Accounting for Non-Accounting Executives Final

8/7/2019 Accounting for Non-Accounting Executives Final

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ACCOUNTING FOR NON-

ACCOUNTING EXECUTIVES

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ACCOUNTING FOR

NON-ACCOUNTING EXECUTIVES

Organize by CareerMind/Success Coaching


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ACCOUNTING FOR NON-


Course Speaker Anthony Wong

Master of Business Administration

Cranfield University United Kingdom

Certified Public Accountant Singapore

Diploma in Business Law National University of Singapore

Postgraduate Diploma in Management Consultancy

Henley Management College, United Kingdom


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PARTICIPANTS FOR THIS WORKSHOP

1 Rina IsmailReceptionist SecretaryC&C Technologies (Asia Pacific) Pte Ltd

2 Low Chen Nie (Jenny)Executive Secretary & PALincoln Industrial Corporation

3 Lai Tak CheeChief Operating Officer / DirectorFulflex Singapore Pte Ltd

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PARTICIPANTS FOR THIS WORKSHOP

4 Samuel TanManaging Director

Airklean Engineering Pte Ltd

5 Terence WongRegional Sales Manager

Airklean Engineering Pte Ltd

6 Lim Hui EngAdmin OfficerLAN system engineering Pte ltd

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Participants contribution and their objectives from

this workshop

1. Self Introduction

2. Designation

3. Responsibilities

4. Company main products/services

5. Top three agendas from this course

6. Others

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The objective of the seminar and workshop

Day 14.1 Introduction to Accounting

4.1.1 Explain the nature and purpose of accounting

4.1.2 Identify the different branches of accounting

4.1.3 Explain the difference between financial and

management accounting

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Day 14.1 Introduction to Accounting

4.1.4 Explain the purpose of auditing

4.1.5 List the steps in a basic accounting cycle

4.1.6 Explain common terminologies used in accounting

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Day 14.2 Basic Rules in Accounting

4.2.1 Explain the rules governing whatdata should beincluded in an accounting system

4.2.2 Explain the rules governing the waydata should berecorded in an accounting system

4.2.2 Identify the ethical rules of accounting

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Day 14.3 Recording Data

4.3.1 Identify the common types of accounts used torecord transactions

4.3.2 Explain how the debit and credit system work

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Day 14.3 Recording Data

4.3.3 Write up simple ledger accounts

4.3.4 Describe how to check transactions using a trialbalance

4.3.5 Explain the common errors affecting the balance ofthe trial balance

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Day 1Understanding:4.4 Basic Financial Accounts

4.4.1 Explain the difference between cash and profit

4.4.2 Explain the purpose of profit and loss statementsand balance sheets

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Day 14.4 Basic Financial Accounts

4.4.3 Prepare a profit and loss statement and a balancesheet using a trial balance

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Day 14.4 Basic Financial Accounts



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Day 1

4.4 Basic Financial Accounts

4.4.3 Prepare a profit and loss statement and a balancesheet using a trial balance

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Day 24.5 Accounting for Adjustments

4.5.1 Identify the four main types of year-end adjustments

4.5.2 Demonstrate how adjustments are made for stocks

4.5.3 Demonstrate how depreciation is done using the

different types of Depreciation methods

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Day 24.5 Accounting for Adjustments

4.5.4 Demonstrate how adjustments are made for

accruals and prepayments

4.5.5 Demonstrate how adjustments are made for baddebts and doubtful debts

4.5.6 Prepare a profit and loss, balance sheet using a trialbalance and make the necessary adjustments

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4.6 Financial Performance

4.6.1 Understand Cash Flow Statements

4.6.1.1 Distinguish between profitability and liquidity

4.6.1.2 Explain the purpose of cash flow statements

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Day 24.6 Financial Performance

4.6.1.3 Explain the difference between the direct and

indirect methods in presenting cash flow information

4.6.1.4 Prepare a simple cash flow statement

4.6.2 Interpretation of Accounting Data

4.6.2.1 Identify the various techniques of analyzingaccounting data

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Day 24.7 Financial Reporting

4.7.1 Identify the users groups of financial information

4.7.2 Identify the main authorities in Singapore forcompany disclosure of information

4.7.3 Identify the main sections of an annual report

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Day 24.7 Financial Reporting

4.7.4 Identify and locate the major items contained in agroup profit and loss account, a statement of totalrecognized gains and losses, a group balance sheet, agroup cash flow and notes to the accounts

4.7.5 Trace the notes to the accounts back to the mainfinancial statements

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External users

Investors

Lenders Suppliers Customers Government

Public

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Internal users

Shareholders

Management Department managers Employees

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4.1.2 Identify the different branches of accounting

Financial accounting and reporting

Management accounting

Auditing

Taxation

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4.1 Introduction to Accounting

4.1.3 Explain the difference between financial andmanagement accounting

a. Financial Compliance with established procedures,standards, principles and statutory requirements for aperiod of time financial year

a. Management mainly for internal level of management

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a. Management Type of financial information:

i) Formulating policies

ii) Planning and controlling

iii)Making decisions

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a. Management Type of financial information:

iv)Formulating plans long term

v) Formulating plans short term e.g. budgeting/profitforecast

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4.1.4 Explain the purpose of auditing

Independent examination of and the expression of an

opinion on the financial statements of an entity

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4.1.5 List the steps in a basic accounting cycle

1. Input Economic environment

2. Business Transactions3. Identifying4. Recording5. Financial statements

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4.1.6 Explain common terminologies used in accounting

See chart of accounts and index of terms

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4.2 Basic Rules in Accounting

4.2.1 Explain the rules governing whatdata should beincluded in an accounting system

Understandability

Relevance

Reliability

Comparability

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4.2.2 Explain the rules governing the waydata should berecorded in an accounting system

Double entry

Supported by an activity e.g. sale and delivery of thegoods, purchases of services

Documentation issued by the third party for the liability

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4.2.3 Identify the ethical rules of accounting

Prudence concept

Consistency

Periodicity

Materiality

Accrual

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4.3 Recording Data

4.3.1 Identify the common types of accounts used torecord transactions

Purchases Book

Sales Book

Cash Book

Journal Book

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4.3 Recording Data

4.3.2 Explain how the debit and credit system work

Debit (ASSET) Credit (LIABILITIES)

Always balance with a double - entry

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4.3 Recording Data

4.3.3 Write up simple ledger accounts

See examples

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4.3 Recording Data

4.3.5 Explain the common errors affecting the balance ofthe trial balance

Wrong account

Inability to differentiate the type of expenses/income/transactions

Journal entries (unauthorised)/(unchecked)

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Understanding:4.4 Basic Financial Accounts


1.A Sale do not generate cash until the monies arereceived i.e. a profit but no monies available

1.A cash can refer to monies received, advanced monies,deposit on orders but not necessary be a profit

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Understanding:4.4 Basic Financial Accounts


Profit and Loss statements do we make a profit from

the period i.e. monthly, quarterly and annual

Balance sheet how much isour retained profit net worth

assets cash available etc

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4.4 Basic Financial Accounts



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4.5 Accounting for Adjustments

4.5.1 Identify the four main types of year-end adjustments

Prepayments

Accrued Income

Deferred Income

Accrual of expenses, Depreciation, Bad and DoubtfulDebts

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4.5.3 Demonstrate how depreciation is done using thedifferent types of Depreciation methods

Straight line Method Fixed instalment

Reducing Balance Method

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4.5.4 Demonstrate how adjustments are made foraccruals and prepayments

Accruals Last year brought forward

Last period (month) brought forwardCurrent month provisions to be made

Prepayments Last year brought forwardYear end payments relating to next year

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4.5.5 Demonstrate how adjustments are made for baddebts and doubtful debts

Last year provisions

This year specific provisions

This year debtors balance after specific provisions andwrite-offs

This year provision

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4.5.6 Prepare a profit and loss, balance sheet using a trialbalance and make the necessary adjustments

Exercises.practice makes perfect

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4.6.1 Understand Cash Flow Statements

Finance reporting direct and indirect methods

Management reporting weekly, monthly and annualcash forecasts

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A lot of sales and customers and the cost of sales andexpenses are lower than the sales

MillionSales $ 5.0Cost of sales 2.0Gross profit 3.0

Overheads 2.0Net Profit 1.0 ===

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A lot of sales and customers but no monies or limitedmonies received

Million Cash receivedSales $ 5.0 4.0

Cost of sales 2.0 2.0 PaidGross profit 3.0 2.0Overheads 2.0 2.0 Paid

Net Profit 1.0 0=== ===

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4.6.1.2 Explain the purpose of cash flow statements

To monitor the timing of the receipts and payments

To identify the working capital and any shortage

To borrow from the bank etc to finance the shortage

To monitor the efficiency of the control of the business

- collection, creditability/quality of the customers etc

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4.6.1.3 Explain the difference between the direct andindirect methods in presenting cash flow information

Direct method

Cash collected from revenues $89,000Cash payment for expenses $80,000

Income before income taxes 9,000

Cash payments for income taxes6,000

Net cash provided by operating activities 3,000=====

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4.6.1.3 Explain the difference between the direct andindirect methods in presenting cash flow information

Indirect Method

Net income $ 34,000Adjustments to reconcile net incometo net cash provided by operating activities:

Increase in accounts receivable (36,000)Increase in accounts payable 5,000

(31,000)

Net cash provided by operating activities $ 3,000=======

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4.6.1.4 Prepare a simple cash flow statement

Management reporting

See exercises Practice make perfect

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4.6.2 Interpretation of Accounting Data

percentage of changes

Actual versus budget/plan

Actual versus forecasts

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4.6.2.1 Identify the various techniques of analyzingaccounting data

Trend analysis

Comparing with the industry

Exception reporting

Materiality

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4.6.2.2 Explain the usefulness and importance of ratioanalysis

To interprete the financial statement

To identify and highlight significant changes

To identify company strengths and weaknesses

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4.6.2.3 Identify and explain the common types ofaccounting ratios

Profitability ratio

Efficiency ratio

Liquidity ratio

Gearing ratio

Investment ratio

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Efficiency ratio

Inventory (Stock) Turnover

Receivables (Debtors) Turnover

Trade suppliers repayment period

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Efficiency ratio (continued)

Total asset turnover

Sales of capital employed

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Liquidity ratio

Current ratio (or Working capital ratio)

Liquid ratio (Acid test ratio or Quick ratio)

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Gearing ratio

Debt capital versus Equity capital Gearing ratio

Fixed interest cover

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Investment ratio

Fixed dividend cover

Dividend cover for equity

Proprietary ratio (Shareholders ratio)

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Investment ratio (continued)

Earnings per share

Price/earnings (P/E) ratio

Earnings Yield

Dividend Yield

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4.6.2.4 Calculate accounting ratios and interpret the result

Exercises

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4.6.2.5 Limitations

Using historical figures

Adjustment for inflation

Inter-company comparisons different accountingpolicies

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4.7 Financial Reporting

4.7.1 Identify the users groups of financial information

4.7.2 Identify the main authorities in Singapore forcompany disclosure of information

4.7.3 Identify the main sections of an annual report

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4.7 Financial Reporting

4.7.4 Identify and locate the major items contained in agroup profit and loss account, a statement of totalrecognized gains and losses, a group balance sheet, agroup cash flow and notes to the accounts

4.7.5 Trace the notes to the accounts back to the mainfinancial statements

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THANK YOU

FOR YOUR

PARTICIPATION

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Understanding Financial Statements

Balance Sheet

Measuring Financial Position

The Accounting Cycle

Recording of Transactions

Assets Current and Fixed

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Income Statement

The Profit and Loss

The Manufacturing Account

Trading Account

Accounting principles Realization, Matching

and Prudence

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Income Statement

Recognition of Revenue

Computation of Cost of Goods Sold

Accrual Accounting concept

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Cash flow Statement

1. Purpose of the cash flow statement

Measuring cash receipts and payments

Cash flows from operating activities

Cash flow from investing activities

Overtrading

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1. Understanding the financial health of yourbusiness and to compete effectively in Themarket to enable a good return on Investment

in terms of profit, growth and Market share.

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2. What is business finance and its applicationand usage

i. Finance as a tool in Management,Sales, Marketing, Production, Logistic& Other operations

ii. Finance is every one business

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4. How finance play its role

i. External

ii. Internal

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5. The ability to read, appreciate and reviewthe contents the annual report produced bya company.

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Business Financial Statement Applications:

Basic Theoretical Concepts in ManagerialAccounting

1. The prudence concept

2. The consistency concept

3. The objectivity concept

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Basic Theoretical Concepts in Managerial Accounting

4. The concept of True and Fair view

5. The Going Concern concept

6. The accrual concept

7. Materiality Principle

8. Convention of Monetary Unit of Measurement

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Basic Theoretical Concepts in Managerial Accounting:

9. Net Realizable value

10. Recording transactions at cost

11. Dual Effects double entry

12. Form and substance

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1. Overview of Financial Statement Analysis

- Balance Sheet

- Profit & Loss / Income Statement

- Cash Flow Statements

Topics For Business Finance

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Understanding Financial Statements

Balance Sheet

Measuring Financial Position

The Accounting Cycle

Recording of Transactions

Assets Current and Fixed

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Balance Sheet

A Balance Sheet is a picture of a company taken at aparticular moment in time a kind of freeze-frame.

It is a measurement of the wealth of a company at thatmoment,

So when it is compared with an earlier balance sheet,Its shows the growth of the company wealth in theintervening period

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Balance sheet of ABC Trading Co as at 31.12.2004 (S$ millions)

Assets LiabilitiesCurrent Assets Current Liabilities

Bank 10 Creditors 400

Debtors/Receivables 790 Accruals 30

Stock/Inventory 300 Long Term Liabilities

Fixed Assets Bank Loan 300

Land and building 100 Bills Payable 5

Plant and Machinery 25 Equity

Office equipment 20 Paid up capital 300

Motor vehicles 3 Reserves & Retained Profit 213------- -------

1,248 1,248

==== ====

Balance Sheet

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Balance sheet of ABC Trading Co as at 31.12.2004 ($ millions)

Double Entry Paid Up Capital

Paid - Up Capital being paid into the company by

shareholder $300 millionDebit Credit

Bank $300

Paid Up Capital $300

Balance Sheet

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Balance sheet of ABC Trading Co as at 31.12.2004Assets LiabilitiesCurrent Assets Current LiabilitiesBank 300 CreditorsDebtors/Receivables Accruals

Stock/Inventory Long Term Liabilities

Fixed Assets Bank LoanLand and building Bills PayablePlant and Machinery EquityOffice equipment Paid up capital 300Motor vehicles Reserves & Retained Profit

------- -----300 300

==== ====

Balance Sheet

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Balance sheet of ABC Trading Co as at 31.12.2004

Assets LiabilitiesCurrent Assets Current LiabilitiesBank 300 Creditors 400Debtors/Receivables AccrualsStock/Inventory 400

Long Term LiabilitiesFixed Assets Bank LoanLand and building Bills PayablePlant and Machinery EquityOffice equipment Paid up capital 300Motor vehicles Reserves & Retained Profit

Current Profit and Loss------- -----

700 700==== ===

Balance Sheet

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Assets LiabilitiesCurrent Assets Current LiabilitiesBank 300 Creditors 400Debtors/Receivables 380 AccrualsStock/Inventory 400 Long Term LiabilitiesFixed Assets Bank LoanLand and building Bills PayablePlant and Machinery EquityOffice equipment Paid up capital 300Motor vehicles Reserves & Retained Profit

Current Profit and Loss 380

------- -------1,180 1,180==== ====

Balance Sheet

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Double Entry Cost of Goods sold and Inventory

Sold goods to customers for $380 million on credit termsCost of goods value at S$300 million.

Debit Credit

Profit & Loss Cost of goods sold $300

Inventory $300

Balance Sheet

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Balance sheet of ABC Trading Co as at 31.12.2004)

Assets Liabilities

Current Assets Current LiabilitiesBank 300 Creditors 400Debtors/Receivables 380 AccrualsStock/Inventory400-300 100 Long Term Liabilities



Less: Cost of goods sold -300------- -------

780 780==== ====

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Double Entry Payment to Supplier (Creditors)

Paid $50 million to customers

Debit Credit

Creditors $50

Bank $50

Balance Sheet

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Balance Sheet


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Balance sheet of ABC Trading Co as at 31.12.2004Assets Liabilities

Current Assets Current LiabilitiesBank 300-50 250 Creditors 400-50 350Debtors/Receivables 380 AccrualsStock/Inventory 100

Long Term Liabilities



Less: Cost of goods sold -300------- ------730 730==== ===

Balance Sheet

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Balance Sheet


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Double Entry Payment for sales expenses

Paid cash $10 million for sales expenses

Debit Credit

Sales expense $10

Bank $10

Balance Sheet

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Balance Sheet


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Assets LiabilitiesCurrent Assets Current LiabilitiesBank 250-10 240 Creditors

350Debtors/Receivables 380 AccrualsStock/Inventory 100 Long Term LiabilitiesFixed Assets Bank LoanLand and building Bills PayablePlant and Machinery EquityOffice equipment Paid up capital 300Motor vehicles Reserves & Retained Profit

Current Profit and Loss 380Less: Cost of goods sold -300

Sales expenses -10------- -------720 720==== ====

Balance Sheet

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B l Sh t


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Double Entry Receipt of payment from Customers

Received $100 million from customers ($ in millions)

Debit Credit

Bank $100

Debtors $100

Balance Sheet

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B l h t f ABC T di C t 31 12 2004 (S$ illi )


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Balance sheet of ABC Trading Co as at 31.12.2004 (S$ millions)Assets LiabilitiesCurrent Assets Current Liabilities

Bank 240 + 100 340 Creditors 350

Debtors/Receivables380-100 = 280 AccrualsStock/Inventory 100



Current Profit and Loss 380Less: Cost of goods sold -300

Sales expenses - 10 70------- -------720 720

==== ====103


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Balance Sheet


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Assets LiabilitiesCurrent Assets Current LiabilitiesBank 340 Creditors 350Debtors/Receivables 280 Accruals 2Stock/Inventory 100

Long Term LiabilitiesFixed Assets Bank LoanLand and building Bills PayablePlant and Machinery EquityOffice equipment Paid up capital 300Motor vehicles Reserves & Retained Profit


Less: Sales commission -2 368------ -------720 720==== ====

Balance Sheet

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Balance Sheet


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Double Entry payment in the following period

The payment of the sales commission in the following period will haveeffect on the balance sheet only. No changes to the

Profit and Loss account ($ in millions)

Debit Credit

Accruals $2

Bank $2

Balance Sheet

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Balance Sheet


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Assets LiabilitiesCurrent Assets Current LiabilitiesBank 340-2= 338 Creditors 350Debtors/Receivables Accruals 2-2. = 0

280 Long Term Liabilities

Stock/Inventory 100 Bank LoanFixed Assets EquityLand and building Paid up capital 300Plant and Machinery Reserves & Retained ProfitOffice equipment Current Profit & Loss 68Motor vehicles

------- -------718 718==== ====

Balance Sheet

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Balance Sheet


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Assets LiabilitiesCurrent Assets Current LiabilitiesBank 338 Creditors 350+50 = 400Debtors/Receivables Accruals

280Long Term Liabilities

Stock/Inventory 100 Bank Loan

Fixed Assets EquityLand and building Paid up capital 300Plant and Machinery Reserves & Retained ProfitMotor vehicles 50 Current Profit & Loss 68

------- -------768 768

==== ====

Balance Sheet

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Balance Sheet


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Double Entry Depreciation

Depreciation is the means by which an assets cost is expensed overits useful life

Cost of Motor Vehicle $50M

Useful life -5 years

Depreciation per year = $50M = $10M5

A depreciation of $10M will be charged in the Profit and LossAccount every year

Balance Sheet

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Balance Sheet


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Double Entry Depreciation ($ in millions)

Debit Credit

Depreciation $10

Provision for Depreciation $10

Balance Sheet

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Balance Sheet


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Assets LiabilitiesCurrent Assets Current LiabilitiesBank 338 Creditors 350+50 = 400Debtors/Receivables Accruals

280Long Term Liabilities

Stock/Inventory 100 Bank Loan

Fixed Assets EquityLand and building Paid up capital 300Plant and Machinery/ Reserves & Retained ProfitMotor vehicles 50 Current Profit & Loss 68Less: Prov for Depn Less: Depreciation -10

-10 40------- -------

758 758==== ====

Balance Sheet

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Balance sheet of ABC Trading Co as at 31 12 2004 (S$ millions)


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Assets Liabilities

Current Assets Current LiabilitiesBank 338-30 = 308 Creditors 400Debtors/Receivables Provision 5.5

280 Long Term LiabilitiesStock/Inventory 100 Bank LoanFixed Assets Equity

Land and building Paid up capital 300Plant and Machinery/ Reserves & Retained ProfitMotor vehicles 50 Current Profit & Loss 58Less: Prov for Depn Less: Expenses

-10 40 & Income tax -35.5------- -------

728 728==== ====

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Income Statement

Recognition of Revenue

Computation of Cost of Goods Sold

Accrual Accounting concept

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Pricing of Company Goods to be sold


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Components of cost of goods sold

material costs

interest expense to finance the purchase ofraw materials

fixed cost components

variable cost components

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Costs of Goods Sold


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Costs of Goods Sold



1. material costs

refer to the costs of raw material purchasedplus the cost on insurance and freightplus the cost on inward freight

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2. interest expense to finance the purchase ofmaterialsE.g.. If the cost of materials is $10 Million

Arrived in May 2005 and sold in Oct 2005= 6 months in storage before the sale

Cost of stockholding = 5% interests p.a. on $10 million= $500,000 X 6 mths = $300,000

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P i i f C G d t b ld


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3. fixed cost components refer to the cost of raw materials, insurance,freight and

landing cost.

4. variable cost components refer to: i. the cost of insurance and freight outward

ii. Repackaging costs

iii. Distribution costsiv. Interests on stockholding

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g ( $ )

Assets LiabilitiesCurrent Assets Current LiabilitiesBank 308 Creditors 400Debtors/Receivables Provision 5.5

280 Long Term LiabilitiesStock/Inventory 100 Bank Loan

Fixed Assets EquityLand and building Paid up capital

300Plant and Machinery/ Reserves & Retained ProfitMotor vehicles 50 Current Profit & Loss 22.5Less: Prov for Depn

-10 40

------- -----728 728

==== ===

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N Singapore Profit and Loss ($000)

Total Sales 274,134Less: Cost of Goods SoldOpening stock 18,645Purchases 262,353Stock/Purchase

Adjustment -323

Closing stock -24,288 -256,387

Gross Margin on sales 17,747

Gross Margin % 6.47%

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N Si P fit d L ($000)


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Gross Margin on sales 17,747

Less:Trade discount received 631Commission received 922Trade service income 475Trade discount paid -224Commission paid -1612

Others -519 -327

Total Gross Profit 17,420

% of Total Sales 6.35%

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N Singapore Profit and Loss ($ 000)

Less: Selling Expense

Carriage charges 1,823 Storage charges 690 Insurance 139 Total Selling Expenses 2,652


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Less: General & Admin Expenses

Traveling & Entertainment 1,055 Personnel expenses 5,518 Service charge 549 Depreciation 236

Others 1,727 Total General & Admin 9,085


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N Singapore Profit and Loss ($ 000)

Less: Selling Expense

Carriage charges 1,823 Storage charges 690 Insurance 139 Total Selling Expenses 2,652

%of Total Sales 0.97%

Total Operating Profit 5,683


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Total Operating Profit 5,683Add: Income 1,286

Exchange gain 439Others 362

Total Non-Operating Income 2,087Less: Non-Operating Expenses

Interest Expense 91Exchange Loss 63Others 413

Total Non-Operating Income 567

Ordinary Profit before extraordinary item 7,203

% on Total Sales 2.63%

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Profit and Loss


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Profit and Loss

Calculation of Gross Margin

Gross Margin is the percentage of Gross Profit over theSales

Gross Profit = Sales less Cost of Goods Sold

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Profit and Loss


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Calculation of Gross Margin $000

Total Sales 274,134

Less:Costs of Goods SoldOpening stock 18,645

Purchases 252,353Stock/purchase adjustment (323)Closing stock (24,288)

256,387

Gross Profit on Sales 17,747

Gross Margin 6.47%

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Profit and Loss


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Gross Profit and Gross Margin

What about the interests on costs of stockholding

e.g. 5% on $10,000,000 = $500,000 per year

= $ 41,666 per month

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Valuation


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Cost on valuing inventoryQty $ Average

unit cost$

Opening Balance 1,000 1,000 1.00

Purchases 1,500 2,250 1.50

Closing Balance 2,500 3,250 1.30

Weighted average unit price =($1,000+$2,250)(1,000+1,500)

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Valuation


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Cost of valuing inventory Qty $ Averageunit cost

$

Closing Balance 2,500 3,250 1.30

Sale of 1,000 units 1,000 @ $1.30 = $1,300

Will be charged into the Profit and Loss under Cost of GoodsSold

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Cash flow Statement


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Cash flow Statement

1. Purpose of the cash flow statement

Measuring cash receipts and payments

Cash flows from operating activities

Cash flow from investing activities

Overtrading

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Cash flow Statement


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Cash flow Statement

Business Cash Flow Management

Usefulness of the statement of cash flow

The entitys ability to generate future cash flow

The entitys ability to pay dividends and meet obligations

The reason for the difference between net income and netcash provided (used) by operating activities

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Cash flow Statement


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Classification of cash flows

Operating activitiesCash effects of transactions that create revenues and expenses

Investing activitiesAcquiring and disposing of investments and property, plant and equipment

Financing activitiesObtaining cash from issuing debt and repaying the amountBorrowedObtaining cash from stockholders and providing a return on investment

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Cash flow Statement


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Type of cash inflows and outflows

Operating activities Income statement items

Cash inflow Cash outflowFrom sale of goods or servicesCommission received

To suppliers for inventoryTo employees for servicesTo government for taxesTo lenders for interest

To others for expenses

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Cash flow Statement


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Investing activities Changes in investments and long-term assets

Cash inflow Cash outflow

From sale of property, plant To purchase property, plantAnd equipment and equipment

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Cash flow Statement


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Financing activities Changes in long-term liabilities andstockholders equity

Cash inflow Cash outflow

From issue of share capital To stockholders as dividends

From issuance of debt (bonds and To redeem long-term debtNotes) or reacquire share capital

- commonly known as buy

back

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Cash flow Statement


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ABC TRADING CO - Statement of Cash flow ($ Millions)

Cash flow from operating activitiesAdjustment to reconcile net income to net cashProfit and Loss 200Add: Depreciation 20

Provision 40 60-----

260Provided by operating activities:

Increase in accounts receivable -20Decrease in merchandise inventory 50Increase in prepaid expenses -30Decrease in accounts payable -100

Decrease in income tax payable - 10 -110-----

Net cash provided by operating activities 150

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Ratio of cash from operations to short term debt


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What is a cash flow statement?

$ %

Cash flow movement

Billed sales 100 76.9

Progress payments 20 15.4

Customer Advances 10 7.7

Total cash receipts A 130 100.0

Accounts payable 80 Payroll/Overheads 40 26.6

Interest on short term

Debt 30 20.1

Total cash disbursements B 150 100.0

Nett cash inflow/Outflow A-B (20) Opening Cash Balance 100

Closing Cash Balance 80

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Total cash receipts 130

Total cash disbursements 150

Net cash increase/(decrease) -20

Beginning balance 100

----

Ending balance 80

===

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TOPICS FOR BUSINESS FINANCE


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3.Asset turnover ratio

Leverage ratio

Interest cover ratio

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4. Trend analysis between the company and the industry

The overtrading problem

Solution to the overtrading problem

The limitations of ratio analysis

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5. Net Working Capital Management Techniques

Inventory turnover

Debtor turnover

Creditor turnover

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Balance Sheet


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USERS OF FINANCIAL STATEMENTS

1. The equity investor group the shareholders or owners

2. The loan creditor group banks and other lenders

3. Employees and their representatives

4. Company management used in controlling andmanaging the business

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Financial Reporting


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Financial Reporting

1. Balance Sheet

2. Profit and Loss

3. Supporting reports Debtors, creditors, assets recordsetc

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Business Finance Skill Development Process on:

How are Your salaries and incentives align with thecompany goals?

What can you do to perform an extra mile for yourcompany?

How do your department react and understand the

profitability of the company performance?

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Business Planning and Resource Utilization


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What are we in business for?

c. Produce and sell efficiently

d. Keep the providers of capital happy

e. Keep our employees safe and happy

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What are we in business for?

g. Reinvest in new and improved:

Products

Markets

Facilities and equipment

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What are your Department strategies?

1. What is your Market share of % growth and target?

2. What type of Market growth in Ringgit and US$ and

Euro, Sales units?

3. Market leader positioning

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Department Action Plan

i. Type of products

ii. Sales Pricing

iii. Support service such as financing, productrepair and servicing

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Business Strength and weakness analysis


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1. Human Resources planning and management

2. Business Operating System

3. FINANCIAL

a. Fundingb. Profitabilityc. Technology leadership/Market share

d. Shareholders returns


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Corporate Governance


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p

1. What is Corporate Governance

2. Shareholders rights

3. Board Effectiveness

4. Control and Disclosure

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Financial ratios analysis


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How to analyze financial statements

Short term liquidity

Long term solvency

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Business Finance Where is your revenue coming from?


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Who is your customer? External & internal

1. Your client Buyer, Senior management

CEO, CFO, Payable Clerk

2. Your clients customer consumer, manufacturer

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Where is your revenue coming from?


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Who is your customer? External & internal

3. Your internal department staff

4. Your immediate supervisor

5. Your supporting dept HR, Finance, IT, Logistics

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What business is your company in?


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ManufacturingRetailing

Distribution

Service provider

Financial MarketConsultancy

Project managementetc. etc.

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Working Capital


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Average days of inventory

The average number of days that inventory that Remains onhand is considered an indicator of how Effectivelyinventory is being managed.

Generally The fewer days that the inventory is on hand, the

Better its the cost manager.

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Working Capital

A d f i t ti


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Average-days-of-inventory ratio

Average days of inventory =

No of days in X Average inventory

period Total cost of goods sold

Eg. 365 days X $26M = 43 days$223M

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Working Capital


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Inventory Turnover Costs of goods sold divided by inventory

a ratio that measures the number of times a

companys inventories are sold and replaced

during the year.

This ratio reflects the relative liquidity of inventories

= Cost of goods sold (Annualised)

Inventories

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Working Capital


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Inventory Turnover

Cost of goods sold (Annualised)

InventoriesEg. = $38 M = 3.17 times

$12 M

Industry average = 3.6 times

Which one is performing better?

It shows that the company invests more in inventoriesPer dollar of sales than does the average firm in its industry

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Ratio of cash from operations


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Ratio use in NAS internal working capital analysis:

Stock Turnover =

Stock BalanceAve monthly sales

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What do cash ratios do for management?

Cash ratios enable management to determine

The sources of greatest cash inflow and outflow,

And possibly to take steps to improve the

Organizations overall cash position

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Trend


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NET WORTH

For a company, total assets minus total liabilities.

Net worth is an important determinant of the value ofa company, considering it is composed primarily of allthe money that has been invested since its inception,as well as the retained earnings for the duration of itsoperation.

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Trend


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NET WORTH

Net worth can be used to determine creditworthiness becauseit gives a snapshot of the companys investment history andalso called owners equity,shareholders equity, or netassets.

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RatiosBalance sheet of ABC Trading Co as at 31.12.2004 (S$ millions)

Assets Liabilities


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Assets Liabilities

Current Assets Current LiabilitiesBank 10 Creditors 400Debtors/Receivables 790 Accruals 30Stock/Inventory 300


Fixed Assets Bank Loan 300Land and building 100 Bills Payable 5Plant and Machinery 25

EquityOffice equipment 20 Paid up capital 300Motor vehicles 3 Reserves & Retained Profit 213

------- -------1,248 1,248==== ====

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RETURN ON EQUITY

Trend


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RETURN ON EQUITY

Return on ordinary equity Ratio =

Net Income available to the ordinary shareholders;

A ratio relating income to the ordinary shareholders

investment

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Assets Liabilities

Ratios


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Assets Liabilities

Current Assets Current LiabilitiesBank 10 Creditors 400Debtors/Receivables 790 Accruals 30Stock/Inventory 300


Fixed Assets Bank Loan 300Land and building 100 Bills Payable 5Plant and Machinery 25 EquityOffice equipment 20 Paid up capital 300Motor vehicles 3 Reserves &

Retained Profit 213------- -------1,248 1,248==== ====

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Trend

RETURN ON EQUITY (ROE)


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( )

If the net income for the year is $60 million

The paid up capital is $300 million of 300 million

shares of $1 each

ROE = $60 million = 11.7 %$513 million

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Net Working Capital Techniques.


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Measuring Liquidity.

Liquidity - describes the ease with which an asset can beconverted to cash

A firms liquidity refers to its ability to generate sufficientcash to meet its short-term obligations.

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Working Capital


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A concept traditionally defined as a companys investmentin current assets.

Net working capital refers to the difference

between current assets and current liabilities.

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Net Working Capital Techniques

Working Capital


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Working Capital

Currents Assets- All the assets the company expects to convert into cashwithin 12 months.

Liquidity- A companys ability to pay its bills on time.

Liquidity is related to the ease and quickness

which a company can convert its non-cash assets into

cash, as well as the size of the companys investment innon-cash assets vis--vis its short-term liabilities.

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Working Capital

Acid test ratio


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Acid-test ratio

= current assets inventories

current liabilities

If the acid-test ratio is greater than 1 or more, then

The company will have the ability to continue its

Business without interruptions from sudden actions

From trade creditors and banks on short terms loans

Sudden demand for payment or settlement.

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Working Capital Trend Analysis

Ratio of cash from operations


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Period 1 2 3 4

A/C receivable 39,969 48,243 58,364 49,948Stock 13,645 16,579 18,540 24,288

A/C Payable 27,475 31,225 36,287 34,410

Working capital 25,139 33,597 40,716 39,826

Sales (3 mth ave) 18,466 21,710 22,602 23,073

Turnover A/v receivable 2.1 2.2 2.6 2.2

Stock 0.7 0.8 0.8 1.1 A/c payable 1.5 1.4 1.6 1.5Working capital 1.4 1.5 1.8 1.7

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Trend


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Trend analysis between the company and the industry

1. Gross Margin 35% UF 45%2. Debtors Collection Period 45 days UF 35 days3. Terms of payment credit limit 30 days UF 45 days

4. Debt Equity Ratio 0.7 UF 0.5

UF - Unfavorable

Others Industry

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Avoid the problems of overtrading

Trend


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This means that it does not have enough cash and alsocannot obtain enough cash quickly.

Working capital is the difference between current assets andcurrent liabilities.

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Trend


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You could renegotiate payment terms, or tell customers thatnew terms will apply for future orders, but you should beaware that customers may object. Much will depend on thestrength or weakness of your competitive position.

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Trend


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Good credit control is essential and most businesses havescope to manage and recover debt more efficiently, which isalways a good idea.

Offer discounts for prompt payment

This can be very effective but there are disadvantages - it canbe expensive and must be policed.

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There are limitations to the financial ratios

Trend


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Such as:

1. Difficult to identify the industry category as the companymay engages in multiples lines of business

2. Published industry averages are only approximations andprovide the user general guidelines

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Trend


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Such as:

3. Accounting practices differ widely among companies andcan lead to differences in computed ratios such as differentmethods of depreciating their fixed assets

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Trend


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There are limitations to the financial ratios Such as:

4. An industry average may not provide a desirable target ratio

or norm. At best an industry average provides a guide tothe financial position of the average firm in the industry.

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Case studies


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Role play to meet company objectives and

Department goals

1. Sales 2. Finance

3. Senior management

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Conclusion


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1. profitability ratios

indicate the effectiveness of profit generation inrelation to:

sales,

assets employed

and shareholder investment.

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Analysis & Interpretation


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Gross Profit Margin = Healthy

Return on Total Assets = Healthy

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Conclusion


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Effective Pricing

Increase Gross Margin

Increase Sales Volume

Effective Credit Control

Timely Collection of Debts and Receivables

Total Satisfied Customers

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Conclusion


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CASH IS KING

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THANK YOU VERY MUCH

FOR PARTICIPATING


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FOR PARTICIPATING

WISHING ALL OF YOU

EVERY SUCCESS

IN YOUR CAREER, BUSINESS, ENDEAVOUR

AND LIFE!

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END

Accounting for Non-Accounting Executives Final

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