P7 Solvency is when a business is able to pay is expenses as it has money available within the business. To determine solvency, businesses can use ratios such as current ratio and acid test ratio. These ratios allow businesses and potential investors to see how well that are able to meet their liabilities. Current Assets Current ratio = Current liabilities The acid test ratio shows the assets compared to liabilities, like the current ratio, but by taking out the stock figure from the current assets, it shows how well a business can meet its liabilities without having to sell stock, Current assets - stock Acid test ratio = Current liabilities Profitability Ratios can also show how profitable a business really is either as a snapshot or over time. There are three ways of working out how profitable a business really is: * Gross profit percentage – This calculation shows gross profit as a percentage of the turnover.
The income statement is important because it will show whether the company’s revenue exceeded expenses for a specific period resulting in net income or the amount the company may have lost because the expenses exceeded the revenue. The retained earnings statement is equally important because it will indicate the exact reason why the company’s retained earnings increased or decreased over the reporting period. The balance sheet is important because it is the overview of the company’s financial condition at the time of the reporting period and the statement of cash flow’s is important because “Reporting the sources, uses, and change in cash is useful because investors,creditors, and others want to know what is happening to a company’s most liquid resource.” (Weygandt,
d) minimize operational costs and maximize ﬁrm eﬃciency. e) maintain steady growth in both sales and net earnings. 4. Accounting concepts for a ﬁrm to create value it must: a) have a greater cash inﬂow from its stockholders than its outﬂow to them. b) create more cash ﬂow than it uses.
TARGET CORPORATION FINANCIAL ANALYSIS AND INTERPRETATION The ability of a business to meet its short-term cash requirements is called liquidity. It is affected by the timing of a company’s cash inflows and outflows along with prospects for future performance. Efficiency refers to how productive a company is in using its assets, and it is usually measured relative to how much revenue is generated from a particular level of assets. They are both important and complementary. Two measures for evaluating a business's short-term liquidity are working capital and the current ratio.
What is more, a company may choose to pay dividend as the consideration for their investment, because high dividend payout is important for investors as dividends provide certainty about the company's financial well-being. Dividends are also attractive for investors looking to secure current income. In addition, some analysts indicate that how the decrease and increase of a dividend distributions from Champion can affect the price of its security. Companies like Champion that have a long-standing history of stable dividend payouts would be negatively affected by lowering or omitting dividend distributions. So it would be positively affected by increasing dividend payouts or making additional payouts of the same dividends.
Executive summary The performance of a firm is most frequently measured by their accounting earnings. What the performance statistics show are of major interest to management, employees, suppliers, investors, customers, the public, and regulators. (Prior, Surroca, & Tribó, 2008) To better distinguish themselves from poor performers, better-performing firms look to financial reporting to facilitate stakeholders to make financial decisions. In an attempt to control fluctuations in reported earnings, firms often use a type of management accounting behavior called income smoothing to steer earnings to levels they consider desirable. In addition, an inherent conflict of interest exists when management, which has the responsibility for preparing financial reports, cannot impartially report on its own achievements.
A conservative model representing current company growth, based on a current calculated growth rate of 3.39%, used a forecasted Cost of Goods Sold (CGS) and Selling, General, Administrative (SGA) of 65.58% and 22.01% of sales respectively (See Exhibit 1a). A more robust growth rate of 6% with a gradual increase over four years was used based on current industry growth and Cooper’s anticipated goals for Nicholson. A rate of 65% and 19% of sales were used for CGS and SGA in this model (See Exhibit 1b.). We feel this comparison helps illustrate potential in the company. EXHIBIT 1.a (Future Cash Flows from Operations) OPERATIONS ($ MILLIONS) 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 Sales Growth 3.39% 3.39% 3.39% 3.39% 3.39% 3.39% 3.39% 3.39% 3.39% 3.39% 3.39% Net sales 55.3 57.18 59.11 61.12 63.19 65.34 67.55 69.84 72.21 74.66 77.19 Cost of goods sold (67.58% of
CASE 1: Warren Buffett a) From Warren Buffett’s perspective, what is the intrinsic value? Intrinsic value is succinctly summed up by Warren Buffett as “the present value of future expected performance” (Bruner, Eades, & Schill, 2009). This intrinsic value can encapsulate how well the company is run, its cash flow and places a premium on management competency. Why is it accorded such importance? Intrinsic value is considered important in value investing as it allows Buffett to identify stocks or businesses which are undervalued.
In budgets, the fixed costs are separated from the variable costs in those accounts that play into overhead rates can be considered fixed and then understand that variable costs will be in correlation with the operating activities. Fixed costs do not change during the accounting period, and therefore, are the same regardless if the budget is static or flexible. Flexible budgets take a little more time, and research as the managerial staff have to go through each of their expenses and explain in detail whether the amount is fixed or variable, the main focus being in overhead rates. If there is ever a variance in the flexible budget, a favorable variance will be when a company pays less than anticipated for any expense. The variance that comes back as spending more will be considered
Retained earnings are “the net income retained in the corporation” (Kimmel, Weygandt, & Kieso, 2009, pg. 13). The retained earnings statement will explain the possible changes in a company’s retained earnings within their specific reporting period. If there were any dividends or withdrawals made by the company or corrections to the net income during the specific time period this retained earnings statement would show corrections and report it. Managers can take advantage of retained earnings for their business by knowing the financial resources available to reinvest in their company.