Generally accepted accounting principles prescribe the accrual basis of accounting over the cash basis of accounting. The accrual basis of accounting measures the performance of a business by showing in detail every transaction regardless of when the funds are received. Cash basis of accounting only accredits earnings and expenses when money is really being paid out or received. The cash basis of accounting is a less expensive way of keeping records but the failure of using this method is that financing is very difficult because of inaccuracy. The big difference between accrual and cash basis of accounting is when one uses cash basis entries are recorded at the time payment is received.
Capital improvement can save the company on unexpected cost and long-term shut down. Moreover, since Alliance’s customers are sensitive to delivery times, improvement on capital can save Alliance from losing loyal customers as well as their reputation. Other necessary solutions: Renegotiate with the bank In order for Alliance Concrete to finance the additional money for capital investment, they need to present these forecast data to the bank: • The forecast of 2006 leverage ratios: o Debt to prior year EBITDA of 2.67 which is less than the prior year of 2.80 shows that Alliance’s additional finance will not exceed three times the prior year’s EBITDA. o Interest coverage
The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company. The quick ratio is calculated as: What Does Receivables Turnover Ratio Mean? An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.
Classified into short-term or long-term facilities Short-term = money Long-term = capital Suppliers of loans or debt funds face credit risk Credit risk: the risk the borrower won’t pay back loan Funds supplied in the form of the acquisition of an ownership share of a business. Longer-term Referred to as capital investment Equity investors face investment risks, but are compensated with dividend payments and capital growth (increase in ownership shares over time) Investment risk: the possibility that the investor’s return will not be realised 1.5 What are some problems with direct financing that make indirect financing more attractive? Direct financing: financing in which DSUs issue financial claims on themselves and sell them for money directly to SSUs. The SSU’s claim is against the DSU, not a financial intermediary. Some problems with direct financing include the denominations of the
Financing decisions firm must routinely make The Equilibrium Theory argues that the value of the leveraged value of a company depends on the un-levered (full equity) value of the firm, plus the present value of the tax shield minus the present value of the distress costs. The present values of tax shield and the distress costs vary with different levels of debt. Debt does not affect the un-levered value of the firm due to the fact that debt finance does not affect the operating risk of the company, however, it does affect the financial risk. As the leverage increases, the expected return from equity holders also augments along with risk. These effects cancel out making the shareholder value unmoved.
The liquidity of a product can be measured as how often it is bought and sold. Buyers are willing to pay higher prices for these assets compared to others so it is more advantageous to own them. All assets and liabilities are listed on the financial statement in the order of their relative liquidity. It is important because businesses that would normally succeed fail due to a lack of readily available cash. I was able to view Unilever’s and Kraft Foods financial statements.
It is based not on past performance, but on current and future trends, which does not allow for exact numbers. Because managers often have to make operation decisions in a short period of time in a fluctuating environment, management accounting relies heavily on forecasting of markets and trends (Francis). The differences between managerial and financial accounting is that managerial accounting is presented internally, whereas financial accounting is meant for external stakeholders. Although financial management is of great importance to current and potential investors, management accounting is necessary for managers to make current and future financial decisions. Financial accounting is precise and must adhere to Generally Accepted Accounting Principles (GAAP), but management accounting is often more of a guess or estimate, since most managers do not have time for exact numbers when a decision needs to be made (Francis).
A company's securities typically include both debt and equity, one must therefore calculate both the cost of debt and the cost of equity to determine a company's cost of capital. However, a rate of return larger than the cost of capital is usually required. The cost of debt is relatively simple to calculate, as it is composed of the rate of interest paid. In practice, the interest-rate paid by the company
Operational trouble shouting It is very difficult to find a relevant and fair capital base for the ROI measure. Abrams use book value for fixed assets which inflate the ROI measure as the assets age. The age and mix of assets also differs among divisions which give unfair measures. It is also easy for the divisions to manipulate the capital base at the end of the year. ROI based bonus may rob the future, who want to invest in assets if that reduce the bonus.
Therefore, the company faces to problems with turning assets into cash. Moreover a low ratio of receivables turnover implies the company should re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm. As for a low quick ration relatively to a current ratio tells us, that the inventory is high, meaning there are troubles with selling. They, in turn lead to a low profit margin. 2) Calculate the operating cycle.