Appunti financial accounting

NI/SALES(REV) x SALES(REV)/AV TOT ASSETS

Margin is the amount of profit from each dollar of sales whereas turnover reflects the sales –

generating capacity of the firm’s assets.

A second profitability ratio is called return on equity (ROE).

ROE put in relation net income with average owner’s equity. ROE measures how well the company

is deploying shareholders’ capital. Also ROE can be divided in different elements: margin x

turnover x average tot. Assets on av. OE (measure of debt: the higher is this ratio, the higher is the

use of debt by the company).

Liquidity measures: the ability of the firm to meet its current obligations.

This information is useful for suppliers and creditors.

Current assets: those assets likely to be converted into cash or used to benefit the entity within one

year. Current liabilities are those liabilities that are to be paid within one year.

The measure of liquidity is the working capital (WC) that should always been greater than zero. It is

the excess of a firm’s current assets over its current liabilities:

CURRENT ASSETS – CURRENT LIABILITIES = WC

In addition to WC we have Current ratio that is the ratio between current assets and liabilities is the

division between them: CA/CL.

This value should be greater than zero and 1. A measure of adequate liquidity is a current ratio of 2.

Moreover we have the acid – test ratio: quick assets divided by current liabilities. Quick assets are

cash and accounts receivable. This ratio provides information about the ability of the firm – in worst

cases (when it cannot sell any of their products) – to meet its current obligations even if none of the

inventory can be sold. An acid test ratio of 1 is a good measure of liquidity.

The third category of ratios are activity measures:

They focus on relationships between assets and sales and it’s a measure of the productivity of the

assets: how assets can generate sales.

The first one is the Turnover, that is often calculated for:

1. Accounts receivable: ARturnover: SALES/AVERAGE AR. It is a measure of how many

times a company converts its receivable into cash each year. The smaller the average the

higher is the ratio. The higher is the ratio the better it is because you are not financing

debtors.

2. Inventories

3. Plant and equipment

4. Total assets

Last category of ratio is composed by debt ratios that measure the extent to which a firm is using

debt to finance its operations:

A. Debt ratioL measures the precent of assets being provided by creditors: Liabilities/tot. Ass.

B. Debt_Equity ratio: Liabilities/OE

Ratios are used in industry comparison and trend analysis.

When comparing the operating results of a company over a number of years, analysts like to

express the result in a percentage format: common size statements: net sales are usually presented

on a base of 100%. Then you multiply each category for sales and here we are.

The horizontal analysis compares in a mutual year base.

Not for profit organisations: they are not owned by their capital providers and they cannot

distributed to the capital providers whereas the profit must be reinvested in the activity. You don’t

have an owners’ equity but it is called “net assets” (assets – liabilities).

Not for profit have similar financial statements to profit firms:

1. Statement of financial position: it gives information about the financial position at the end of

the period

2. Statement of activity: changes in net assets

3. Statement of cash flows: cash during the period

There is the statement of financial position: net assets is the seed capital the organisation started

with plus any income accumulated through the years (equal to stockholders’ equity). Income can be

earned from different sources: earned income, restricted donation and unrestricted donation.

Part of the capital of the organisation can be spent and other part not.

Assets and liabilities are quite similar to profit organisations.

Unrestricted net assets: can be spent as desired, this means that all earned income (the income that

comes from the sell of goods and services) from sales of good and services plus non restricted

donations.

Temporarily restricted assets are donations for a special project (purpose restriction) or for a certain

period (time restriction).

In the period in which the money can be finally spent, the money moves from temporarily restricted

to unrestricted.

Other assets can be permanently restricted: donations that can never be spent. Examples are

endowments (money invested for interest – the interests go into the unrestricted assets) or paintings,

works of arts donated to the entity (cannot be sold).

Also these elements is in the statement of activity. We have revenues, expenses and losses and the

difference is not called profit but “changes in net assets”.

Revenues, that include also support (donations and rents) can come from three different sources:

1. Contributions: memberships donations and grants

2. Fees for selling goods and services

3. Interests on investments

Unrestricted revenues can come from a reclassification of a temporarily restricted donation when

the donation is satisfied. For instance, if in 2004 we had 150.000 dollars of restricted income in

2005 the restriction is over we move the revenue to a non restricted one.

Expenses are classified only as unrestricted but there are two expenses:

A. Programme expenses: incurred to realise programmes

B. Support expenses: general expenses for the activities (management and general instead of

fundraising expenses)

The final result is the change in net assets that flows directly into the statement of financial position

in the item “change in net assets”.

Then we have the statement of activity that can present another document to provide the functional

and natural classification of expenses (type of expenses). For very programme we will have a

classification of expenses depending on their nature.

The statement of cash flow works as for profit organisations. It is particularly important for NPO

which can be easily fall in short of cash.

Change in net assets

- Adjustments from operating activities

- Adjustments from investing activities

- Adjustments from financing activities

You get net decrease in cash and equivalent then cash at the beginning of the year and cash at the

end of the year.

Three ratios for NPOs:

A. Related to revenues

B. Related to expenses

C. Related to the balance sheet

Each organisation can decide itself which calculation is valuable.

Sources of revenues ratios:

1. Reliance on sources of revenues. It puts in relationship the largest part of revenues on the

total amount of revenues you get a reliance ratio that indicates the risk of this of a major

reduction In revenues if this source of contributed revenue is reduced or stopped.

2. Reliance of government funding: the type of revenue is government funding divided total

revenues. This ratio is a measure of the autonomy of organisation: the higher this ratio is the

lower is the dependence from government.

3. Earned income ratio: earned income with total revenues. The higher is this ratio, the more

the org is relying on the income, the more autonomous will be the organisation.

4. Self – sufficiency ratio: relates income with expenses. The proportion of expenses that are

covered by earned income. The higher this ratio is the better it is.

Again we have expenses ratio:

1. Percentage of expenses for personnel: usually, staff is the arrest part of the expenditures for

NPOs organisations.

2. Functional allocation cost: the ratio between total fundraising administrative expenses and

total expenses. Why it is important? A NPOs organisation means that is not very efficient.

It’s not using the programmes but they spend a lot of money for general administrative costs.

3. Fundraising efficiency: the average dollar amount of contributions raised for every dollar

spent on fundraising.

4. Cost per unit of service: in the nonprofit uses programme – based recordkeeping and has an

identifiable “unit” of service (i.e. Artists in residences). This ratio helps in valuations

efficiency and identifying efficiency.

Balance sheet ratio are the same of for profit organisations.

14.10.2016

Managerial accounting and cost – volume – profit relationships.

Managerial accounting supports the internal planning and decision making process (future oriented)

of the management. Financial accounting has more of a score keeping, historical orientation that

provides information to owners and others outside the organisation.

The real tool that managers use to plan and take decision is managerial accounting. Decision

making regards future activity: I made a decision for something that occurs today, tomorrow and so

on, not the past. The idea is providing economic information to have managers make future

decisions of the entity. Managers make decision all alone. They plan and control cycle. There is an

analytical model used in management to identify the phases of the life within an organisation. We

can find different formalisations of the planning side. We can distinguish in three macro categories:

1. Planning: identify goals and aims. Budgeting is part of the planning because it is forecasted.

You have to identify aims and activities in order to build the budget.

2. Organising: plans are implemented.

3. Controlling: Once the plans have been implemented you need to control results of your

activity and check with the initial goals

The managerial accounting system provides data and information to the management all long to the

process cycle. It’s a fundamental tool to plan, modify those activities in the meanwhile etc.

For these reasons managerial accounting system differs from financial accounting one:

1. Managerial accounting refers to managers whereas financial refers to external investors or

creditors

2. Managerial: present and future, financial: past.

3. Breadth of concern: managerial: micro – individual units of organisations/ financial

accounting: entire organisations.

4. Managerial: frequent and timely – one day after periods end. Financial: monthly/heavily – a

week or more after periods end.

5. Managerial: relevance more important than reliability. Financial: high accuracy desired –

reliability very important

6. Reporting standards is not imposed in managerial accounting whereas must follow IASB or

FASB and prescribed formats in financial accounting.

What are some managerial decisions? Different costs for different purposes! Depending on the kind

of decisions you can classify costs in different ways: the cost of a product as a category doesn’t

exist per se, it can be calculated depending on decisions managers have to do.

We distinguish between operating costs and non operating costs.the first one comes from operating

activity and the second comes from non operating activities (i.e. Financial and investing activities).

In operating costs we