Scribd Logo
Upload

Welcome to Scribd!

  • Cost and Financial Accounting Session 4 Notes

    Uploaded by

    Dreadshade
    5 views2 pages
    The operating cycle is the "engine of profit" and "engine of liquidity" for a business. It involves the transformation of raw materials into work in progress, finished goods, accounts receivable, and ultimately cash. The longer this cycle takes, the longer it takes to generate profit, so businesses aim to make the cycle as quick as possible. As long as a business generates enough liquidity to pay creditors, it will remain solvent. Working capital refers to the capital required to fund current assets like inventory and accounts receivable needed to keep business operations running. Financial ratios can assist in analyzing operational profitability, liquidity, asset management, debt management, and the interrelationships between income statement and balance sheet items.

    Original Description:

    Original Title

    Cost and financial accounting session 4 Notes

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    The operating cycle is the "engine of profit" and "engine of liquidity" for a business. It involves the transformation of raw materials into work in progress, finished goods, accounts receivable, and ultimately cash. The longer this cycle takes, the longer it takes to generate profit, so businesses aim to make the cycle as quick as possible. As long as a business generates enough liquidity to pay creditors, it will remain solvent. Working capital refers to the capital required to fund current assets like inventory and accounts receivable needed to keep business operations running. Financial ratios can assist in analyzing operational profitability, liquidity, asset management, debt management, and the interrelationships between income statement and balance sheet items.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as docx, pdf, or txt
    5 views2 pages

    Cost and Financial Accounting Session 4 Notes

    Uploaded by

    Dreadshade
    The operating cycle is the "engine of profit" and "engine of liquidity" for a business. It involves the transformation of raw materials into work in progress, finished goods, accounts receivable, and ultimately cash. The longer this cycle takes, the longer it takes to generate profit, so businesses aim to make the cycle as quick as possible. As long as a business generates enough liquidity to pay creditors, it will remain solvent. Working capital refers to the capital required to fund current assets like inventory and accounts receivable needed to keep business operations running. Financial ratios can assist in analyzing operational profitability, liquidity, asset management, debt management, and the interrelationships between income statement and balance sheet items.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as docx, pdf, or txt
    of 2

    Cost and financial accounting – Session 4 – IML 2023

    Operating cycle: “The engine of profit” “The engine of liquidity”

    Accounts payable - > Raw Material - > W.I.P. Work in progress/process - > Finished goods ->
    Accounts Receivable - > Cash -> repeat

    The Longer it takes to complete an operation cycle – the longer it takes us to generate profit, as such
    we want to make the cycle repeat as quick as possible.

    As long ass you generate enough liquidity to pay your creditors – Your business will stay afloat.

    Working Capital - The capital that is necessary to pay for the current assets which are required to
    keep the operation running , e.x. to fund the Inventories, Accounts Receivable and Cash necessary to
    keep operating the business.

    The investment made in working capital by the organization itself from its total pool of funds is
    estimated as : Working Capital = Total Current Assets – Total Current Liabilities

    Working Capital Structure

    A firm should not fund too much of its working capital by accounts payable or short-term funding,
    this in turn could cause serious problems if business slows down and could lead to liquidity
    problems, where the company has difficulty in paying its bills as they fall due.

    In such cases creditors and other providers of short-term funds can easily stop supplies or call in
    short term loans/overdrafts. This can lead to the firm’s bankruptcy.

    Ratio Analysis – Assists the analysis in the assessment of:

    - Operational Profitability
    - Liquidity
    - Asset Management and efficiency
    - Debt Management

    Inter-relatedness of Financial Ratios

    ROI (ROCE)  Balance Sheet Ratios

    I I

    Income Statement Ratios Sales / Capital Employed (Asset turnover)

    I I

    Profit / Sales (Profit Margin) Fixed asset turnover ratio <- Working Capital Ratio

    I I I

    Sub-Analyzed as a cost to sales Ratios Acc. Payable, Receivable Liquidity Ratio

    Inventory, Turnover Rate

    Where do the Numbers come from in the Higgledy/Piggledy Ratio set? H/W for Session 5
    Principles of Accounting 2 – Last chapter deals with Financial Ratios and

    You might also like