in four years at an interest rate of 6%.


34/51

C343

34

Discounting

PV = FV(1 + r) - n

PV = Present or initial value

FV = Future value after n periods

r = Rate of interest per period

-n = Number of periods to the present

DiscountingQuestion 4

What is the Present Value of 200 receivable in four years time if the discount rate (interest

rate) is 6%?

DiscountingAnswer 4

Value after one year: 200 x 1.06-1 = 188

Value after two years: 188 x 1.06-1 = 177

Value after three years: 177x 1.06-1 = 166

Value after four years: 166 x 1.06-1 = 156

FV = PV(1 + r) n 100(1 + 0.06) 4 = 156

The 100 is worth 156 in four years at an interest rate of 6%.


35/51

C343

35

Net Present ValueQuestion 5

year Cash flow

0 (25000)

1 10000

2 8000

3 6000

4 9000

Net Present ValueUsing Excel

3720.492

year Cash

Flow

Discount factor

@ 6%

PV

0 -25000 1

1 10000 0.943396226 9433.962

2 8000 0.88999644 7119.972

3 6000 0.839619283 5237.716

4 9000 0.792093663 7128.843

Internal Rate of Return (IRR)

Where:L = Lower rate of interestH = Higher rate of interestNL = NPV at the lower rate of interestNH = NPV at the higher rate of interest


36/51

C343

36

Internal Rate of ReturnQuestion 6

The potential cash flows for an investment give an NPV of 90,000 at a discount rate of 10%

and - 20,000 at a discount rate of 15%. The companys required rated of return is 13%.

_______

IRR = L + (NL / NLNH X (HL))

Where:L = Lower rate of interestH = Higher rate of interest

NL = NPV at the lower rate of interestNH = NPV at the higher rate of interest

IRR= 10% +(90000/90000-(-20000)*(15%-10%))IRR =50.90%


37/51

C343

37

5.3report on the appropriateness of a strategic investment decision using informationfrom a post-audit appraisal

Appropriateness of Payback:

The payback is another method to evaluate an investment project. The payback

method focuses on the payback period. The payback period is the length of time that it takes

for a project to get back its initial cost out of the cash receipts that it generates. This period is

sometimes referred to as" the time that it takes for an investment to pay for itself." The basic

premise of the payback method is that the more quickly the cost of an investment can be

recovered, the more desirable is the investment. The payback period is expressed in years.When the net annual cash inflow is the same every year, the following formula can be used

to calculate the payback period.

Rapid payback

leads to rapid company growth

minimises risk

maximizes the cash available to the company

Disadvantages of Payback

The payback method ignores the time value of money. The cash inflows from a

project may be unequal, with most of the return not happening until well into the future. A

project could have an acceptable rate of return but still not meet the company's required

minimum payback period. The payback model does not consider cash inflows from a project

that may occur after the initial investment has been recovered. Most major capital expenditures

have a long life span and continue to provide income long after the payback period. Since the

payback method focuses on short-term profitability, an attractive project could be overlooked

if the payback period is the only consideration.


38/51

C343

38

Appropriateness of Net Present Value

NPV compares the value of a dollar today to the value of that same dollar inthe future, taking inflation and returns into account. If the NPV of a prospective project ispositive, it should be accepted. However, if NPV is negative, the project should probably berejected because cash flows will also be negative.

Disadvantages of Net Present Value

NPV is difficult to use.

NPV cannot give accurate decision if the amount of investment of mutually exclusive

projects is not equal. It is difficult to calculate the appropriate discount rate.

NPV may not give correct decision when the projects are of unequal life.

Requires an estimate of the cost of capital in order to calculate the net present value.

Expressed in terms of dollars, not as a percentage.
http://www.investopedia.com/terms/n/npv.asphttp://www.investopedia.com/terms/n/npv.asp


39/51

C343

39

6.1 Analyze financial statements to assess the financial viability of an organization.

Profit and Loss Account:

It shows the flow of sales and expenses over a period, usually one year.

It shows the level of profit or loss made.

It shows what has been done with the profit or loss.

Income Statement

31-Mar-10(12)

31-Mar-09(12)

31-Mar-08(12)

Profit / Loss A/C Rs mn %OI Rs mn %OI Rs mn %OI

Net Sales (OI) 122906.10 100.00 136105.80 100.00 134161.90 100.00

Material Cost 503.90 0.41 299.50 0.22 151.50 0.11Increase Decrease Inventories 0.00 0.00 0.00 0.00 0.00 0.00

Personnel Expenses 6717.90 5.47 7583.60 5.57 8224.90 6.13

Manufacturing Expenses 93255.70 75.88 73855.80 54.26 55534.70 41.39

Gross Profit 22428.60 18.25 54366.90 39.94 70250.80 52.36

Administration Selling and DistributionExpenses

13732.90 11.17 18879.60 13.87 21264.50 15.85

EBITDA 8695.70 7.08 35487.30 26.07 48986.30 36.51

Depreciation Depletion and Amortisation 15112.40 12.30 19335.10 14.21 18436.60 13.74

EBIT -6416.70 -5.22 16152.20 11.87 30549.70 22.77

Interest Expense 10908.90 8.88 10356.80 7.61 8700.50 6.49

Other Income 23703.80 19.29 7757.00 5.70 4353.40 3.24Pretax Income 6378.20 5.19 13552.40 9.96 26202.60 19.53

Provision for Tax 1405.40 1.14 124.00 0.09 176.40 0.13

Extra Ordinary and Prior Period Items Net -183.50 -0.15 34598.30 25.42 -161.70 -0.12

Net Profit 4789.30 3.90 48026.70 35.29 25864.50 19.28

Adjusted Net Profit 4972.80 4.05 13428.40 9.87 26026.20 19.40

Dividend Preference 0.00 0.00 0.00 0.00 0.00 0.00

Dividend Equity 1754.40 1.43 1651.20 1.21 1548.00 1.15


40/51

C343

40

Balance Sheet:

A snapshot of the firms position at a point in time

Shows what a company owns (assets) and what it owes (liabilities)

Balance Sheet shows what assets a company has (use of funds) and where the money came

from to acquire those assets (source of funds)

Balance Sheet

31-Mar-10 %BT 31-Mar-09 %BT 31-Mar-08 %BT

Equity Capital 10320.10 1.23 10320.10 1.12 10320.10 1.83Preference Capital 0.00 0.00 0.00 0.00 0.00 0.00

Share Capital 10320.10 1.23 10320.10 1.12 10320.10 1.83

Reserves and Surplus 494668.80 58.75 506583.10 55.09 238080.20 42.24

Loan Funds 244782.80 29.07 309036.10 33.61 202864.30 35.99

Current Liabilities 58365.30 6.93 57814.90 6.29 72077.60 12.79

Provisions 33868.40 4.02 35839.70 3.90 40304.00 7.15

Current Liabilities and Provisions 92233.70 10.95 93654.60 10.18 112381.60 19.94

Total Liabilities and Stockholders Equity (BT) 842005.40 100.00 919593.90 100.00 563646.20 100.00

Tangible Assets Net 145318.60 17.26 138458.90 15.06 148834.50 26.41

Intangible Assets Net 160806.20 19.10 175618.80 19.10 20041.80 3.56

Net Block 306124.80 36.36 314077.70 34.15 168876.30 29.96

Capital Work In Progress Net 16835.20 2.00 36438.60 3.96 71175.60 12.63

Fixed Assets 322960.00 38.36 350516.30 38.12 240051.90 42.59

Investments 318986.00 37.88 313647.50 34.11 138441.40 24.56

Inventories 2983.40 0.35 2531.40 0.28 2012.20 0.36

Accounts Receivable 17386.30 2.06 14822.20 1.61 10932.10 1.94

Cash and Cash Equivalents 821.80 0.10 5351.50 0.58 1926.60 0.34

Other Current Assets 5571.90 0.66 5619.40 0.61 1.40 0.00

Current Assets 26763.40 3.18 28324.50 3.08 14872.30 2.64

Loans & Advances 173296.00 20.58 227105.60 24.70 170280.60 30.21

Miscellaneous Expenditure Other Assets 0.00 0.00 0.00 0.00 0.00 0.00

Total Assets (BT) 842005.40 100.00 919593.90 100.00 563646.20 100.00


41/51

C343

41

Analyses of financial Statement:

Financial statement analysis is defines as the process of identifying financial

strengths and weaknesses of the firm by properly establishing relationship between the items of

the balance sheet and the profit and loss account. There are various methods or techniques that

are used in analyzing financial statements, such as comparative statements, schedule of

changes in working capital, common size percentages, funds analysis, trend analysis, and ratios

analysis.

Comparison of two or more year's financial data is known as horizontal analysis,

or trend analysis. Horizontal analysis is facilitated by showing changes between years in both

dollar and percentage form.

As per profit and loss account its clearly show that on 2010 profit is reduce.

Gross profit is 39.94% in 2009 which is reduced by 18.25% 2010. Profit before interest and tax

was gone -5.22 in 2010 from 11.87 (2009) so its very bad position. In net profit they increase

profit 3.90 but in last year it was 35.29.

Balance sheet saws that current liabilities was 6.29% in 2009 which increased up

to 6.93% in 2010 so that bad for company which liabilities were increase. And on assets side

current assets was also increase up to 3.18 (2010) and fixed assets was shows 38.36 (2010) its

increase from 38.12 (2009).
http://www.accountingformanagement.com/working_capital_definition.htmhttp://www.accountingformanagement.com/working_capital_definition.htm


42/51

C343

42

6.2 Apply financial ratios to improve the quality of financial information in an

organisations financial statements.

Profit and Loss Account

31-Mar-10(12)

Profit / Loss A/C Rs mn

Net Sales (OI) 122906.10

Turnover 100477.7

Gross Profit 22428.60

Administration Selling and Distribution Expenses 13732.90

Operating Profit 8695.70

Depreciation Depletion and Amortisation 15112.40

Profit before interest and tax -6416.70

Interest Expense 10908.90

Other Income 23703.80

Profit before tax 6378.20

Provision for Tax 1405.40

Extra Ordinary and Prior Period Items Net -183.50

Net Profit 4789.30

Adjusted Net Profit 4972.80

Dividend Preference 0.00

Dividend Equity 1754.40


43/51

C343

43

BALANCE SHEET OF ORGANIZATION

31-Mar-10

Equity Capital 10320.10

Preference Capital 0.00

Share Capital 10320.10

Reserves and Surplus 494668.80

Loan Funds 244782.80

Current Liabilities 58365.30

Provisions 33868.40

Current Liabilities and Provisions 92233.70

Total Liabilities and Stockholders Equity (BT) 842005.40

Tangible Assets Net 145318.60

Intangible Assets Net 160806.20

Net Block 306124.80

Capital Work In Progress Net 16835.20

Fixed Assets 322960.00

Investments 318986.00

Inventories 2983.40

Accounts Receivable 17386.30

Cash and Cash Equivalents 821.80

Other Current Assets 5571.90

Current Assets 26763.40

Loans & Advances 173296.00

Miscellaneous Expenditure Other Assets 0.00

Total Assets (BT) 842005.40


44/51

C343

44

1. Profitability ratios:(a)Return on capital employed (ROCE) :

ROCE = Profit before interest and tax X 100%

Capital Employed

=6378.20/10320.10 * 100 =61.80%

(b) Return on equity (ROE):

ROE = Profit after tax X 100%

Shareholders funds

= 4789.30/10320.10*100 = 46.40%

(c) Profit margin:

Profit margin = Operating profit X 100%

Turnover

=8695.70/122906.1*100

= 7.075%

(d) Interest cover:

Profit margin = Operating profit

Debt interest

= 8695.70/10908.90

= 0.797 times


45/51

C343

45

2. Liquidity ratios:(a)Current ratio:

Current ratio = Current assets

Short term liabilities

=26763.40/33868.40

= 79%

(b)Acid test ratio:Acid test ratio = Current assets - stock

Short term liabilities

=26763.40-033868.4

= 79%

3. Efficiency ratios:(a)Fixed asset turnover ratio:

Fixed assets turnover ratio = Turnover

Fixed assets

=122906.1/322960.00

= 0.38 Times


46/51

C343

46

(b)Asset turnover ratio :Assets turnover ratio = Turnover

Fixed assets + Current Assets

= 122906.1322960.00+ 26763.40

= 0.35


47/51

C343

47

6.3 Make recommendations on the strategic portfolio of an organisation based on its

financial information.

(a) Return on capital employed (ROCE) :

Return on Capital Employed (ROCE) is a measuring tool that method theefficiency and profitability of capital investments undertaken by a corporation. A firmacquires capital assets such as trucks, computers, etc to help makes its businessoperations more efficient, cut down on costs and realize greater profits or acquire moremarket share.

Return on Capital Employed ratio also indicates whether the company is

earning enough revenues and profits in order to make the best use of its capital assets. Itis spoken in the form of a percentage, and the higher the percentage, the better.

Firms can increase their Return on Capital Employed Ratio by:

Cutting costs so as to increase the Profit Margin ratio Buying raw material and other goods at cheaper costs

(b)Return on equity (ROE) :The amount of net income returned as a percentage of shareholders

equity. Return on equity measures a corporations profitability by revealing howmuch profit a company generates with the money shareholders have invested.

ROE is expressed as a percentage and calculated as:

Return on Equity = Net Income/Shareholder's Equity

Net income is for the full fiscal year (before dividends paid to commonstock holders but after dividends to preferred stock.) Shareholder's equity does notinclude preferred shares.


48/51

C343

48

(c)Profit margin:A ratio of profitability calculated as net income divided by revenues,

or net profits divided by sales. It measures how much out of every dollar of salesa company actually keeps in earnings. Profit margin is very useful when comparingcompanies in similar industries.

A higher profit margin indicates a more profitable company that hasbetter control over its costs compared to its competitors. Profit margin is displayed as apercentage; a 20\% profit margin, for example, means the company has a net income of$0.20 for each dollar of sales.

(d)Interest cover:

A ratio used to determine how easily a company can pay interest onoutstanding debt. The interest coverage ratio is calculated by dividing a company'searnings before interest and taxes (EBIT) of one period by the company's interestexpenses of the same period.

The lower the ratio, the more the company is burdened by debtexpense. When a company's interest coverage ratio is 1.5 or lower, its ability to meetinterest expenses may be questionable. An interest coverage ratio below 1 indicates thecompany is not generating sufficient revenues to satisfy interest expenses.
http://www.investopedia.com/terms/p/profitmargin.asphttp://www.investopedia.com/terms/i/interestcoverageratio.asphttp://www.investopedia.com/terms/i/interestcoverageratio.asphttp://www.investopedia.com/terms/p/profitmargin.asp


49/51

C343

49

2. Liquidity ratios:

A. Current ratio:An indication of a company's ability to meet short-term debt obligations

the higher the ratio, the more liquid the companys. Current ratio is equal to current

assets divided by current liabilities. If the current assets of a company are more than

twice the current liabilities, then that company is generally considered to have good

short-term financial strength. If current liabilities exceed current assets, then the

company may have problems meeting its short-term obligations.

For example, if XYZ Company's total current assets are $10,000,000,

and its total current liabilities are $8,000,000, then its current ratio would be

$10,000,000 divided by $8,000,000, which is equal to 1.25. XYZ Company would be

in relatively good short-term financial standing

B. Acid test ratio:

A tough indicator that determines a firm has enough short-term assets tocover its direct liabilities without selling inventory. The acid-test ratio is far morestrenuous than the working capital ratio, primarily because the working capital ratioallows for the inclusion of inventory assets.

Calculated by:

Companies with ratios of less than 1 cannot pay their current liabilities and

should be looked at with extreme caution. Furthermore, if the acid-test ratio is much

lower than the working capital ratio, it means current assets are highly dependent on

inventory. Retail stores are examples of this type ofbusiness.
http://www.investorwords.com/992/company.htmlhttp://www.investorwords.com/10302/meet.htmlhttp://www.investorwords.com/4563/short_term.htmlhttp://www.investorwords.com/12619/debt_obligations.htmlhttp://www.investorwords.com/4041/ratio.htmlhttp://www.investorwords.com/2832/liquid.htmlhttp://www.investorwords.com/1245/current_assets.htmlhttp://www.investorwords.com/1245/current_assets.htmlhttp://www.investorwords.com/1254/current_liabilities.htmlhttp://www.investorwords.com/19048/current_asset.htmlhttp://www.investorwords.com/2792/liability.htmlhttp://www.investorwords.com/5572/financial.htmlhttp://www.investorwords.com/12632/total_current_assets.htmlhttp://www.investorwords.com/12633/total_current_liabilities.htmlhttp://www.investorwords.com/7216/standing.htmlhttp://www.investopedia.com/terms/a/acidtest.asphttp://www.investopedia.com/terms/a/acidtest.asphttp://www.investorwords.com/7216/standing.htmlhttp://www.investorwords.com/12633/total_current_liabilities.htmlhttp://www.investorwords.com/12632/total_current_assets.htmlhttp://www.investorwords.com/5572/financial.htmlhttp://www.investorwords.com/2792/liability.htmlhttp://www.investorwords.com/19048/current_asset.htmlhttp://www.investorwords.com/1254/current_liabilities.htmlhttp://www.investorwords.com/1245/current_assets.htmlhttp://www.investorwords.com/1245/current_assets.htmlhttp://www.investorwords.com/2832/liquid.htmlhttp://www.investorwords.com/4041/ratio.htmlhttp://www.investorwords.com/12619/debt_obligations.htmlhttp://www.investorwords.com/4563/short_term.htmlhttp://www.investorwords.com/10302/meet.htmlhttp://www.investorwords.com/992/company.html


50/51

C343

50

3. Efficiency ratios:Ratios are naturally used to analyze how company uses its assets and

liabilities internally. Efficiency Ratios can calculate the turnover of receivables,the repayment of liabilities, the quantity and usage ofequity and the general use ofinventory and machinery.

Some common ratios are accounts receivable turnover, fixed assetturnover, sales to inventory, sales to net working capital, accounts payable to salesand stock turnover ratio. These ratios are important when compared to peers in thesame industry and can identify businesses that are better managed relative to theothers. Also, efficiency ratios are important because an improvement in the ratios

usually translate to improved profitability.
http://www.investopedia.com/terms/e/efficiencyratio.asphttp://www.investopedia.com/terms/e/efficiencyratio.asphttp://www.investopedia.com/terms/e/efficiencyratio.asphttp://www.investopedia.com/terms/e/efficiencyratio.asp


51/51

C343

51

Reference:

1. Ratnamani company information available on (http://www.ratnamani.com)

assessed from 15th august 2011.

2. Cash flow available on

(http://www.investopedia.com/terms/c/cashbudget.asp#axzz1VkmZC6fs) assessed

from 15th august 2011.

3. Actibe based budgeting available on

(http://www.investopedia.com/terms/a/abb.asp#ixzz1Vlb4l6Tm)assessed on 19th august 2011.

4. http://www.wikipedia.org/
http://www.ratnamani.com/http://www.ratnamani.com/http://www.ratnamani.com/http://www.investopedia.com/terms/c/cashbudget.asp#axzz1VkmZC6fshttp://www.investopedia.com/terms/c/cashbudget.asp#axzz1VkmZC6fshttp://www.investopedia.com/terms/c/cashbudget.asp#axzz1VkmZC6fshttp://www.investopedia.com/terms/a/abb.asp#ixzz1Vlb4l6Tmhttp://www.investopedia.com/terms/a/abb.asp#ixzz1Vlb4l6Tmhttp://www.investopedia.com/terms/a/abb.asp#ixzz1Vlb4l6Tmhttp://www.wikipedia.org/http://www.wikipedia.org/http://www.wikipedia.org/http://www.investopedia.com/terms/a/abb.asp#ixzz1Vlb4l6Tmhttp://www.investopedia.com/terms/c/cashbudget.asp#axzz1VkmZC6fshttp://www.ratnamani.com/

Final Financial Principles & Techniques Full

Documents

Transcript of Final Financial Principles & Techniques Full