Business Finance – the financial position of business firms

Back to: COMMERCE SS2

 

Welcome to Class !!

We are eager to have you join us !!

In today’s Commerce class, We will be learning about Business Finance. We hope you enjoy the class!

 

 

DETERMINATION OF THE VIABILITY OF A BUSINESS

To determine whether or not a business is viable an investigation into the following sources of information must be made.

1. Trading, Profit and Loss Account.
2. Balance Sheet
3. Annual Reports of Limited companies.
4. Stock Exchange Report relating to quoted companies.
5. Financial Ratios prepared by accountants and investment analysts.

 

 

BALANCE SHEET

The Balance sheet of a firm is the summary or statement of the financial position of that firm at a particular date, usually at the end of the financial year.

STRUCTURE OF THE BALANCE SHEET

The normal balance sheet shows the capital and liabilities on the left-hand side and the assets on the right-hand side.  An illustration is given below

 

Peter Okocha Trading Enterprises:

Balance Sheet as at 31st December 2005

 

N                     FIXED ASSETS                                    N

Capital                            25,000                 Premises                                      20,000

Add: Net Profit              35,000               Machinery                                     25,000

Fixtures & Fittings                        5,000

60,000                                                                 50,000

CURRENT LIABILITIES:                                  CURRENT ASSETS:

Creditors                       27,000                        Stock                                18,000

Bank Overdraft             3,000                          Debtors                            12,000

                         Cash in Bank                     6,000

Cash at Hand                  4,000

30,000                                                             40,000

 

90,000                                                               90,000

 

REVIEW QUESTIONS

1. List six examples of each of the following:

(a)      Fixed Assets

(b)      Current Assets

2. State two importance of the Balance Sheet as a financial statement.

 

 

USES OF FINANCIAL RATIO:

1. Ratios are used in preparing industrial averages.
2. They can be used to interpret financial statements.
3. They help in comparing performances between and among related organizations.
4. Ratios help to measure the ability of a given entity to meet its short-term obligations.
5. They are used in evaluating the performance of companies in the same business

 

DISADVANTAGES OF USING RATIO

1. Ratios can easily be affected by inflation
2. They can be manipulated upon or abused
3. Different accounting policies affect ratio calculation

 

TYPES OF RATIO

1. Profitability and efficiency ratio
2. Liquidity ratio
3. Investment ratio

 

PROFITABILITY AND EFFICIENCY:

Profitability and efficiency ratios measure the effectiveness of the management as shown by the returns obtained on sales and capital invested. This can be broken down into the following.

1. Net profit%
2. Gross profit%
3. Returns on capital employed
4. Assets turnover ratio
5. Individual expenses items to sales ratio e.g. advertising carriage outwards etc

 

Formulae:

$$\begin{gathered} 1* \mathrm{NP}\% = \frac{\mathrm{NET} \mathrm{PROFIT}}{\mathrm{SALES}} \times \frac{100}{1} \\ 2* \mathrm{GP}\% = \frac{\mathrm{GROSS} \mathrm{PROFIT}}{ \mathrm{SALES}} \times \frac{100}{1} \end{gathered}$$

 

3. Returns on capital employed ROCE. This measures management ability to utilize effectively the organizations resources.

It is        PROFIT                             ×   100

CAPITAL EMPLOYED            1

Where capital employed can be: a) total asset b) total assets to current liabilities

 

4. ASSETS TURNOVER RATIO:

This ratio measures the turnover generated by assets and shows how fully a company is utilizing its assets.

Formula:           SALES

CAPITAL EMPLOYED

 

5. INDIVIDUAL EXPENSE TO SALES:

This helps to reveal the reason for improvement or reduction in the net profit to sales.

Formula: INDIVIDUAL EXPENSES × 100

SALES

 

 

GENERAL EVALUATION QUESTIONS

1. Explain seven roles of transport to businessmen
2. List ten sources of capital available to a public limited company
3. Give seven reasons why consumers need protection
4. State five effects of hire purchase on the buyer
5. State eight reasons why a bank may dishonour a cheque

 

 

 

We have come to the end of this class. We do hope you enjoyed the class?

Should you have any further question, feel free to ask in the comment section below and trust us to respond as soon as possible.

In our next class, we will continue learning about Business Finance. We are very much eager to meet you there.

 

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