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2 Financial Statement, Taxes and Cah Flow
2 Financial Statement, Taxes and Cah Flow
2 Financial Statement, Taxes and Cah Flow
Cash Flows
Definition: Statements prepared at the end of a certain accounting
period for representing operating performance and financial position of
an institution based on incurred transactions are called financial
statement. Generally financial statements may be the following types:
Income statement: Statement reports the results of operations of an
institution for a particular time period at the end of the period is called
income statement or profit and loss account.
Balance sheet: Statement reports the financial position i. e. amount of
equity, liability and assets of an institution at a particular time point at the
end of the certain time period is called balance sheet.
Cash flow statement: Statement shows the amount of cash receipts
and amount of cash payments from different sources and activities and
for different purposes and areas is known as cash flow statement.
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Types of ratios:
A: Liquidity ratio - ratios that show the relationship of a firms
cash and other current assets to its current liabilities. This
includes (i) Current ratio (ii) Quick ratio
B: Asset management ratio - A set of ratios that measures
how effectively a firm is managing its assets. This includes (i)
Inventory turnover ratio (ii) Days sales outstanding or average
collection period (iii) Fixed asset turnover (iv) Total asset
turnover
C: Debt management ratio - ratios that show the relationship
of a firms total debt, equity and total assets. This includes (i)
Debt ratio (ii) Debt-equity ratio (iii) Times interest earned ratio
(iv) Fixed charge coverage ratio
Types of ratios:
D: Profitability ratio - a group of ratios showing the effect of
liquidity, asset management and debt management on
operating results. This includes (i) Gross profit margin (ii)
Operating profit margin (iii) Net profit margin (iv) Return on
total asset (v) Return on common equity (vi) Operating
expense ratio
E: Market value ratio a set of ratios that relate the firms
stock price to its earnings and book value per share. Ratios
under this are (i) Price/earnings ratio (ii) Market value/book
value ratio