A financial ratio is a relation scale of two special numerical principles taken from an organization's financial statements. It regularly applied in accounting which is a lot of standard ratios used to attempt to calculate the overall financial situation of a business or other association. Financial ratios might be applied by managers within a firm, by present and potential shareholders of a firm, and by a firm's creditors. Sanctuary analysts use financial ratios to evaluate the strengths and weakness in different organizations. If shares in an organization are deal in a financial market, the market value of the shares is applied in definite financial ratios. (Cpaclass,2010)
Financial ratios measure various parts of a business and are an essential part of the financial statement examination. Financial ratios are classified according to the financial aspect of the company which the ratio measures. Liquidity ratios quantify the accessibility of cash to pay debt. Activity ratios determine how rapidly a firm transfers non-cash assets to cash assets. Debt ratios calculate the firm's capability to pay back long-term debt. Profitability ratios evaluate the firm's utilize of its assets and manage of its operating expenses to create a satisfactory rate of return. Market ratios calculate shareholder response to owing an organization's inventory and also the cost of issuing inventory. (Wikipedia,2010)
Financial ratios might not be directly equivalent between organizations that apply dissimilar accounting systems or follow different standard accounting practices. Most public organizations are necessary by law to utilize normally accepted accounting principles for their home nations, but private organizations, partnerships and sole proprietorships might not apply accumulation basis accounting. Large multi-national organizations might apply International Financial Reporting Standards to manufacture their financial statements, or they might utilize the commonly accepted accounting values of their home nation. (Bizmove,2009)
2.0 Income Statement
Company A & B Income Statement For The Year Ended December 31, 2000.
Company A
Sales
$ 125,000.00
Cost of goods sold
$ 75,000.00
Purchase
$ 12,000.00
Closing stock
$ 10,000.00
Gross profit
$ 48,000.00
Operating expenses
Fixed cash operating expenses
$ 21,000.00
Variable operating expenses
$ 12,500.00
Depreciation
$ 4,500.00
Total operating expenses
$ 10,000.00
Earning before interest & taxes
$ 12,000.00
Interest
$ 3,000.00
Earning before taxes
$ 9,000.00
Taxes
$ 4,500.00
Net income
$ 4,500.00
(Weigend, Andreas S. ,1999)
3.0 Balance Sheet
Company A & B Balance Sheet For December 31, 2000.
Company A
Cash
$ 9,000.00
Debtor
$ 4,500.00
Accounts receivable
$ 12,500.00
Inventotries
$ 29,000.00
Total current assets
$ 55,000.00
Land
$ 20,000.00
Buildings and equipment
$ 70,000.00
Less: allowance for depreciation
$ 28,000.00
Total fixed assets
$ 62,000.00
Total assets
$ 112,500.00
Accounts payable
$ 10,500.00
Bank notes
$ 17,000.00
Total current liabilities
$ 27,500.00
Long-term debt
$ 28,750.00
Creditor
$ 5,500.00
Common stock
$ 31,500.00
Retained earnings
$ 24,750.00
Total liabilities & equity
$ 90,500.00
(Finance,2005)
Company A
Company B
Return on capital employed = Net profit x 100
Capital employed
(4500/90500) x 100= 4.972%
(5450/86600) x 100= 6.293%
Gross profit as percentage of sales = Gross profit x 100
(48000/12500) x 100= 38.4%
(96000/160000) x 100= 60%
Sales
Net profit as a percentage of sales = Net profit x 100
(4500/12500) x 100= 3.6%
(5450/160000) x 100= 3.4%
Sales
Current ratio = Current assets
Current liabilities
50500/27500 = 1.836 times
62000/69000 = 0.898 times
Acid test ratio = Current assets - Closing stock
Current liabilities
(50500-10000)/27500 = 1.472 times
(62000-15000)/69000 = 0.681 times
Fix asset turnover ratio = Sales
Net fix assets
125000/62000 = 2.016 times
160000/88000 = 1.818 times
Total asset turnover ratio = Sales
Total assets
125000/112500 = 1.11 times
160000/15000 = 1.066 times
Stock turnover = Cost of sales
175000/10000 = 12.5 times
96000/15000 = 1.066 times
Average stock
Inventory turnover = Cost of goods sold
Closing stock
75000/10000 = 7.5 times
96000/15000 = 6.4 times
Debt/ sales ratio
(4500/125000) x 12 = 0.432 months
(4600/160000) x 12 = 0.345 months
Creditor/ purchase ratio
(5500/12000) x 12 = 5.496 times
(5600/15000) x 12 = 4.476 times
4.0 Conclusion
In conclusion, the current ratio of company A has a bigger sum compared to company B. The sum of company A is 1.836 times bigger than company B which is 0.898. Whereas, the total asset turnover ratio is 1.11 times bigger than 1.066 which is the ratio of company B.
The acid test ratio is 1.472 times larger in company A than company B which is 0.681 times. Furthermore, the stok turnover is 12.5 times in company A compared to company B which is 1.066 times. The financial position of company A is higher compared to company B and the performance of these two company's using the accounting ratio analysis. Based on the comparison of both the company's the Company A is prefered because their forecasting is very good. (Cpaclass,2010)
5.0 Reference
Wikipedia(2010), Financial Ratio, Retrieved on February 12,2011
from en.wikipedia.org/wiki/Financial_ratio
Bizmove(2009), Financial Ratio, Retrieved on February 12,2011
from www.bizmove.com/finance/m3b3.htm
Cpaclass(2010), Financial Ratio, Retrieved on February 12,2011
from cpaclass.com/fsa/ratio-01a.htm
E-Library
Weigend, Andreas S. (1999),Computational Finance ,
MIT Press
Finance(2005),Boston Institute of Finance Stockbroker Course : Series 7,
John Wiley & Sons, Incorporated
Das, Dilip K.(1993),International Finance : Contemporary Issues
Routledge
Question 2
Identify and discuss three different ways for transferring capital or fund from savers to borrowers in the financial market.
1.0 Introduction
Broad phrase is defining any market where purchasers and vendors contribute in the deal of resources such as equities, bonds, currencies and derivatives. Financial markets are naturally described by having cleared pricing, basic rules on trading, costs and fees and market forces shaping the prices of securities that operate. Some financial markets only agree to participants that meet definite criterion, which can be based on issues like the sum of money held, the investor's environmental place, and understanding of the markets or the profession of the applicants. Markets work by placing a lot of attracted and vendors in the marketing place, consequently creating it easier for them to discover each other. An economy which relies principally on relations between purchasers and retailers to distribute resources is recognized as a market economy in dissimilarity either to a command economy or to a non-market economy.
Without financial markets, borrowers would have complexity discovery lenders themselves. Intermediaries such as banks assist in this procedure. Banks get deposits from persons who have money to save. They can then provide money from this collection of deposited money to individuals who request to borrow. Banks usually lend money in the structure of loans and mortgages. More difficult transactions than a simple bank deposit involve markets where lenders and their representatives can meet borrowers and their representative, and where obtainable borrowing or lending commitments can be trade on to other revelries. An excellent instance of a financial market is a stock exchange. A corporation can increase money by selling shares to shareholders and its presented shares can be bought or sold. (Weigend, Andreas S. ,1999)
2.0 Commercial bank
Commercial banks are an association which generally executes certain financial transactions. It carries out the twin task of accepting deposits from groups of public and creates advances to needy and valuable people from the public. When banks recognize deposits its liabilities enhance and it becomes a debtor, but when it makes advances its assets raises and it becomes a creditor. Banking dealings are generally and officially approved. It is dependable in maintaining the deposits of its bank account holders. It is a financial organization that offers services such as an accepting deposits and providing company loans. Commercial banking activities are dissimilar than those of investment banking, which comprise underwriting, performing as an intermediary between an issuer of securities and the investing community, assisting mergers and other business reorganizations, and also performing as a broker for institutional customers.
Commercial bank being the financial institution executes different types of purposes. It satisfies the financial wants of the parts such as farming, manufacturing, trade, communication, and other. That means they participate very important part in a development of economic social requirements. The purposes presented by banks are altering according to alter in time and recently they are becoming client centric and enlarging their functions. Commonly the functions of commercial banks are separated into two groups which are the main purposes and the secondary functions. (Finance,2005)
A bank offering checking accounts, savings accounts, certificates of deposit, individual and company loans, and other related services. Commercial banks charge costs and or interest for a lot of their services, though they might pay interest on extra services. A retail bank is frequently an individual division of a commercial bank where one might acquire these services. Commercial banks present a complete collection of retail banking goods and services, such as read-through and savings accounts, loans, credit cards, and lines of credit to personalities and trades. Mainly commercial banks also trade certain investments and a lot of offer complete brokerage and financial forecasting services. ( Capitalone,2010)
2.1 Pension fund
A finance recognized by an employer to facilitate and manage the investment of workers retirement funds contributed by the employer and workers. The retirement fund is a regular asset pool intended to create constant development over the long term, and offer pensions for workers when they get to the end of their working times and start retirement. Pension funds are generally run by some type of financial intermediary for the corporation and its workers, although some larger businesses manage their pension funds inside the company. Pension funds organize relatively huge amounts of capital and represent the major institutional investors in various nations.
It is a financial organization that organizes assets and distributes revenue to people after they have stop working. Pension funds which invest in a selection of securities manage such giant amounts that their investment decisions can have major force on personality security prices. It is a retirement plan in which an employer creates an involvement into an account each month. The contributions are invested on behalf of a worker, who might initiate to make withdrawals after retirement. Naturally, pensions are tax-deferred, meaning that the worker does not give taxes on the funds in the pension until he or she starts creating withdrawals. With the enlarged emphasis on market assessment in accounting system and solvency instruction, the correct forming of interest rate dynamics has become increasingly significant for pension funds.
An amount of pension fund characteristics create these forms mostly demanding. Initially, as the requirements of pension funds enlarge far into the prospect, the form must be sensible both for short rates and very long term rates. Second, as the importance of liabilities enlarges extremely if interest rates approach zero, particularly the possibility of very low rates must be modeled appropriately. Third, as pension rights are typically indexed, the interaction between interest rates and inflation must be addressed. Fourth, in order to allow for long term analysis, the imitation outcomes must preferably be fixed. Fifth, account has to be in use to probable structural breaks in the inflation and interest rate dynamics, if only to meet the terms with maximum return assumptions of supervisors. (Wikipedia,2010)
2.2 Retire fund
Although a number of employees retire by option, others should leave their job due to disability or unforeseen conditions. It is significant that professionals have a substantial retirement fund to give for living and medical expenditure as they get older. Retirement funds come in various forms and offer dissimilar vehicles for professionals looking to save money during their working times.
Retirement funds which also defined to as retirement plans, allow employees to set aside money in an account to be spent during their retirement years. Retirement plans fall into described benefit plans and described contribution plans. Defined benefit plans are funded by the employer and based on the corporation's promise that workers will receive a set dollar sum or monthly wages during retirement. Conversely, workers who give to their retirement funds, through a defined contribution plan, should give money to their personality account and select how those funds are invested.
It is a fund to build up by a business, labor union, governmental unit, or other association to give the pension profits of retired employees. Retirement funds provide billions of dollars yearly in the stock and bond markets, and are consequently a main issue in the supply-demand balance of the markets. Earnings on the investment portfolios of retirement funds are tax deferred. Fund managers create actuarial statements about how much they will be necessary to give out to pensioners and then try to ensure that the rate of return on their portfolios equals or exceeds that estimated payout require. (Wikipedia,2010)
3.0 Conclusion
Financial market executes the crucial part of bringing together those economic representatives with extra funds who desire to lend, with those with a shortage of funds who want to borrow. In doing this it propose the main profits of maturity and risk alteration. It is probable for this to be done by straight contact between the crucial borrowers. In addition to checking the investments, the people should think how to transfer their funds in the financial marketplace. It suggests that people investing in a termed profit plan commonly review their investment statements for correctness and update individual information when required. Other action items comprise understanding their investment profits and analyzing the market position if they want to invest and obtain more benefits. (Das, Dilip K.,1993)
Therefore, the existence of threat is central to the want for some intermediary to cooperate this part. The nature of the connection between intermediaries and their clients sets them in a model situation to check those risks. Financial market allows investors to discover comparatively safe outlets for their savings which give a competitive rate of interest. Those who desire to borrow are also capable to do so in a well developed market for finances. Such savings and loans markets are significant for the performance of a market financial system. In exacting, it allows customers to shift utilization either forward or backward in time, thus deeply enhancing the sort of choices accessible. Saving postpones expenditure for the expectations. Borrowing permits consumption at the moment that will be remunerated for in future, or the purchase of great robust product similar to a house or a car, the services of which will be consumed over outlook times. ( Capitalone,2010)
