Chapter 17Introduction to financial

management

Total Assets

= Total Liabilities

+ Owners’ Equity

/ Net Worth

Current Assets +

Fixed Assets =

(Current

Liability

+Long term)

Liability +

(Common Stock

+ Retained

Earnings)

Current Assets

= Cash + Accounts Receivable

+ Inventory

Current Liability

= Short term bank loan

+ Account Payable

ABC Retailing Co., Ltd.Balance Sheet as at 31 December 1996

$ $ $ASSETS

Current assetsCash 80,000Accounts receivable 60,000Inventory 100,000Prepaid expensives 10,000 Total current assets 250,000Fixed AssetsMachinery 600.000Less: Accumulated depreciation 20,000 580,000Buildings 610,000Less: Accumulated depreciation 310,000 300,000 Total fixed assets 880,000 Total assets 1,130,000

LIABILITIES AND OWNERS’ EQUITY

Current liabilitiesAccounts payable 40,000Short-term bank loans 90,000Accrued expenses 10,000 Total current liabilities 140,000

Long-term liabilitiesLong-term bank loans 600,000 Total liabilities 740,000

Owners’ equityCommon stock 300,000Retained earnings 90,000 Total owners’ equity 390,000 Total liabilities and owners’ equity 1,130,000

$ $$

P.378 Case Study 2- Solution

Cash= C.A. – inventory – A/R= 254000 – 200000 – 50000 = 4000 Retained earnings = T.A. – T.L. – common stock – capitalTotal Assets = C.A. + F. A.= 254000 + 300000–100000 = 454000Total Current Liability= A/P + ST bank loans = 34000 +80000=114000Total Liability=C.L. + LT. L. = 114000+200000 = 314000Total liability and owners’ equity = T.A. = 454000Retained earnings = 454000-314000-100000 = 40000

Case Study 3 - Solution

Cost of goods sold $270000

Gross Profit 160000

Interest 70000

Operating expenses 100000

Sales = G.P. + C.O.G.S. = 430000E.B.I.T. = G.P. – O.E = 60000Net Income = E.B.I.T. – Interest = -10000

Ratio Analysis

Compare the financial ratios with the industry average

Compare the financial ratios for the current period with those in the past

Compare the financial ratios with the management targets

Types of ratios

Liquidity ratio (流動資金比率 ) Profitability ratio (盈利能力比率 ) Activity ratio　（活動比率） Leverage ratio　（槓桿比率） Equity ratio　（主榷比率）

Limitations of Ration Analysis

1. Financial statements are prepared by using different accounting policies and techniques in different companies. They may have different valuation methods or depreciation methods. It is difficult to compare the performance of different companies.

2. Differences in the backgrounds of the companies may also weaken the validity of inter-firm comparison. It is difficult to compare a firm which hires its plant with a firm which purchases its own plant.

3. The environment and external factors can affect the performance of a company difference. Differences in these factors may affect the inter-period comparison.

4. Changes in prices levels may also affect the validity of inter-period comparison.

5. Differences in the basis of data recording may also weaken the comparison of the return on capital employed between different periods. Most of the assets are recorded at historical cost, but the profit is recorded at the current price.

6. Accounting ratios act as indicators for financial assessment. However it is difficult to establish a proper standard for determining which result is good and which result is bad.