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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.
- Trading, Profit and Loss Account.
- Balance Sheet
- Annual Reports of Limited companies.
- Stock Exchange Report relating to quoted companies.
- Financial Ratios prepared by accountants and investment analysts.
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
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
- List six examples of each of the following:
(a) Fixed Assets
(b) Current Assets
- State two importance of the Balance Sheet as a financial statement.
USES OF FINANCIAL RATIO:
- Ratios are used in preparing industrial averages.
- They can be used to interpret financial statements.
- They help in comparing performances between and among related organizations.
- Ratios help to measure the ability of a given entity to meet its short-term obligations.
- They are used in evaluating the performance of companies in the same business
DISADVANTAGES OF USING RATIO
- Ratios can easily be affected by inflation
- They can be manipulated upon or abused
- Different accounting policies affect ratio calculation
TYPES OF RATIO
- Profitability and efficiency ratio
- Liquidity ratio
- 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.
- Net profit%
- Gross profit%
- Returns on capital employed
- Assets turnover ratio
- Individual expenses items to sales ratio e.g. advertising carriage outwards etc
- 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
- ASSETS TURNOVER RATIO:
This ratio measures the turnover generated by assets and shows how fully a company is utilizing its assets.
- INDIVIDUAL EXPENSE TO SALES:
This helps to reveal the reason for improvement or reduction in the net profit to sales.
Formula: INDIVIDUAL EXPENSES × 100
GENERAL EVALUATION QUESTIONS
- Explain seven roles of transport to businessmen
- List ten sources of capital available to a public limited company
- Give seven reasons why consumers need protection
- State five effects of hire purchase on the buyer
- 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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