financial statements important for showing
financial health
two types of financial statements
income statement
balance sheet
income statement purpose
show if company is profitable
comparison from last year
income statement components
revenue
-cost of sales (gross profit)
then - operating expenses (operating profit)
then- financial costs (profit before tax)
then - tax ( net profit)
three components of balance sheet
assets,
liabiities
equity
assets consist of
total current assets (cash, materials etc)
and fixed or non current assets (value of property, plant, equipment)
liabilities consist of
current liabilities (amount due to be paid (rents, billings etc) non current liabilities (long term bank loans, building etc) obligations to third parties essentially. current need to be payed with a year
what is equity
total equity is the sum of capital ,stock, retained earnings
represents net worth of company. calculated by summing up capital owners have invested and the profits that have been accumulated (minus dividens paid)
whats the accounting equation?
equity + total liabilitie= total assets
what is working capital
=current assets-current liabailities.
measure of the short term financial strength. liquidity is high.
how to increase working capital
making a profit, selling equipment, have long term loan (this increases short term assets but increases long term liabilities
how to decrease working capital
lose money on a project, buy equipment, repaying loans
healthy company , the volume of unfinnished work should
be at most ten times the working capital (of all projects)
be at most five times working capital of the biggest project.
what is current ratio
=current assets /current liabilities
should be 1.3 or higher
what is underbilling
-balance sheet under current assets, and is estimated work done but not billed yet.
what is over billing
under current liabilities, (excess billings for work not done yet)
profitibility ratios
gross profit/ revenue
net profit before tax/ revenue
net profit before tax/ owners equity
liquidity ratios
current assets/current liabilities
cash+account recievable/current liabilites
current assets/total assets
what is operating leverage
percentage change in profit per percentage change in sold items
