Lecture 13 & 14: Company Finance Flashcards
Why are financial statements important?
They reflect the financial health of a company.
What are two types of financial statements?
- Income Statement (Profit & loss account)
- Balance Sheet
Describe engineering accounting.
A vector shows direction (income statement) and position (balance sheet or financial position)
What does a balance sheet show?
- Statement of Financial Position at a point in time
- A point in time where the income statement shows the earnings (and expenses) or ‘enrichment’ over time.
What is the purpose of an income statement?
To show whether or not a company’s business is profitable.
What does an income statement show?
- the profit or loss over a period of time (financial year)
- usually there is a comparison between the figures of the most recent year and that of the year before
What are the steps in income statement?
- Establish the revenue
- deduct the cost of sales to get the Gross Profit.
- further deduct the operating expenses to get the operating cost
- further deduct any financial costs or income to get the Profit before Income Tax
- deduct Tax to get Net profit for the period
What are the three major items in a balance sheet?
- assets
- liabilities
- equity (Net Worth)
Total Assets is the sum of:
- Total Current Assets and
(cash, inventory, investments, account receivables, and estimated work done but not billed yet) - Fixed or non-current assets
(total value or property, plant, equipment
minus the accumulated depreciation to get ‘net’ fixed assets)
Total Assets = Equity + Total Liabilities
Liabilities is the sum of:
- Current Liabilities and
(accounts payable to subs/suppliers, accrued expenses, excess billings for work not done yet, bank overdraft and short term loan, suppliers and employers, rents, utilities) - Non-current or long term liabilities
(long term bank loans, mortgages of equipment, building, land, cars/trucks)
What are liabilities?
Obligations to third parties.
Current liabilities of a construction company are debts the company has to pay within a year.
Long term liabilities are obligations with a pay back period of more than one year.
Total equity is the sum of:
Capital, Stock, Retained Earnings
Can be calculated by summing the capital the owners have invested and the profits that have been accumulated (after deducting all the dividends paid) and retained up to the present moment since the business began.
What is equity?
Is the capital invested by the owner(s) of company.
Represents the net worth of the business
How to calculate Working Capital?
Working Capital = Current Assets - Current Liabilities
What is Working Capital?
A measure of the short term financial strength of a construction company.
How much current assets exceed current liabilities.
How can Working Capital be increased?
- Making profit, selling equipment or other assets, or have long term loans from a bank.
(A long term long increases current assets but also increases long term liabilities)
How can Working Capital be decreased
Losing money on a project, or purchasing equipment, or repaying long term loans.
How should construction companies stay healthy?
The volume of unfinished work:
- of all projects in hand should be at most 10x the working capital
- of the biggest project in hand should be at most 5x working capital
What does current ratio show?
A construction company’s liquidity (its ability to fulfill short term financial obligations)
(should be 1.3 or higher)
What is the current ratio?
Current Assets /
Current Liabilities
