Accounting Management

Accounting Management is the practical application of management techniques to control

and report on the financial health of the organization.

This involves the analysis, planning, implementation, and control of programs designed
to provide financial data reporting for managerial decision making.

This includes the maintenance of bank accounts, developing financial statements, cash
flow and financial performance analysis

A financial statement (or financial report)

A financial statement (or financial report) is a formal record of the financial activities
of a business, person, or other entity.
For a business enterprise, all the relevant financial information, presented in a structured
manner and in a form easy to understand, are called the financial statements.
They typically include four basic financial statements, accompanied by a management
discussion and analysis
Balance sheet: also referred to as statement of financial position or condition, reports on
a companys assets, liabilities, and Ownership equity at a given point in time.
Income statement: also referred to as Profit and Loss statement, reports on a companys
income, expenses, and profits over a period of time. Profit & Loss account provide
information on the operation of the enterprise. These include sale and the various
expenses incurred during the processing state.
Statement of retained earnings: explains the changes in a companys retained earnings
over the reporting period.
Statement of cash flows: reports on a companys cash flow activities, particularly its
operating, investing and financing activities.

Purpose of financial statements

The objective of financial statements is to provide information about the financial

position, performance and changes in financial position of an enterprise that is useful to a
wide range of users in making economic decisions.
Financial statements should be understandable, relevant, reliable and comparable.
Reported assets, liabilities, equity, income and expenses are directly related to an
organization's financial position.

Financial statements may be used by users for different purposes

Owners and managers require financial statements to make important business decisions
that affect its continued operations.
 Financial analysis is then performed on these statements to provide management with a
more detailed understanding of the figures.
These statements are also used as part of management's annual report to the stockholders.
Employees also need these reports in making collective bargaining agreements (CBA)
with the management, in the case of labor unions or for individuals in discussing their
compensation, promotion and rankings.
Prospective investors make use of financial statements to assess the viability of investing
in a business.
Financial analyses are often used by investors and are prepared by professionals
(financial analysts), thus providing them with the basis for making investment decisions.
Government entities (tax authorities) need financial statements to ascertain the propriety
and accuracy of taxes and other duties declared and paid by a company.
Vendors who extend credit to a business require financial statements to assess the
creditworthiness of the business.
Media and the general public are also interested in financial statements for a variety of
reasons.

FINANCIAL RATIOS

Much of the financial information is reported in the firm's financial statements.

Many diverse groups of people are keenly interested in the information found in the
firm's financial statements. They study the statements carefully, interpreting the
information that relates to their particular interest in the company.
The principal idea in analyzing financial ratios is that there are several key ratios,
obtainable from the firm's financial statements, that reveal the financial and non-financial
health of the firm.
In general, we will look at four categories of ratios, each attempting to measure a
particular aspect of the firm's position and performance.
1. Liquidity ratios
Liquidity ratios reflect the firm's ability to meet scheduled short-term obligations

2. Activity ratios

Activity ratios measure how well the firm is managing various classes of assets (like
inventory and fixed assets).

3. Leverage ratios--Debt equity ratio

Leverage ratios show how much debt the firm has used to finance its investments.

4. Profitability ratios

Profitability ratios are designed to reflect the profitability of the firm.

Liquidity Ratios

For the firm to remain alive, it must be able to pay its bills as they become due.
Liquidity ratios measure the extent to which the firm can meat its immediate obligations.
Liquidity ratios also reflect the firms ability to meet short term financial contingencies
that might arise.
There are two commonly used liquidity ratios:
Current ratio
Quick ratio
Current ratio, which relates current assets to current liabilities. Current assets include
cash, bank balances, marketable securities (like stocks and bonds), accounts receivable
and inventory.
Current liabilities include accounts payable, bank loans, taxes payable and other accrued
expenses.
Current Assets
Current
Current Liabilities
Relatively high values of the current ratios are interpreted as an indication that the firm is
liquid and in good position to meet its current obligations and vice-versa.

Quick ratio

Inventory is typically the least liquid component of current assets; the quick ratio is the
same as the current ratio only with inventory subtracted from the numerator .
Current Assets Inventories
Quick Ratio
Current Liabilities
Like the current ratio, the quick ratio or acid-test ratio is meant to reflect the firm's
stability to pay its short term obligations and the higher the quick ratio, the more liquid
the firm's position.

Activity ratios

Activity ratios are called turnover ratios because they show how rapidly assets are being
converted (turned over) into sales.
High turnover ratios are generally associated with good asset management and vice-
versa.
Inventory turnover shows how efficiently the firm's inventory is being managed.
It is a rough measure of how many times per year the inventory level is replaced (turned
over).
Sales
Inventory Turn over
Inventory
 Generally higher than average inventory turnovers are suggestive of good inventory
management and vice-versa.

The collection period attempts to measure how efficient the firms collection policy is by
calculating how long it takes to collect the firms accounts receivable.
Re ceivables 365 days
Collection Period
Sales
Collection period figure (assume it calculates to be 40 days) really means this: Assuming
all sales are made on credit, how many days worth of sales are tied up in receivables?

Shorter collection periods are usually viewed as an indication that the firms receivables
policy is fairly effective.

Fixed assets turnover ratio is sales divided by fixed assets. This ratio is a measure of
how well the firm uses its long term (fixed) assets.
Sales
Fixed Assets Turnover
Fixed Assets
In general, higher than average fixed assets turnover ratios are supposed to reflect better
than average fixed asset management and vice versa.

Total assets turnover is defined as sales divided by total assets.

Sales
Total Assets Turnover
Total Assets
In principle, high total assets turnover ratios are supposed to indicate successful asset
management and vice versa.

Leverage ratios

Leverage ratios indicate to what extent the firm has financed its investments by
borrowing.

Leverage ratios reflect the financial risk posture of the firm ; the more extensive the use
of debt, the larger the firms leverage ratios and more risk present in the firm.

While there are many leverage ratios, we will only look at two :

Debt Equity Ratio and

Times Interest Earned

Debt equity ratio is the ratio of the total debt in the firm, both long-term and short term to
equity, where equity is the sum of common and preferred stockholders' equity.
Total Debt
Debt Equity Ratio
Equity
 A high ratio means that the firm has liberally used debt (has borrowed) to finance its
assets and vice versa.

Any ratio over 1.0 means the firm has used more debt than equity to finance its
investments.

Times interest earned is the sum of net income before taxes and interest expense divided
by interest expense.
Net Income before Taxes Interest Expense
Time Interest Earned
Interest Expense
It is supposed to measure how ably the firm can meet its interest obligations.

Profitability Ratios

These ratios tell the story about the firm's past profitability. Profitability ratios are:-
Net Income
Pr ofit M arg in
Net Sales
The profit margin is an important ratio because it describes how well a rupee of sales
is squeezed by the firm into profit.
Net Income
Re turn on Assets
Total Assets
The intent of this ratio is to measure how profitably the firm has used its assets .
Net Income
Re turn on Equity
Equity
It indicates what kind of rate of return was earned on the book value of the owners
equity.