CASH TO CURRENT ASSET RATIO

Effeicient management of the inflow and outflow of cash palys a curial role in the overall performence of a business. Cash is the most liquid form od\f assets which safeguards the security intrest of a business. Cash including bank balance plays a vital role in the total networking capital. The ratio of cash to working capital significance the proportion of cash to the total net working capital and can be calculated by dividing the cash including bank balance by the working capital.

Cash to Working Capital Ratio = Cash / Working Capital

Cash is not an end in itself, it is a means to achieve the end. Therefore, only a required amount of cash is necessary to meet day to day operations. a higer proportion of cash may lead to shrinkage of profits due to idleness of resources of a firm.

CURRENT RATIO

The mosrt widely used measure of liquid position of an enterprise is the current ratio. The ratio os the firm's current assets to current liabilities. It is calculatd by dividing current assets by current liabilities:

Current ratio = Current assets / Current Liabilities

The current assets of a firm represent those assets which can be in the ordinary couse of business, converted in to cash wiht in a short period of time, normally mot exceeding one year and include cash and bank balance, marketable securitties, debtors net of provision for bad and doubtful debts, bills receivable and pre-paid expences.

The current liabilities defines as liabilities which are short-term maturing oboligations to be meet, as originally contemplated, wiht in a year, consist of treade creditors, bills payable , bank credit, provison for taxation, dividends payable and outstyanding expences.

Current assets shouid be twice of the current liabilites. If the current assets are two times of the current liabilities, there will be do no adverse effect on business operations when the payment of current liabilitie is made. If the ratio is less than 2, difficultly may be experienced in the payment of current liabilitiew and day to day operations of the business may suffer.

If the ratio is higer than 2, it is vety comfortable for the creditors but, for the concern, it indicates idle funds and lack of enthusiasm for work.

CAPITAL STRUCTURE OR LEVERAGE RATIOS

Finaincial strength the soundness of the financial resources of an organisations to perform its operations in the long run. The parties associated with the organisation are intrested in knowing the financial strenth of the organisations. Financial strength is directly associated with the operational ability of the organisations and its efficient management of resources. The financial strength analysis can be made with the help of the following ratios :

• Debt - Equity Ratio
• Capital Gearing Ratio
• Financial Leverage
• Proprietery Ratio and
• Intrest Coverage

CASH FLOW ANALYSIS

While funds flow anlysis studies the reasons for the changes in working capital by anlysing the souces and application of funds, cash flow analysis paya attentions to changes in cash position that has taken place between two accounting periods. These reasons are not available in the traditional a statement known as a cash flow statement. A cash flow statewment summarises the change in cash position os the concern. Transaction which increase the cash position of the concern are labelled as "inflows" of cash and those which decreases the cash position as " out flows " of cash.

FUNDS FLOW ANALYSIS

The purpose of this analysis is to go beyond an behind the information contained in the financial statements. Income statement tells the quantum or profit earned or loss suffered for a particular accounting year. Balance sheet gives the assets and liabilities position as on a particular date. But im an accounting year a number of financial transactions take a place which have a bearing on the performence of the concdrn but which are not revealed by the financial statements. For E.g: A concern collect finance throug various sources and uses them for various purposes. But these details couid not be known from the financila traditional statements.

Funds flow analysis gives an opening in this respect. All the more, funds flow analysis gives an opening in this respect. If there is an increase on working capital what resulted in the increase and if there is a decrease in working capital what caused the decreases, etc. will be made available through funds flow analysis.

RATIO ANALYSIS

Of all the tools of finanacial anlysis available with a financial anlyst the most important and the most widely used is ratio analysis. Simply started ratio anlysis is an analysis of financial statements done with the help of ratios. A ratio expresses the relationship that exists between two numbers and in financial statement anlysis a ratio shows the relationship between two interrelated accounting figures.

The accounting figures may be taken from the balance shhet and the resulting ratio is called a balance shhet ratio. But if both the figures are taken from profit and loss account ratio. Composite ratio is that which is calculated by taking one figure from profit and loss account and the other figure from balance sheet. A detailed discucssion on ratio analysis is made in the pages to come.

ACCOUNTS PAYABLES OUTSOURCING

Most financial organizations spenda large part of their financial budget on processing Accounts Payables. This is due to the largeky manual effort required to enter invoices in to the accounting system and, if applicable, match those invoices to purchase orders and receipts.

While AccountsPayable is critical to ensure that authorised invoices are paid accurately, it is often not managed to world-class standards due to the time and expences required to implement best practices.

ISs your organizations untilizing Accounts Payable best practices to stay in control? If you can answer YES to the following questions, you are :

• We know how many invoices we receive on a monthly basis ?
• We have definesd and well-docimented business rules for matching invoice to PO's and receipts and approval levels that are followed explicitily by managers and Accounts Payable staff ?
• We catch all duplicates invoices and have very small tolerance for invoices that do not match the PO or receipt ?
• We know the number and dollar value of outourcing invoices (liabilities) befor they are approved ot matched ?
• We know how many of our invoives do not match the PO or receipt and why ?
• We know which of our managers have invoices in their inboxes waiting for approval and their dollar value ?
• We have images of all invoices and can look them up on the web to reduce the volume of phone calls to our staff ?
• Let our vendors llok up invoice informations and payment status on the web to reduce the volume of phone calls to our staff ?

LARGE RETAILER

One of the Largest retailer in its industry, with stores dispersed around the southwest, was facing growth challenges as it continued the consolidation of its industry. The client had plans to add over 150 stores with in 5 years, yet suffered from a lack of accurate and timely financial and operational information due to poor processes and systems. Management recognized that a better information was needed to understand where its strategies were working or not working.

Most importantly, the client was spending valuable management its time handling back office issues and personnel instead of accounting outsourcing and manage its back office. New process were we developed in all areas including daily cash and accounts payable accounting. Comprensive business rules were developed to handle all ecpections and IQ Back office's proprietry and imaging solution was employed to rapidly resove issues with store managers and head quarters.

IQ back office is also implementing a management dashboard and data warehouse to allow to client management to understand what is happening with their business in real-time along every dimension of the business. The client was able to eliminate their accounting department and has saved significantly in its back office costs. Most importantly, client management can now focus on its business, armed with meaningful financial and operationa informations to ensure they make the right decision to grow quickly and profitably.

LARGE DISTRIBUTOR

A Large impoter and distributor of stone, glass, ceramics and peweter was growing very rapidly. It had grown from a small to a mid-sized firm in just a few years. As a result , its internal accounting infraturer had not keep pace. It had an old accounting system with poor reporting capabilities and couid not genet\rate accurate or timely fifnacial statements or operational management information.

Management was basically flying blind,making assimptions about sales, margins and pricing. Additionally, its staff had grown and it had a poor payroll solution for hourly, high-turnover employees. IQ Backoffice worked with the client and external vendors to implement a new accounting system and a new payroll solution. IQ Back office also designed and implemented new business processes for Accounts paybles, Billing, Accounts Receivables, Cash applocation and reporting. We developed comprehensive business rules for processing accounting transactions, as well as closing the books and producing the financial and operational reporting.

We also implemented IQ Backoffice technoligy to allow management, who traveled frequently overseas, to be able to review and approve financial transactions over our secure, web-based application.

AUDITS OF ACCOUNTS PAYABLES

Auditor often focus on the exixtence of approved invoices, expence reports, and other supporting documentation to support checks that were cut. The presence of a confirmation or statement from the suppliers is a reasonable proof the existance of the account. It is not uncommon for some of this documentation to be lost or misfiled by the time the audit rolls around. An auditor may decide to expand the sample size in such situations.

Auditors typically prepare an ageing structure of accounts payable for a better understanding of outstading debts over certain periods ( 30,60,90 days, etc). Such structure are helpful in the correct presentation of the balance sheet as of year end.

ACCOUNTS PAYABLES

Accounts payable is a file or account that contain money that aperson or company owes to suppliers, but has not paid yet. when you receive an invoice you add it to the file, and then you remove it when you pay. Thus, Account paybles is a form credit that suppliers offer to their purchases by allowing them to apy for a product or service after it has already been received.

The profession is unregulated, though there are internation standard setting bodies, an example of which is the INTERNATIONS ACCOUNTS PAYABLE PROFESSIONALS (IAPP). an assiciation of more than 5000 members in the United States, Cananda, and U K.

" Account payable is a strategic, value - added accounting fucntion that performs the primary non-payroll disbursement function in an organisation. As such, the AP operation plays a critical role in the financial cycle of the organisations. AP enables an organisation to the accomplish by bringing a systematic, disciplaned approach to evaluate and improve the effectiveness of the entire payable process. In addition to the traditional AP activities where by liabilities to third party entries (suppliers, vendors,taxing authorities) are recognized and paid based on the credit policies agreed to between the company and its supplies.AP departments have taken on much wider roles including fraud prevetion, cost reduction, workflow system solution, cashflow management system, internal controls and vendors financing".

BANK RECONCILIATION

A company's general ledger account cash contains a record of the transactions (checks writen, receipt from customers etc) that involve its checking account. The bank also creartes a record of the companys checking account when it processes the companys checks, depositrs, service charges and other items. Soon after each month ends the bank usually mails a bank statement to the company. The bank statement lists the activity in the bank acount during the recent month as well as the balnces in the bank account.

When the company receives its bank statement, the company shouid verify that the amounts on the bank statement are consistent or compitable with the amounts in the companys Cash account in its Generel Ledger and vice versa. This process of confirming the amounts is referred to as "RECONSILING THE BANK STATEMENT, BANK STATEMENT RECONCILIATION, BANK RECONCILIATION, or doing Bank.rec" The benefit of reconciling the bank statement is knowing that the amount of cash reported by the company is consistent with the amount of cash shown in the bank's records.

After you adjust the balance per bank to be the true balance and after you adjust the balance per books to also be the same true balance, you have reconsiled the bank statements. Most accountants wouid sinply say that you have done the bank reconciliation or the bank rec.

KINDS OF ACCOUNTS

All the accounting heads used in an organigational accounting system are divided in to 3 kinds/types.

1. PERSONAL ACCOUNT
2. NOMINAL ACCOUNT
3. REAL ACCOUNT

PERSONAL ACCOUNT : The elements or accounts which represent persons and organigations.

NOMINAL ACCOUNT : The elements are accounts which represent expences, losses, incomes, gains.

REAL ACCOUNT : The elements or aaccounts ehich represent assets. In the initial stages of lwearning accounting, we can assume real account to be those related to tangible aspects.

AN ACCOUNT SHOUID BE ONE OF THE THREE :

Any elements are or accounts used in an organigational accounting system shouid be one these. Thus, we can say that if an account is not real or persoanl it shouid be a nominal account.

Therefore we may also interpret.

• Nominal account as, the accounts other than Personal and Real accounts.
• Real accounts as, The accounts other than Personal and Nominal accounts.
• Personal accounts as, the accounts other than Real and Nominal accounts.

EXPENCES ACCOUNTS

Most companies have a seperate account for each type of expences they incur. Your company probably incurs pretty much the same expences month after month, so once they are established, the expences accounts won't very much form month to month. Typical exp[ences accounts include.

• Salaries and Wages
• Telephone Expences
• Electric Utilities charges
• Repairs
• Maintanence
• Depreciation
• Intrest
• Rent
• General Expences

INCOME ACCOUINTS

If you have several lines of business, y0u'll probably want to establish an inocme account for each. In that way, you can identify exactly where your income is comnig form. Adding them together yields total revenues.

Typical income accounts wouid be

• Sales revenue form product A
• Sales revenue form product B ( and so on for each product you want tot track)
• Intrest Income
• Income from sale of assets
• Consulting income.

Most companies have only a few income accounts. Thats really the way you want it. Too many accounts are a burden for the accounting department and probably don'y tell mangement what it wants to know. NEvertheless, if there a source of income yu want to track, creat an account for it in the chart of accounts and use it.

INCOME AND EXPENCES

In the chart of accounts (usually after the owners equity section) come the income and expences accounts. Most companies want to keep track of just where they get income and where it goes, and these accounts tell you.

A final reminder: For income accounts, use credits to increase them and debits decrease them. For expences accounts, use debit to increase them and credits to decrease them.

ASSETS AND LIABILITIES

Balance sheet accounts are the assets and liabilities. When we set up your chart of accounts, Thera will be seperate sections and numbering schemes for the assets and liabilities that make upo the balance sheet.

A quick reminder: Increases assets with a debit and decreases them with a credit. Increases liabilities with a credit and decreasedx them with a debit.

Simply stateted, asssts are those things of value that your company owns. The cash in your bank account is an asset. So is the compnay car you drive. Assets are the objects, rights and claims owned by and having value for the firm. Since your company has right to yhe future collection of miney, accounts receivable are an asset - probably a major asset, at that. The machienary on your production floor is also as asset. If your form owns real estate or the other tabgible property, those are considered assets as well. If you were a bank, the loans you make wouid be considered assets since they represnt of right future collections.

Generally the value of intangible aseets in whatever both parties agree to when the assets are created. In the case of patent, the values is often linked to its development costs. Goodwill is often the difference between the purchases price of a company andf the value of the assets acquired.

INCOME STATEMENT

Income statement is preffered to determine the operational position of he concern. It is a statement of revenues earned and the expences incured for earning that revenues. Excess of revenues over ecpenditure is profit and if the expenditure is more than the inocme, there is a loss. The income statement is prepared for a perticaular period., generally a year.

When income statement is prepared for the year ending 31st December 2008, then all revenues and expenditures falling due in the year will be taken into account irrespective of their receipt or payment in the scene outstanding incomes and expences are also included.

The income statement may be prepared in different forms. Manufacturing account is prepared find out the cost of production, in the form of trading account to determine gross profit or gross loss and a profit a profit and loss account to determine net profit and net loass. A statement of reatined earnings may also be prepared to show the distrubution of Profits.

RETAINED EARNINGS

The term "Owners equity" refers to the claims of the business (share holders) against the assets of the firm. IT consist of two elements :

• Paid up share capital, The iontital amount of funds invested by the share holders.
• Reatained earnings/reserves and surplus representing undistributed profits.

The statements of changes in owners equity simply shows be opening balance of each owners equity account, the reasons for increases and decreases in each , and its ending balance. However in most cases, the only item in owenrs equity account that changes significantly is retained earnings and hence the statement of changes in owners equity becomes merely a statement of retained earnings.

A statement of retained earnings is also known as aprofit and loss appropriation account or income Disposal statement. As name suggest it shows appropriations of earnings. The pravious year balance is forst brought forward. The net profit during the side, appropriations like interm dividend paid, praposed dividend and preference and funds.

TYPES OF FINANCIAL STATEMENTS

There are 2 basic financial statements:

1. The position statements or the balance sheet.

2. The income statement or the Profit and Loass account However, Generally Accepted Accounting Principles (GAAP) specify that a full fledged set of financial statements must included:

• A Balance sheet
• An Income Statement
• A Statement of charges in owners account, and
• A Statement of changes in financial position.

MEANING AND CONCEPT OF FINANCIAL ANALYSIS

The term " financial analysis" also known as analysis interpretatin of financial statements refers to the process fo determining financial strengths and weakness of the firm by establishing stategic relationship betweent he items of the balance sheet, profit and loss account and other operative data.
"Financial Statement analysis is largely a study the relationship among the various financial factors in business as discovered by a single set of statements and a study of the trend of these factors as shown in a series of statements" --- Mysers.

ADVANTAGES OF COST ACCOUNTING

The short comings of financial accounting are the advantage of the cost accounting. However, the extent of advantages obtained will depend upon the effeiciency with which cost sustem is installed and also the extent to whih the management is prepared to accept the costing system. The principal advantages of cost accounting are :

1. It reveals profitable and unprofitable activities.

2. It helps in cost control by identyfing the sorces of losses, wastages and inefficiences and fixing the responsibilitities for cost control.

3. It enables measurement of efficiency and to maintain and improve efficiency in alla reas of operartions.

4. It helps in decision making. It provides required data management tot ake decisions on various matters. To replace labour with machine or old old machine with anew one etc.

5. It helps inventory control, with the opeeration of perpetual inventory control system in place, helps in eliminating wastages and ineffeciency in purchase of raw materials.

6. It helps in formulation of policies. Cost accounting provides such information which enables the management of formulate production and pricing policies.

7. It guides in fixing selling price under various conditions.

8. It helps in cost reduction by introducing cost reduction programs.

9. It provides information which helps in estimates and preparation tenders.

10.It provides the use of budgets and enables the management to eliminate ineffeciencies.