Accounting Definations - 6

Earning per share (EPS): It is a financial ratio that gives the information regarding earning available to each equity share. It is very important financial ratio for assessing the state of market price of share. The EPS statement is applicable to the enterprise whose equity shares are listed in stock exchange.

Types of EPS:

1.             Basic EPS ( with normal shares)

2.             Diluted EPS (with normal shares and convertible shares)

EPS Statement             :

             

Sales                                                                     ***

Less: variable cost                                                ***

                                                Contribution                   ***

Less: Fixed cost                                                    ***

 

                                                  EBIT                 ***

Less: Interest                                                         ***

                                             

                                                     EBT                   ***

Less:  Tax                                                              ***

                                               Earnings                  ***

 Less: preference dividend                                     ***

                                                                                         ***

Earnings available to equity

Share holders (A)                                                   ***

EPS=A/ No of outstanding Shares

EBIT and Operating Income are same

The higher the EPS, the better is the performance of the company.

Cash Flow Statement:

It is a statement which shows inflows (receipts) and outflows (payments) of cash and its equivalents in an enterprise during a specified period of time. According to the revised accounting standard 3, an enterprise prepares a cash flow statement and should present it for each period for which financial statements are presented.

Funds Flow Statement:

 Fund means the net working capital. Funds flow statement is a statement which lists first all the sources of funds and then all the applications of funds that have taken place in a business enterprise during the particular period of time for which the statement has been prepared. The statement finally shows the net increase or net decrease in the working capital that has taken place over the period of time.

Float: The difference between the available balance and the ledger balance is referred to as the float.

Collection Float: The amount of cheque deposited by the firm in the bank but not cleared.

Payment Float: The amount of cheque issued by the firm but not paid for by the bank.

Operating Cycle: The operating cycle of a firm begins with the acquisition of raw material and ends with the collection of receivables.

Marginal Costing:

                               Sales – VaribleCost=Fixed Cost ± Profit/Loss

                                 Contribution= Sales –VaribleCost

                                 Contribution= Fixed Cost ± Profit/Loss

P / V Ratio= (Contribution / Sales)*100

When per 1 unit information is given,

                                P / V Ratio = (Contribution per Unit / Sales per Unit)*100

Two years information is given,

                               P / V Ratio= (Change in Profit / Change in Sales) * 100

Through Sales, P / V Ratio

                               Contribution =Sales * P / v Ratio

Through P / V Ratio, Contribution

Sales = Contribution / P V Ratio

Break Even Point (B.E.P)

IN Value = (Fixed Cost) / (P / v Ratio) OR (Fixed Cost / Contribution) * Sales

In Units = Fixed Cost / Contribution OR Fixed Cost / (Sales Price per Unit – V.C per Unit)

Margin of Safety = Total Sales – Sales at B.E.P (OR) Profit / PV Ratio

Sales at desired profit (in units)

                                 = Fixed Cost+ Desired Profit / Contribution per Unit

Sales at desired profit (in Value)

            = Fixed Cost+ Desired Profit / PV ratio (OR) Contribution / PV Ratio

RATIOANALYSIS

A ratio analysis is a mathematical expression. It is the quantitative relation between two. It is the technique of interpretation of financial statements with the help of meaningful ratios. Ratios may be used for comparison in any of the following ways.

ü  Comparison of a firm its own performance in the past.

ü  Comparison of a firm with the another firm in the industry

ü  Comparison of a firm with the industry as a whole

TYPES OF RATIOS

ü  Liquidity ratio

ü  Activity ratio

ü  Leverage ratio

ü  profitability ratio

1. Liquidity ratios:

These are ratios which measure the short term financial position of a firm.

(i) Current ratio: It is also called as working capital ratio. The current ratio measures the ability of the firm to meet its current liabilities-current assets get converted into cash during the operating cycle of the firm and provide the funds needed to pay current liabilities i.e.

= Current assets/ Current liabilities                                                                  

è Ideal ratio is 2:1

(ii) Quick or Acid test Ratio: It tells about the firm’s liquidity position. It is a fairly stringent measure of liquidity.                          

                                   

=Quick assets/Current Liabilities                        

                                                è Ideal ratio is 1:1

                        Quick Assets =Current Assets – Stock - Prepaid Expenses 

  (iii) Absolute Liquid Ratio:

                                    = Absolute Liquid Assets/Current Liabilities

                                    ** ALAssets=Cash + Bank + Marketable Securities.

2. Activity Ratios or Current Assets management or Efficiency Ratios:

These ratios measure the efficiency or effectiveness of the firm in managing its resources or assets

ü     Stock or Inventory Turnover Ratio: It indicates the number of times the stock has turned over into sales in a year. A stock turn over ratio of ‘8’ is considered ideal. A high stock turn over ratio indicates that the stocks are fast moving and get converted into sales quickly.

                                    = Cost of goods Sold/ Avg. Inventory

ü     Debtors Turnover Ratio: It expresses the relationship between debtors and sales.

=Credit Sales /Average Debtors

ü     Creditors Turnover Ratio: It expresses the relationship between creditors and purchases.

=Credit Purchases /Average Creditors

ü     Fixed Assets Turnover Ratio: A high fixed asset turn over ratio indicates better utilization of the firm fixed assets. A ratio of around 5 is considered ideal.

= Net Sales / Fixed Assets

ü     Working Capital Turnover Ratio: A high working capital turn over ratio indicates efficiency utilization of the firm’s funds.

=CGS/Working Capital

=W.C=C.A – C.L.

3. Leverage Ratio: These ratios are mainly calculated to know the long term solvency position of the company.

a>Debt Equity Ratio: The debt-equity ratio shows the relative contributions of creditors and owners.

                                    = outsiders fund/Share holders fund

è Ideal ratio is 2:1

b>Proprietary ratio or Equity ratio: It expresses the relationship between net worth and total assets. A high proprietary ratio is indicative of strong financial position of the business.

                                    =Share holders funds/Total Assets

                       

                 = (Equity Capital +Preference capital +Reserves – Fictitious assets) / Total Assets

c>Fixed Assets to net worth Ratio: This ratio indicates the mode of financing the fixed assets.  

                                                è Ideal ratio is 0.67                                                         

                                    =Fixed Assets (After Depreciation.)/Shareholder Fund

4. Profitability Ratios: Profitability ratios measure the profitability of a concern generally. They are calculated either in relation to sales or in relation to investment.

ü     Return on Capital Employed or Return on Investment (ROI): This ratio reveals the earning capacity of the capital employed in the business.

                                                =PBIT /Capital Employed

ü     Return on Proprietors Fund / Earning Ratio:  Earn on Net Worth

                                                =Net Profit (After tax)/Proprietors Fund

ü     Return on Ordinary shareholders Equity or Return on Equity Capital: It expresses the return earned by the equity shareholders on their investment.

             =Net Profit after tax and Dividend / Proprietors fund or Paid up equity Capital

ü     Price Earning Ratio: It expresses the relationship between market price of share on a company and the earnings per share of that company.

                                         =MPS (Market Price per Share) / EPS

ü     Earning Price Ratio/ Earning Yield:

                                                = EPS / MPS

ü     EPS= Net Profit (After tax and Interest) / No. Of Outstanding Shares.

ü     Dividend Yield ratio: It expresses the relationship between dividend earned per share to earnings per share.

                                 =    Dividend per share (DPS) / Market value per share

ü     Dividend pay-out ratio: It is the ratio of dividend per share to earning per share.

= DPS / EPS                           

DPS: It is the amount of the dividend payable to the holder of one equity share. =Dividend paid to ordinary shareholders / No. of    ordinary shares

                                                C.G.S=Sales- G.P

                                                G.P= Sales – C.G.S

                                                G.P.Ratio =G.P/Net sales*100

Net Sales= Gross Sales – Return inward- Cash discount allowed

Net profit ratio=Net Profit/ Net Sales*100

Operating Profit ratio=O.P/Net Sales*100

Interest Coverage Ratio= Net Profit (Before Tax & Interest) / Fixed Interest Classes

            Return on Investment (ROI): It reveals the earning capacity of the capital employed in the business. It is calculated as,

                                          EBIT/Capital employed.

The return on capital employed should be more than the cost of capital employed.

Capital employed=EquityCapital+Preference sharecapital+Reserves+Longterm loans and Debentures - Fictitious Assets – Non Operating Assets