FINANCIAL TERMS

Financial Statement Analysis JOMON THOMASAssignment MBA11- B22

FSA ASSIGNMENT

1. Current assets are important to businesses because they are the assets that are used to fund day-to-day operations and pay ongoing expenses. Depending on the nature of the business, current assets can range from barrels of crude oil, to baked goods, to foreign currency. In personal finance, current assets include cash on hand and in the bank, and marketable securities that are not tied up in long-term investments. In other words, current assets are anything of value that is highly liquid.

2. There are 5 major items included into current assets:

1. Cash and cash equivalents — it is the most liquid asset, which includes currency, deposit accounts, and negotiable instruments ( money orders, cheque, bank drafts).

2. Short-term investments — include securities bought and held for sale in the near future to generate income on short-term price differences (trading securities).

3. Receivables — usually reported as net of allowance for non-collectable accounts.

4. Inventory — trading these assets is a normal business of a company. The inventory value reported on the balance sheet is usually the historical cost or fair market value, whichever is lower. This is known as the "lower cost or market" rule.

5. Prepaid expenses — these are expenses paid in cash and recorded as assets before they are used or consumed (insurance).

3. current liabilities are often understood as all liabilities of the business that are to be settled in cash within the fiscal year or the operating cycle of a given firm, whichever period is longer. Current liabilities appear on the company's balance sheet and include short term debt, accounts payable, accrued liabilities and other debts.


4. Items considered as Current Liabilities

Current liabilities appear on the company's balance sheet and include short term debt, accounts payable, accrued liabilities, sundry creditors, Bank O/D and other debts.

5. Fixed assets, also known as a non-current asset or as property, plant, and equipment are a term used in accounting for assets and property which cannot easily be converted into cash. This can be compared with current assets such as cash or bank accounts, which are described as liquid assets. In most cases, only tangible assets are referred to as fixed.

6. Land, Building Plant and Machinery, Furniture, Company Vehicles, Long term Investments, office equipment’s etc.

7. SUNDRY DEBTOR - is an entity from who amounts are due for goods sold or services rendered or in respect of contractual obligations. Also termed as debtor, trade debtor, and account receivable.

8. SUNDRY CREDITOR- A business or an individual to whom there is money owed.

9. Asset- Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Examples are cash, securities, accounts receivable, inventory, office equipment, real estate, a car, and other property. On a balance sheet, assets are equal to the sum of liabilities, common stock, preferred stock, and retained earnings. From an accounting perspective, assets are divided into the following categories: current assets (cash and other liquid items), long-term assets (real estate, plant, equipment), prepaid and deferred assets (expenditures for future costs such as insurance, rent, interest), and intangible assets (trademarks, patents, copyrights, goodwill).

10. Liability-An obligation that legally binds an individual or company to settle a debt. When one is liable for a debt, they are responsible for paying the debt or settling a wrongful act they may have committed. In the case of a company, a liability is recorded on the balance sheet and can include accounts payable, taxes, wages, accrued expenses, and


deferred. Current liabilities are debts payable within one year, while long-term liabilities are debts payable over a longer period.

11. Long-term liabilities are liabilities with a future benefit over one year, such as notes payable that mature longer than one year.

In accounting, the long-term liabilities are shown on the right wing of the balance-sheet representing the sources of funds, which are generally bounded in form of capital assets. A category of debts on a company's balance sheet that do not need to be repaid during the upcoming twelve months, but that instead need to be repaid in a year or more.

12. Examples of long-term liabilities are debentures, mortgage loans and other bank loans

13. Short term liability- A debt or current liability arising from normal business operations and recurring expenses that is expected to be satisfied within one year. Examples of short term liabilities are accounts payable, taxes payable, unearned revenues, current purchases, vendor invoices, accrued expenses payable and current portions of long-term debt.

14. Short term liabilities are accounts payable, taxes payable, unearned revenues, current purchases, vendor invoices, accrued expenses payable and current portions of long-term debt.

15. Net worth- For a company, total assets minus total liabilities. Net worth is an important determinant of the value of a company, considering it is composed primarily of all the money that has been invested since its inception, as well as the retained earnings for the duration of its operation. Net worth can be used to determine creditworthiness because it gives a snapshot of the company's investment history. Also called owner’s, shareholders' equity, or net assets.

16. Turnover is sometimes a synonym for revenue. Turnover is sometimes the name for a measure of how quickly inventory is sold


17. Turnover ratio - A measure of the number of times a company's inventory is replaced during a given time period. Turnover ratio is calculated as cost of goods sold divided by inventory during the time period. A high turnover ratio is a sign that the company is producing and selling its goods or services very quickly.

18. Revenue- For a company, this is the total amount of money received by the company for goods sold or services provided during a certain time period. It also includes all net sales, exchange of assets; interest and any other increase in owner's equity and is calculated before any expenses are subtracted. Income can be calculated by subtracting expenses from revenue. In terms of reporting revenue in a company's financial statements, different companies consider revenue to be received, or "recognized", different ways. For example, revenue could be recognized when a deal is signed, when the money is received, when the services are provided, or at other times. There are rules specifying when revenue should be recognized in different situations for companies using different accounting methods, such as cash basis and accrual basis accounting.

19. Gross profit- Calculated as sales minus all costs directly related to those sales. These costs can include manufacturing expenses, raw materials, labor, selling, marketing and other expenses.

20.Net Profit - Often referred to as the bottom line, net profit is calculated by subtracting a company's total expenses from total revenue, thus showing what the company has earned (or lost) in a given period of time (usually one year). also called income or net earnings.

21. Cost of Goods Sold- An income statement figure which reflects the cost of obtaining raw materials and producing finished goods that are sold to consumers. Cost of Goods Sold = Beginning Merchandise Inventory + Net Purchases of Merchandise - Ending Merchandise Inventory.

22. Equation for Cost of Goods Sold = PRIME COST + FACTORY O/H + COST OF PRODUCTION

http://www.investorwords.com/3234/net.html


23. Inventory - A company's merchandise, raw materials, and finished and unfinished products which have not yet been sold. These are considered liquid assets, since they can be converted into cash quite easily. There are various means of valuing these assets, but to be conservative the lowest value is usually used in financial statements.

24. Suppliers - Supplier may refer to:

Manufacturer uses tools and labor to make things for saleDistributor (business), the middleman between the manufacturer and retailerWholesaler, retailers etc.

25. Debt - An amount owed to a person or organization for funds borrowed. Debt can be represented by a loan note, bond, mortgage or other form stating repayment terms and, if applicable, interest requirements. These different forms all imply intent to pay back an amount owed by a specific date, which is set forth in the repayment terms.

26. Operating Profit - A measure of a company's earning power from ongoing operations, equal to earnings before deduction of interest payments and income taxes. Also called EBIT (earnings before interest and taxes) or operating income.

27. Working Capital - Current assets minus current liabilities. Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth. Also called net current assets or current capital.

28. Capital Employed - Fixed assets plus current assets minus current liabilities. Capital employed is the value of the assets that contribute to a company's ability to generate revenue.


29. Shareholders' funds is all the money belonging to common stock shareholders which includes the balance of share capital, all profits retained and money classified as reserves. For the accounts of a company with no subsidiaries it is total assets minus total liabilities

30. External Fund- Funds brought in from outside the company, such as through a bond or equity offering.

LOGIC OF SELECTING A BEST COMPANY IN ANGLE OF:

Suppliers who supply raw materials

Financial stability of Companies

Production capabilities of the company

Brand value of the product

Location of the company

Debt Payment of the Company

Banks which planned to give short term loan

Credit history of the company

Cash flow history and projections of the business

Collateral available to secure the loan

Financial position of the company

Owners in terms of Survival of the company


Return on Investment

Availability and cost of raw materials

Goodwill

Customer satisfaction towards the Product

New investors planned to invest

Goodwill of the company

Share value

Profitability

Dividend of the company

Growth rate

Management to show their efficiency

Harmonious relationship within the Organization

Employee satisfaction

Good external relationship

Meet Customers’ needs and wants.


Documents

FINANCIAL TERMS