CARDIFF BUSINESS SCHOOL

FINANCIAL ANALYSIS & CONTROL

(BST511)

ACCOUNTS PREPARATION AND RATIO

SURGERY

PATRICK WYLIE

Room B26

email: wyliejp@cardiff.ac.uk
 Encourage
Ask questions, we learn by asking questions.

It is new and hence difficult, so dont be

worried about asking questions and being
wrong.

Ask questions, we learn from our mistakes.

 Recording Transactions
Dual aspect to recording transactions
Each transaction will have two equal and opposite entries.

All transactions fall within one of five categories:

Income
Expense
Asset
Liability
Equity
 Reporting Transactions

Income and expenses = Income Statement

Income Statement for year to 31 March 2013

Revenue 1,000
Cost of Sales (300)
Gross Profit 700
Operating Expenses 250
Operating Profit 450
Finance Costs (50)
Net Profit before taxation 400
Taxation (120)
Net profit after taxation 280
 Cost of Sales
Cannot treat Total Purchases as Cost of Sale:
Purchase 10 bikes for 100 & sells 8 bikes for 120, making a profit of 20 per
bike.
If treat Total Purchases as Cost of Sale:
Sales 8 bikes @ 120 960
Cost of Sale: Total Purchases 10 bikes @ 100 1,000
Loss 40 This is not
so, making
20 a bike!
Must adjust Total Purchases for stock/inventory:
Sales 8 bikes @ 120 960
Cost of Sale: Total Purchases 10 bikes @ 100 1,000
Less closing Inventory 2 bikes @ 100 (200)
800
Profit 160 8 bikes @ 20
 Reporting Transactions

Assets, Liabilities and Equity = SOFP

 SOFP at 31 March 2012
Assets
Non-current assets 2,000
Current Assets 500
Total Assets 2,500

Liabilities
Non-current liabilities 600
Current liabilities 400
Total Liabilities 1,000

Equity
Share Capital 1,000
Retained Profits 500
Total Equity 1,500
Total Equity and Liabilities 2,500
 Cash + O. Assets = Capital + Income - + Liabilities
(Expenses)

Investment by Bert & Ernie 35,000 35,000

CARBS loan 35,000 35,000
Loan Interest (1,400) (2,800) 1,400
Lease Premium (15,000) 15,000
Lease Depreciation (1,500) (1,500)
Rent (5,000) 1,000 (4,000)
Photocopier (3,000) 3,000
Photocopier Depreciation (700) (700)
Cash Sales 15,000 15,000
Credit Sales 34,000 8,000 42,000
Bad debt (3,000) (3,000)
Total purchases (37,000) (41,000) 4,000
Inventory 5,900 5,900
Salaries (14,400) (14,400)
Expenses (3,980) (3,980)
Electric Accrual (150) 150
Telephone Prepayment 100 100
Adverts (2,400) 1,500 (900)
36,820 29,300 35,000 (9,430) 40,550
BERT & ERNIE: CASH FLOW STATEMENT

Cash flows from operations:
Cash received from customers (15,000 +34,000) 49,000
Cash paid to suppliers (37,000)
Payments to and on behalf of employees (14,400)
Other operating cash payments:
Rent paid (5,000)
Rates and utilities (1,200+500+700+1,580) (3,980)
Advertising (2,400) (11,380)

Net Operating Cash Outflow (13,780)

Capital Investment:
10 year leasehold (15,000)
Copier (3,000) (18,000)
Net Cash Flow before Financing: (31,780)
Financing:
Capital from B & E 35,000
Long term loan from bank 35,000
Loan Interest (1,400) 68,600

Increase in cash for the year: 36,820

BERT & ERNIE: PROFIT AND LOSS ACCOUNT
Sales (15,000+42,000) 57,000
Deduct: Cost of sales
Purchases (settled and still owed) 41,000
Less: closing stock at cost less written off amount 5,900
35,100
Trading profit 21,900
Deduct: Operating expenses
Depreciation charges
Leasehold (15,000/10) 1,500
Copier (3,000-200)/4 700
Bad debt provision 3,000
Wages payable 14,400
Rent payable for the year (4/5 x 5,000) 4,000
Rates and utilities payable (3,980+150-100) 4,030
Advertising (2,400 x 3/8) 900
Total operating expenses 28,530
Operating loss (6,630)
Deduct: Interest accrued on loan (300,000 x 9%) 2,800

Loss for the year (9,430)

Statement of Financial Position AT 31 December 2010

Non Current Assets:

Lease (15,000-1,500) 13,500
Equipment (3,000-700) 2,300
15,800
Current Assets:
Inventory at cost 5,900
Trade receivables less provision 5,000
Prepaid expenses:
(Rent 1,000 + Tel 100 + Adverts 1,500) 2,600
Cash 36,820 50,320
Total Assets 66,120

Non Current Liabilities

Long term loan 35,000
Current liabilities
Trade payables 4,000
Accruals (Electric and Interest) 1,550 5,550
Total Liabilities 40,550

Equity
Paid-in capital 35,000
Loss (9,430)
Total Equity 25,570
Total Liabilities & Equity 66,120
 Financial Analysis

Financial
Reports

Understand
Review

Answers Questions
 Financial Analysis Techniques
Keep it simply to start with, review key reports at a
high level.
Review sales
Review key margins
Review profits
Review assets and liabilities
Review cashflow

Identify trends and seek out explanations.

Identify anomalies and seek out explanations.

 Financial Analysis Techniques

The findings from the high level review normally focus

attention onto specific business areas.
Profitability
Liquidity
Working Capital Efficiency
Long Term Capital Efficiency
Financing
Investment

Without a clear understanding of what the six business areas

mean, it will not be possible to interpret information.
 Linkage between ratios and figures

Linkage between ratios and figures:

Margin analysis, what is driving changes to the
operating profit margin?
ROCE and asset age.
Quick ratio, stock value, stock turnover, quick
ratio, creditor days.
Average wage, number of employees, assets.
Profit and Loss Accounts Frank Lampard
000s 000s
Sales turnover 90,000 50,000
Less: Cost of sales 27,900 15,500
Gross profit 62,100 34,500
Less: Operating expenses:
Staff salaries 31,500 19,000
Other operating costs 4,500 3,500
Depreciation 6,500 250
Total operating expenses 42,500 22,750
Operating profit 19,600 11,750

Less: Interest payable 4000 0

Profit before Tax 15,600 11,750
Tax 3,900 2,938
Profit after Tax 11,700 8,813
Dividend 2,000 1,000
Retained Profits 9,700 7,813

Average number of employees 850 1196

Number of empoyees leaving 32 201
Share Price 4 2

Balance Sheets Frank Lampard

Assets 000s 000s
Equipment and vehicles at cost 80,000 25,000
Less: Accumulated depreciation 6,500 21,000
Net book value 73,500 4,000
Current assets:
Stock 4,000 7,000
Trade debtors 6,000 3,000
Cash 10,000 1,000
Total Assets 93,500 15,000
Liabilities
Current liabilities: trade creditors 5,000 5,000
Long term loans 30,000 0
35,000 5,000
Equity
Share capital (1 Ordinary Shares) 20,000 1,000
Accumulated profit less losses 38,500 9,000
Equity 58,500 10,000
Total Liabilities & Equity 93,500 15,000
 Frank Lampard
Profitability Ratios
Gross Profit Margin 69% 69%
Operating Profit Margin 22% 24%
ROCE 22% 118%
Wages Margin 35.0% 38%
Long Term Capital Efficency
Average Wage 37k 16k
Staff Turnover 4% 17%
Undepreciated Asset 92% 16%
Fixed Asset Turnover 1.22 12.5
Liquidity Ratios
Current Ratio 4 2.2
Quick Ratio 3.2 0.8
Working Capital Ratio
Stock Turnover 52 days 165 days
Debtor Days 24 days 22 days
Creditor Days 65 days 118 days
Financing Ratios
Debt to Equity Ratio 51% 0%
Debt to Asset Ratio 37% 33%
Investment Ratios
PE Ratio 6.8 0.2
 Frank Lampard
Profitability Ratios Explained by fixed asset investment.
ROCE 22% 118% Lampard more efficient at generating profits
Gross Profit Margin 69% 69% and managing operating costs.
Operating Profit Margin 22% 24% Dep. impacting operational cost margins, as
opposed to operational inefficiencies, ex
Operational Efficency dep. Frank margin 5% better.
Wages Margin 35% 38% Inconsistent with operational profit margin.
Number of Staff 850 1,196 Explained by switch to automated operations
Average Wage 37k 160k
Staff Turnover 4% 17% Suggests low staff morale!
Undepreciated Asset 92% 16% Suggests fixed asset investment

Liquidity Ratios Appears to be no liquidity issues, check stock!

Current Ratio 4 2.2 Lampard stock levels are high, are they liquid?
Quick Ratio 3.2 0.8 Stock levels & stock turnover suggest quick
ratio appropriate, suggests liquidity
Working Capital Ratio issues!
Stock Turnover 52 days 165 days Suggests stock is not liquid.
Debtor Days 24 days 22 days
Creditor Days 65 days 118 days Confirms Lampard liquidity concerns

Financing & Investment Ratios

Debt to Equity Ratio 51% 0% Frank primarily equity funded businesses,
investment via equity. Lampard potential
Debt to Asset Ratio 37% 33% to raise additional debt?
PE Ratio 6.8 0.2 What does the market think?
 In Summary
Lampard appear more profitable, but..
Frank has recently invested, through a mix of debt and equity
finance, in new machinery, employing a skilled and happy
work force that are generating operating efficiencies.
Lampard has old machinery that requires replacing and is
dependent on a labour intensive workforce that are unhappy.
Frank has no liquidity issues and is good at managing working
capital.
Lampard has liquidity issues and is not good at managing
working capital.
The market believes Franks future prospects are good, the
same cannot be said for Lampard!
 THANK YOU

PATRICK WYLIE

Room B26

email: wyliejp@cardiff.ac.uk