Thursday, May 7, 2009
I kept emphasizing on my accounting blog, to know your financial statements, and how to fill it out:
1. Balance Sheet
2. Income Statement (sorry I'm a little old school and US centric on this one)
3. Cash Flow Statement
4. Operations Statement
Some points of the test!!!
A) Know what principles/theories, etc and the advantages and disadvantages
B) Calculation of ratios (PE, turnover, etc)
C) Compare 2 businesses and do all the formulas and advise which one is the better buy.
If you know how to do these at least halfway decently you should be able to pass.
If you don't know anything, at least memorize all the principles/theories and know how to fill out a Balance Sheet, Income Statement and know how to do a bank reconciliation.
If you don't know how to do those by now, you're in big trouble.
Wednesday, May 6, 2009
Accounts Receivable Analysis (How credit is managed)
- A/R Turnover
- Number of Days Sales in A/R
- Estimate number of days of A/R to Cash
Accounts Receivable, end of year
Monthly Average Accounts Receivable (net)
Terms of sales are 1/10 (1% discount, if paid within 10 days), and n/60 (net 60, net due within 60 days)
a) Determine for each year (1) The accounts receivable turnover and (2) the number of days sales in receivables.
b) What conclusions can be drawn from these data concerning accounts receivables and credit policies?
First: Accounts Receivable Turnover Formula
Net Sales divided by Average A/R
Div by Avg A/R
That means the ratio of how much the A/R turnovers is 7 times a year
Second: Number of Days Sales in A/R
Accounts Receivable @ the End of the Year divided by Average Daily sales
A/R @ EOY
Div by Avg Daily A/R
Current Position Analysis
1. Working capital
Formula = current asset – current liabilities
2. Current Ratio – Let's you know how many times current assets can cover current liabilities
Current Assets/Current Liabilities (current assets divided by current liabilities)
3. Acid Test Ratio aka Quick Test (to show how quickly a business can fulfill its obligations, simply put how quickly they can pay off debt if they had to)
Quick Assets/Current liabilities (quick assets – cash/securities, etc divided by current liabilities.
Accounts & Notes Rec (net)
Account & Notes Payable (net)
Current Assets in blue
Current Liabilities in green
a) determine for each year (1) the working capital (2) the current ratio & (3) the acid-test ratio.
b) What conclusions can be drawn from these data as to the company's ability to meet its currently maturing debts?
Let's do this: For the sake of simplicity, let's use 2009 & 2008
1. Working capital
2. Current Ratio
Divide by 310,000
Divide by 350,000
This means in 2009, current obligations can bet met 4.5 times compared to 3.9 times in the preceding year.
3. Acid Test
Quick Assets = Cash, Marketable Securities, Receivables divided by current liabilities
Divided by 310,000
Divided by 350,000
This means that 2008 the quick assets could cover the liabilities 2.2 times and in 2009, it improved to 2.6
Wednesday, April 1, 2009
Practice Question : Cash flow statement
Wednesday, March 4, 2009
2. Prudent Accounting principle, e.g. if given a choice between a transaction making a profit or just break even, post break-even, or e.g. if you can depreciate in 5 years or in 3 years, assume 3 years due to say, technological obsolescence.
3. Accounting Standards (not sure if this is part of the syllabus, but in the real world is important). IFRS or US GAAP or other? It basically mean that you have to follow the same rules to similar problems, e.g. don't recognise revenue when the merchandise leaves the warehouse, if the rule for revenue recognition says that it can only be recognised when it is receptioned at the customer's warehouse with a Proof of Delivery.
4. The Going Concern concept. This is more theoretical, but basically says that you must assume the company will continue in business for the foreseeable future. This is important if you have, for example long-term debt that you have to service over more than an accounting cycle, or if you have assets that depreciate over a long period of time, i.e. buildings over 30 years, or ships over 20 years, etc.
5. Accruals. Very important in the real world (again, not sure if part of LSE syllabus). This is linked to principle 2 above, and it basically means that if you think something is going to cost you money, even if you haven't incurred the cost, nor received the invoice, then book an accrual for an estimation of that cost "as if you would have incurred it already". Silly example (again, probably repeating what you are already know): there are rumours in the market that the price of, I don't know, platinum, is going to go up, and you are a trader in exhaust filters for the automotive industry (where platinum is a key element). Instead of waiting to get the nice letter from, I don't know, Buffalo Gold Ltd, or First Nickel Inc., you decide to book an accrual for 20% of the value of the future purchases of the new exhaust filters to accomodate the potential increase in price and a potential loss of rebate for volume purchases, because you don't expect to sell as many if prices go up. If later on, the real invoice from the supplier is lower than your accrual, you "reverse" the accrual back into the P&L as a profit.
6. Materiality. This is to do with the fact that if you spend $10,000 in a fancy meeting in Las Vegas, you have to book it under the rubric "entertainment and hospitality" or whichever the name is, and not as "marketing", even if effectively it builds up ties between suppliers and customers (before they get too drunk to remember you). So all "marketing" costs are really marketing, and not full of "extras" incurred by the VP's wife on a shopping spree.
7. Financial statements. P&L, Balance Sheet and Cash Flow statement. This is very important and you mustn't mix them up, e.g. your bank loan sits in the asset part of the Balance Sheet, but the interest expense to service the loan sits in the P&L, etc.
Well, that's mostly all I can remember. I can't recommend some concepts and not others, as you need them all to do well in most cases. Of course, I haven't got the foggiest idea what the syllabus is all about, so I hope that this was of any help at all.