An Introduction To Concept Of Financial Accounting

Financial Ratio Analysis

Discuss about the An Introduction To Concept Of Financial Accounting.

From the above serviceability analysis, the interest cover ratio has been increased from 19.71 to 36.96. This implies that wholesale butchers has enough earnings to pay its interest cost. Increase in the ratio shows that earnings of the company has increased and also its proposed interest cost is reduced in year 2017. Similarly, DSCR has increased from 1.92 to 2.04 which is also favourable for the company and involves low risk. This means that the company has enough earnings to pay its debt. Moreover, the amount available for debt service has also increased as compare to the total commitment.

Unit Trust: It is basically an organization that collects money from small investors and invest it into shares and stock on behalf of them, under a trust deed. It is a form of a collective investment.

Discretionary Trust: It is a type of trust where trustees can decide about how to utilize the trust income or capital.

Hybrid Trust: it covers the elements of both unit trust and discretionary trust.

Discretionary Family Trust: it is a type of discretionary trust established for the purpose of holding family assets or to run a family business through trust.

Trustee: a person who holds and manages the assets or property owned by a trust for the benefit of beneficiaries.

• Unit trust is used at the time of making short term investment in a property or any asset.
• When an individual wants to pass his or her wealth to the beneficiaries, discretionary trust are used.
• Hybrid trust is a combination of unit and discretionary trusts. It is used at times when tow group of individuals buy a property together.
• When an individual wants to start a family business through a trust, family trust is been set up.

Legal requirements:

• Must have a registered office should inform to ASIC about its location.
• Personal details of all the directors should be provided to ASIC
• Keeping up to date, the financial records.
• At time of registration, company is required to pay a certain fees to ASIC.
• Inform ASIC about the changes in the business and also checking the accuracy of annual statements.

Personal obligations of a director as per law is that he or she has to act in the best interest of the company, avoid conflicts between personal interest and company’s interest, to protect the company from being insolvent and to perform the duties with due care and diligence.

A person who is 18 years old and above and also ready to undertake the roles and responsibility of a director.

In a proprietary company, at least one director is required and in public company, at least three are required.

Balance sheet: It reflects the balances of all the accounts prepared by the company during a fiscal year. It represents the true and fair view of company’s profitability and financial stability.

Profit and loss statement: The account shows all the incomes earned and expenses incurred by a company. The net difference between these income and expenses is reported as a profit or loss in the income statement.

Depreciation: it is a kind of expense charged on the life of an asset. It reduces the value of an asset over the time and also known as a method of reallocating the cost of a tangible asset over its life.

Serviceability Analysis

Liquidity Ratio: it is a ratio calculated for measuring the liquidity of the company. It shows the ability of a company to pay its short term financial obligations with its current assets.

Current Ratio: it measures the portion of company’s Current assets against its current liabilities. The ideal CR is 2:1 which implies that the value of business’s current assets should be double of its current liabilities (Weil, Schipper & Francis, 2013). 

Debt to Equity Ratio: it is one of the financial leverage ratio which shows that how much of the company’s assets are been financed through debt and how much are financed through equity.

Cash flow Statement: A statement which shows the outflow and inflow of cash from operating. Investing and financing activities.

Asset: an item owned by a business which has its own value and is used for paying debts or legacies.

Liability: A financial debt or an obligation for a company, arises during the course of its operations.

Net profit: The figure is determined by deducting all the operating expenses from the total revenue earned by the business. 

Equity: it is simply means ownership in the business. It is an accounting difference between total liabilities and total assets.

As per Australian taxation, allowable expenses are travel expenses, gifts and donations, interest, dividend, investment income, clothing expenses, home office expenses, tools and equipment and other deductions for specific industries

Commercial bank bill: a bill of exchange issued by a commercial bank for helping in raising finance for the purpose of investment. For example, for purpose of financing the working capital requirements, company borrows through bank bills.

Invoice or Factoring finance: it is a method for raising finance, used by the companies, in which accounts receivables of the business are sold to a third party known as factor.

Chattel mortgage: It is a loan provided to the individual on a moveable property.  For example, business can raise finance for purchasing a heavy machinery by giving a security interest in machinery to the seller. So in case of default, the seller can sell the machine to recover the loss.

Equipment Finance: it is a loan used for purchasing or borrowing a physical asset for the business. Method of financing are Equipment loan and equipment leasing.

• In the process of risk management, it is very necessary to categorize the various risks into a common area, as this will facilitate a structured and systematic approach in identification of the risks.
• Risk categorization enables the management to enhance their focus on the wider range of risks. Moreover, the managers can identify all the risk in a very systematic and consistent manner.
• It makes the risk assessment easier as the categories enable the meeting and interviews with the people who are familiar with a specific risk category.
• Categorization of the risk helps in greater controlling and monitoring the identified risk classified under same area.

References

Australian Government (2010). Risk Management – Principles and Guidelines. Finance.gov.au. Retrieved from https://www.finance.gov.au/sites/default/files/COV_216905_Risk_Management_Fact_Sheet_FA3_23082010_0.pdf [Accessed on 26 February 2018].

Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. USA: Cengage Learning.

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