A look at the important concepts in finance

Shaharu B.

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A look at the important concepts in finance

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Abstract

RAY G. JONES and DEAN DUDLEY observe that the word finance comes indirectly from the Latin word Finis. Finance is defined as the "Issuance of the distribution of and the purchase of liability and equity claim issued for the purpose of generating revenue-producing assets. These claims are commonly referred to as financial claims".

According to PAUL.G.HASINGS -"Finance" Is the management of the monitory affairs of the company. It includes determining what has to be paid for and when, raising the money on the best terms available, and devoting the available funds to the best uses.

Financial analysis is the process of scanning the financial statements with a view of getting the necessary information.

In other words, it is the methodical classification of the data found in the financial statements into simple component part or elements and establishment of relationships between the classified component parts and the explanation of the significance of relationships between the classified component parts as to the provide a full diagnosis of the profitability and the financial strength of a firm.

Introduction
Meaning of financial statements
1. Income statement or trading and profit and loss account
2. Position statement or balance sheet
Importance of financial statement
Financial analysis
1. Meaning
2. Meaning of ratio
3. Significance of ratio analysis
4. Limitation of ratio analysis
Types of ratios
1. Financial ratios
2. Current ratio
3. Acid test ratio
4. Capital ratio
5. Equity ratio
6. Proprietory ratio
7. Return on investment ratio
8. Gross profit ratio
9. Operating ratio
10. Activity ratios
11. Capital turnover ratio
12. Working capital turnover ratio
13. Debtors turnover ratio
14. Stock turnover ratio
15. Debt payment period
Operational definitions

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[...] Ratio are helpful in assessing the financial position and profitability of a concern. Ratio analysis also helps in effective control of business measuring performance, control of cost etc., effective control is a key stone of better management. Ratio analysis helps the investors in making investment decisions to make a profitable investment. It helps to know the relationship between different related items of financial statement. It helps in investigating the factors responsible for financial soundness / deterioration of a particular situation. [...]

[...] The important Liquidity Ratios are: CURRENT RATIO: Current Ratio is calculated by dividing CURRENT ASSETS by CURRENT LIABILITIES. It indicates the availability of current assets in rupees for every one rupee of current liability. The current ratio represents the Margin of safety for creditors. The standard Current Ratio is which means that for every rupee of current liability at least two rupees of current assets must be there. CURRENT RATIO = CURRENT ASSETS/ CURRENT LIABILITIES ACID TEST RATIO: This ratio establishes a relationship between liquid assets and current liabilities. [...]

[...] This is also known as INVENTORY TURNOVER RATIO or STOCK VELOCITY. STOCK TURNOVER RATIO = COSTS OF GOODS SOLD/AVERAGE INVENTORY CREDITORS TURNOVER RATIO: This is the ratio between CREDITORS and NET CREDIT PURCHASES. This ratio indicates the number of times the creditors are paid in a year. It determines the rate at which payments are made to the creditors. DEBT PAYMENT PERIOD: This ratio indicates the average period of credit received from the creditors. This ratio indicates the time within which payments are made [...]

[...] In other words, it is the methodical classification of the data found in the financial statements into simple component part or elements and establishment of relationships between the classified component parts and the explanation of the significance of relationships between the classified component parts as to the provide a full diagnosis of the profitability and the financial strength of a firm. According to Mr.J.N.Myer, “Financial statement analysis is largely a study of relationships among the various financial factors in a business as disclosed by a single set of statements and a study of the trend of these factors as shown in a series of statements”. [...]

[...] GROSS PROFIT RATIO = GROSS PROFIT *100/ SALES NET PROFIT RATIO: This ratio establishes a relationship between NET PROFIT and SALES and indicates management's efficiency in manufacturing, administrating and selling the products. This ratio indicates the proportion of sales available to the owners of the business after deducting operating expenses, interest and tax from the gross profit. This ratio also indicates the firm's capacity to withstand adverse economic conditions hence a high net profit ratio is desirable. NET PROFIT RATIO = NET PROFIT *100/ SALES OPERATING RATIO: This ratio establishes a relationship between OPERATING COSTS and NET SALES and indicates the proportion operating costs bear to net sales. [...]

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