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Title Name Amity Solved Assignment for Accounting for Manager MBA Assignment 2
University AMITY
Service Type Assignment
Course MBA
Semister Semester-I Cource: MBA
Short Name or Subject Code Accounting for Manager
Commerce line item Type Semester-I Cource: MBA
Product Assignment of MBA Semester-I (AMITY)

Solved Assignment


  Questions :-

                                                             Accounting for Managers (EDL 105) - Semester I

Assignment A

QUESTION 1

"G Ltd. acquired assets worth Rs.75,000 from H Ltd. by issue of shares of Rs.10 at a premium of Rs.5. The number of shares to be issued by G Ltd. to settle the purchase consideration will be"                       

  1. 6,000 shares                      
  2. 7,500 shares                      
  3. 9,375 shares                      
  4. 5,000 shares

 

QUESTION 2

 "Gama Ltd. issued 10,000, 10% debentures of Rs.100 each at a discount of 10%. The entire amount is payable on application. Application were received for 12,000 debentures. The allotment of debentures was made on 10th October, 2006. The amount which should be credited to the debentures account on 10th October, 2006 will be"                       

  1. "Rs.12,00,000"                       
  2. "Rs.10,80,000"                       
  3. "Rs.9,00,000"                       
  4. "Rs.10,00,000"

 

QUESTION 3 

"Alfa Ltd. issued 20,000, 8% debentures of Rs.10 each at par. The debentures are redeemable at a premium of 20% after 5 years. The amount of loss on redemption of debentures should be:"                       

  1. "Rs.50,000"                       
  2. "Rs.40,000"                       
  3. "Rs.30,000"                       
  4. None of the above

 

QUESTION 4 

"Indigo Ltd. had 9000, 10% redeemable preference shares of Rs.10 each, fully paid up. The company decided to redeem these preference shares at par by the issue of sufficient number of equity shares of Rs.10 each fully paid up at a discount of 10%. The number of equity shares issued should be:"                    

  1. "9,000"                       
  2. "11,000"                       
  3. "10,000"                       
  4. None of the above

 

QUESTION 5 

Dividends are usually paid upon:                       

  1. Paid up capital                       
  2. Called up capital                       
  3. Issued capital                       
  4. Reserve capital

 

QUESTION 6

 "When shares are forfeited, the Called Up Amount on shares is debited to -"                       

  1. Shares Forfeited Account                       
  2. Capital Reserve Account                       
  3. General Reserve Account                       
  4. Capital Account

 

QUESTION 7 

Money spent to acquire or upgrade physical assets is known as:                       

  1. Revenue Expense                       
  2. Capital Expense                       
  3. Administrative Expense                       
  4. Operating Expense

 

QUESTION 8 

"If, Cost of machine = Rs.400, 000 Useful life = 5 years Residual value = Rs.25,000 Sale price = Rs.40, 000 Rate of depreciation = 40% What will be depreciation of machine after one years using diminishing balance method?"                       

  1. "Rs. 1, 60,000"                       
  2. "Rs. 11,840"                       
  3. "Rs. 34,560"                       
  4. "Rs. 34,860"

 

QUESTION 9 

Super quick assets do not include                       

  1. Closing stock                       
  2. Prepaid expenses                       
  3. Sundry debtors                       
  4. Both (a) & (b)

 

QUESTION 10 

Which of the following is not a short-term solvency ratio?                       

  1. Current Assets Ratio                       
  2. Defensive Interval Ratio                       
  3. Super Quick Assets Ratio                       
  4. None of these

 

QUESTION 11 

How cash flows are denominated in terms of both current assets and current liabilities?                       

  1. Increase in current assets and Decrease in current liabilities                       
  2. Decrease in current assets and Increase in current liabilities                       
  3. Increase in current assets and Increase in current liabilities                       
  4. Both (a) & (b).

 

QUESTION 12 

Cash flow analysis superior than the fund flow analysis due to                       

  1. Shorter span of cash resources are considered                       
  2. Real cash flows only taken into consideration                       
  3. Opening and closing cash balances are only considered                       
  4. "(a), (b) & (c)."

 

QUESTION 13 

Sale of the plant and machinery falls under the category of                       

  1. Non-current asset sale cash in flow                       
  2. Current asset sale cash out flow                       
  3. Non-current asset sale cash out flow                       
  4. None of the above

 

QUESTION 14 

Which of the following cannot be included in financing cash flows?                       

  1. Payments of dividends                       
  2. Repayment of debt principal                       
  3. Sale or repurchase of the company´s stock                       
  4. Proceeds from issuing shares.

 

QUESTION 15 

If cost of sales is Rs. 95,000, income from sales Rs. 200,000 and operating expenses Rs. 300,000. What will be net result?                       

  1. Rs. 1, 95,000 Losses                       
  2. Rs. 1, 95,000 Profits                       
  3. Rs 1, 05,000 Profits                       
  4. Rs1, 05,000 Losses

 

 

 

Assignment B 

QUESTION 1    Discuss the limitations of financial statements and point out how these limitations can be removed through management accounting.         

QUESTION 2    Explain different ratios coming under:

(a) Profitability ratios

(b) Overall measure of efficiency ratio

  Answers :-

                               Accounting for Managers (EDL 105) - Semester I

Assignment A

QUESTION 1

"G Ltd. acquired assets worth Rs.75,000 from H Ltd. by issue of shares of Rs.10 at a premium of Rs.5. The number of shares to be issued by G Ltd. to settle the purchase consideration will be"                       

  1. 6,000 shares                      
  2. 7,500 shares                      
  3. 9,375 shares                      
  4. 5,000 shares

 Ans:5,000 shares

 

QUESTION 2

 "Gama Ltd. issued 10,000, 10% debentures of Rs.100 each at a discount of 10%. The entire amount is payable on application. Application were received for 12,000 debentures. The allotment of debentures was made on 10th October, 2006. The amount which should be credited to the debentures account on 10th October, 2006 will be"                       

  1. "Rs.12,00,000"                       
  2. "Rs.10,80,000"                       
  3. "Rs.9,00,000"                       
  4. "Rs.10,00,000"

 Ans:"Rs.10,00,000"

 

QUESTION 3 

"Alfa Ltd. issued 20,000, 8% debentures of Rs.10 each at par. The debentures are redeemable at a premium of 20% after 5 years. The amount of loss on redemption of debentures should be:"                       

  1. "Rs.50,000"                       
  2. "Rs.40,000"                       
  3. "Rs.30,000"                       
  4. None of the above

 Ans:"Rs.40,000"      

 

QUESTION 4 

"Indigo Ltd. had 9000, 10% redeemable preference shares of Rs.10 each, fully paid up. The company decided to redeem these preference shares at par by the issue of sufficient number of equity shares of Rs.10 each fully paid up at a discount of 10%. The number of equity shares issued should be:"                    

  1. "9,000"                       
  2. "11,000"                       
  3. "10,000"                       
  4. None of the above

 Ans: "10,000"   

 

QUESTION 5 

Dividends are usually paid upon:                       

  1. Paid up capital                       
  2. Called up capital                       
  3. Issued capital                       
  4. Reserve capital

 Ans:Paid up capital  

 

QUESTION 6

 "When shares are forfeited, the Called Up Amount on shares is debited to -"                       

  1. Shares Forfeited Account                       
  2. Capital Reserve Account                       
  3. General Reserve Account                       
  4. Capital Account

 Ans: Capital Account

 

QUESTION 7 

Money spent to acquire or upgrade physical assets is known as:                       

  1. Revenue Expense                       
  2. Capital Expense                       
  3. Administrative Expense                       
  4. Operating Expense

 Ans:Capital Expense 

 

QUESTION 8 

"If, Cost of machine = Rs.400, 000 Useful life = 5 years Residual value = Rs.25,000 Sale price = Rs.40, 000 Rate of depreciation = 40% What will be depreciation of machine after one years using diminishing balance method?"                       

  1. "Rs. 1, 60,000"                       
  2. "Rs. 11,840"                       
  3. "Rs. 34,560"                       
  4. "Rs. 34,860"

 Ans: "Rs. 1, 60,000"       

 

QUESTION 9 

Super quick assets do not include                       

  1. Closing stock                       
  2. Prepaid expenses                       
  3. Sundry debtors                       
  4. Both (a) & (b)

 Ans:Closing stock   

 

QUESTION 10 

Which of the following is not a short-term solvency ratio?                       

  1. Current Assets Ratio                       
  2. Defensive Interval Ratio                       
  3. Super Quick Assets Ratio                       
  4. None of these

 Ans:Defensive Interval Ratio  

 

QUESTION 11 

How cash flows are denominated in terms of both current assets and current liabilities?                       

  1. Increase in current assets and Decrease in current liabilities                       
  2. Decrease in current assets and Increase in current liabilities                       
  3. Increase in current assets and Increase in current liabilities                       
  4. Both (a) & (b).

 Ans: Decrease in current assets and Increase in current liabilities  

 

QUESTION 12 

Cash flow analysis superior than the fund flow analysis due to                       

  1. Shorter span of cash resources are considered                       
  2. Real cash flows only taken into consideration                       
  3. Opening and closing cash balances are only considered                       
  4. "(a), (b) & (c)."

 Ans: "(a), (b) & (c)."

 

QUESTION 13 

Sale of the plant and machinery falls under the category of                       

  1. Non-current asset sale cash in flow                       
  2. Current asset sale cash out flow                       
  3. Non-current asset sale cash out flow                       
  4. None of the above

 Ans: Non-current asset sale cash in flow   

 

QUESTION 14 

Which of the following cannot be included in financing cash flows?                       

  1. Payments of dividends                       
  2. Repayment of debt principal                       
  3. Sale or repurchase of the company´s stock                       
  4. Proceeds from issuing shares.

 Ans: Proceeds from issuing shares

 

QUESTION 15 

If cost of sales is Rs. 95,000, income from sales Rs. 200,000 and operating expenses Rs. 300,000. What will be net result?                       

  1. Rs. 1, 95,000 Losses                       
  2. Rs. 1, 95,000 Profits                       
  3. Rs 1, 05,000 Profits                       
  4. Rs1, 05,000 Losses

 Ans:Rs. 1, 95,000 Losses 

 

 

 

Assignment B 

QUESTION 1    Discuss the limitations of financial statements and point out how these limitations can be removed through management accounting.     

Ans: 

The following are all limitations of financial statements:

Dependence on historical costs. Transactions are initially recorded at their cost. This is a concern when reviewing the balance sheet, where the values of assets and liabilities may change over time. Some items, such as marketable securities, are altered to match changes in their market values, but other items, such as fixed assets, do not change. Thus, the balance sheet could be misleading if a large part of the amount presented is based on historical costs.

Inflationary effects. If the inflation rate is relatively high, the amounts associated with assets and liabilities in the balance sheet will appear inordinately low, since they are not being adjusted for inflation. This mostly applies to long-term assets.

Intangible assets not recorded. Many intangible assets are not recorded as assets. Instead, any expenditures made to create an intangible asset are immediately charged to expense. This policy can drastically underestimate the value of a business, especially one that has spent a large amount to build up a brand image or to develop new products. It is a particular problem for startup companies that have created intellectual property, but which have so far generated minimal sales.

Based on specific time period. A user of financial statements can gain an incorrect view of the financial results or cash flows of a business by only looking at one reporting period. Any one period may vary from the normal operating results of a business, perhaps due to a sudden spike in sales or seasonality effects. It is better to view a large number of consecutive financial statements to gain a better view of ongoing results.

Not always comparable across companies. If a user wants to compare the results of different companies, their financial statements are not always comparable, because the entities use different accounting practices. These issues can be located by examining the disclosures that accompany the financial statements.

Subject to fraud. The management team of a company may deliberately skew the results presented. This situation can arise when there is undue pressure to report excellent results, such as when a bonus plan calls for payouts only if the reported sales level increases. One might suspect the presence of this issue when the reported results spike to a level exceeding the industry norm.

No discussion of non-financial issues. The financial statements do not address non-financial issues, such as the environmental attentiveness of a company´s operations, or how well it works with the local community. A business reporting excellent financial results might be a failure in these other areas.

Not verified. If the financial statements have not been audited, this means that no one has examined the accounting policies, practices, and controls of the issuer to ensure that it has created accurate financial statements. An audit opinion that accompanies the financial statements is evidence of such a review.

No predictive value. The information in a set of financial statements provides information about either historical results or the financial status of a business as of a specific date. The statements do not necessarily provide any value in predicting what will happen in the future. For example, a business could report excellent results in one month, and no sales at all in the next month, because a contract on which it was relying has ended.

Over time the Financial Accounts (FAs) have increased in importance as a statistical cornerstone

for economic analysis. In countries such as Spain, which in the past followed monetary policy

strategies based on monitoring a monetary aggregate, the FAs were statistics used to supplement

traditional monetary analysis for studying various aspects of financial reality. Furthermore, the FAs

were (and also today are) the statistical basis for wide-ranging financial analysis of the economy,

including those undertaken by the Banco de España in its quarterly report and annually in its

Annual Report. With the passing of time, following far-reaching and forceful deregulation and

financial globalisation, and as traditional monetary analysis became less relevant in the new

economic setting, the FAs gained indisputably in terms of significance, turning into the statistical

cornerstone for monetary and financial analysis. This growing importance of the FAs compelled

countries to devote considerable time and resources to developing them. The progress achieved in

the last two decades in most countries is undeniable; however, in parallel, it is the very usefulness

of this instrument which has led to constant pressure from users to overcome its shortfalls and

weaknesses. In the context of the current financial crisis, the ensuing greater demands for

statistical information have once again put the spotlight on the FAs and highlighted the need for

them to be developed further and standardised across countries. But the FAs also have their

intrinsic limitations. Consequently, identifying these limitations and studying how the FAs could be

complemented is another merits reflection and discussion in fora such as this Conference.

In order to contribute to this necessary debate, following a brief review in section 2 of the wideranging

standpoints of economic and financial analysis that can be covered by the FAs, this paper

describes the level of development of Spanish FAs in section 3, and then analyses, in section 4,

how Spain has endeavoured to overcome certain limitations of the accounts, either with other

statistical information or through increased coordination with other institutions. Finally, in

conclusion, section 5 outlines the work still to be done.

  1. The various uses of the FAs

Compared with other statistics, the considerable advantage of the FAs is that they are a very

complete, uniform and consistent set of financial data. They are complete because they cover all

standard sectors, sub-sectors and instruments used to classify any country´s economy since the

national accounts manuals were created back in the sixties. They are uniform because they

incorporate a shared methodology. And they are consistent because all entries follow the

quadruple-entry principle (double entry in two sectors) and the from-whom-to-whom approach.

Also, the financial balance sheets are linked to the flows which explain the changes of the former.

11-07 STATISTICS DEPARTAMENT. TRYING TO OVERCOME THE LIMITATIONS OF THE FINANCIAL ACCOUNTS: THE SPANISH EXPERIENCE 2

As a result of these characteristics, the FAs can be used for monetary, financial and general

economic analysis. In fact, for monetary analysis, the FAs contribute to valuing and quantifying

key factors of changes in monetary aggregates such as the credit effect and the portfolio switching

effect, a distinction which is significant for monetary policy decision making. Similarly, using the

FAs, the degree of bank intermediation of a specific economy can be analysed, which helps

assess how smooth or difficult the transmission of monetary policy measures may prove.

In terms of financial analysis, the degree of importance acquired by financial intermediaries such

as investment funds, financial vehicle corporations and insurance companies and pension funds

can be studied through the FAs. The performance of the aforementioned entities is sometimes of

paramount importance for financial stability studies or for supplementing monetary analysis, insofar

as these intermediaries channel a large share of household and non-financial corporations´ financial

saving. The role played by certain securitisation processes in triggering and spreading the current

financial crisis is an important example here.

As for general economic analysis, many facets of economic agents´ behaviour can be studied on

the basis of the information provided by the FAs. Some examples here are: changes in sectors´

financial wealth, a variable which may influence consumption and real investment decisions,

aggregate demand and prices; the relationship between sectors´ wealth and indebtedness, or the

interplay between financial operations and housing investment.

  1. The degree of development of the Financial Accounts of the Spanish Economy

(FASE)

The FASE are part of the National Statistics Plan (PEN). This four-year plan sets out the statistics

which must be compiled during that period, since it is approved by Royal Decree, following the

guidelines of the Law on the Public Statistical Function. The statistical work to be undertaken in

order to comply with the PEN is established each year, also by Royal Decree. From the outset, it

has been the responsibility of the Banco de España to compile the FASE.

Compared with other developed countries such as France, Germany and Italy (in Europe) and the

US, Canada and Japan, who first compiled FAs at the beginning of the sixties, they were created

in Spain rather belatedly at the end of the seventies. However, the Banco de España, mindful of

the importance of these statistics, invested considerable effort from the outset in developing them

and, thus, the FASE are currently among the most complete of their kind. The key achievements in

this process can be summarised as follows:

- 1979 was the first year that the Banco de España´s Annual Report included a Statistical

Appendix, with only partial data on certain sectors, paving the way for the FAs. From 1982

this appendix began to be published annually as a separate report and it became more

comprehensive in terms of its coverage of sectors and instruments, and the extension of

the time series, which dated back to 1970.

- In 1990 these statistics ultimately took the form of an integrated system of accounts of all

sectors, following the guidelines of the ESA 79 (based, in turn, on SNA 63). Although the

ESA 79 did not envisage the preparation of financial balance sheets, the Banco de España

has prepared them since that year, and the time series of transactions and of financial

balance sheets were reconstructed until 1970.

- Growing demand from analysts prompted the Banco de España to compile the quarterly

financial accounts which, following a period of internal dissemination, were published for

the first time in 1999, both in terms of transactions and of financial balance sheets. The

quarterly accounts were consistent with the annual accounts, although they were much

more simplified.

- In June 2000 the first financial accounts following the ESA 95 methodology (based on the

SNA 93) were disseminated in Spain. With the adoption of this change, the Banco de

11-07 STATISTICS DEPARTAMENT. TRYING TO OVERCOME THE LIMITATIONS OF THE FINANCIAL ACCOUNTS: THE SPANISH EXPERIENCE 3

España decided that the quarterly accounts should be developed in the same way as the

annual accounts and, since then, the FASE are unique and quarterly. This means that the

series of financial balance sheets for each year are identical to those for the fourth quarter

of the same year and that the series for the financial transactions of a full year are the sum

of the corresponding series of financial transactions of the four quarters of that year.

- In subsequent years the time series was reconstructed using the ESA 95 methodology

and extended back to 1990, with quarterly periodicity, and to 1980, with only annual

periodicity.

- The most recent development in the FASE was in 2009, when the series of revaluations

and other changes in volume for all the sectors began to be disseminated, following a long

period of quality control during which these series were only available internally. Thus,

disseminated for each sector of the economy is the complete link between the financial

balance sheet at the start and close of each period, with a breakdown for each instrument

of the financial transactions, the revaluations and other changes in volume. Until 2009, this

complete link was only provided for the last year included in the accounts.

The accounts are compiled1

 by organising the available basic information in a matrix whose

rows and columns correspond to the instruments circulating in the Spanish economy

(approximately 40 instruments) and to 20 institutional groupings. At a later stage, these instruments

and groups of institutions are condensed into the categories of instruments, sectors and subsectors

envisaged by the ESA 95. Furthermore, for each instrument the following are identified: the

issuing sector, the counterpart sector and whether a stock, a transaction, a revaluation or a

change in volume is concerned. All this information is stored in FAME, a time series database,

which currently contains more than 300,000 series and is fully integrated with the primary

information sources.

The FASE are presented in an unconsolidated version, with the exception of trade credits

and advances in the households sector which do not include those that may have arisen between

units of the sector itself (between sole proprietors and that granted by sole proprietors to

households for the purpose of consumption). However, it is possible to prepare the consolidated

accounts from the information the FASE contain, since the accounts provide, for the various

sectors, the summary by instrument and counterpart sector including the counterpart vis-à-vis the

sector itself; consequently, by elimination of the asset and liability positions within the sector itself,

the consolidated accounts of each sector can be obtained.

The FASE are disseminated quarterly, with a lag of t+110 days with respect to the last reference

period, on the Banco de España website (www.bde.es) including all the available breakdowns.

They are also released annually in mid-June, in a more simplified print edition. Appendix 1 includes

the breakdown of sectors and sub-sectors which is included in the electronic format of the

accounts. As a result of the release calendar for the FASE, the statistics can be used in the Banco

de España´s quarterly analysis of the Spanish economy, which is disseminated in its monthly

Economic Bulletin for January, April, July and October (published early in the following month), and

in its Annual Report, which is published mid-June together with the print edition of the FASE and

the annual Balance of Payments Report.

Turning to the revision policy, the last eight quarters and the corresponding years of the FASE

are revised in each quarterly update. This regular revision procedure does not exclude broader

exceptional revisions due to specific circumstances such as conceptual changes or new basic

information.

1 More detailed information on this process and other details on content, revision policy and highlights of the FASE, can be

found in the methodological notes of the FASE which are disseminated each year in mid-June both electronically on the

Banco de España´s website (www.bde.es) and in a print edition.

11-07 STATISTICS DEPARTAMENT. TRYING TO OVERCOME THE LIMITATIONS OF THE FINANCIAL ACCOUNTS: THE SPANISH EXPERIENCE 4

Therefore, to sum up, as a result of the work on financial accounts undertaken at the Banco de

España over the past 30 years, the FASE currently includes unconsolidated uniform time series

which are consistent with ESA 95 methodology, with a quarterly periodicity from 1990 and annually

from 1980. These time series are complete in the sense that they include transactions accounts,

financial balance sheets, revaluations and other changes in volume accounts, for all sectors of the

economy. Even for the financial institutions sector, they offer the breakdown between monetary

financial institutions and non-monetary financial institutions. Furthermore, given that for all sectors

and for these two sub-sectors the accounts provide, for all instruments, the breakdown of the

counterpart (complete from-whom-to-whom version) it is also possible to obtain the consolidated

accounts of the sectors. Similarly, the FASE include the detail by instrument of all the sub-sectors

envisaged in the ESA 95. The accounts are disseminated with a time-lag of t+110 days and the

revision policy consists of revising, with each quarterly update, the last eight quarters and,

exceptionally, broader revisions are once a year when material events occur.

  1. Is there any way to overcome the limitations of the FAs?

As indicated in the introduction, the growing success of the FAs as a powerful tool for economic,

financial and monetary analysis has meant that they have been brought into the spotlight in recent

years by users who constantly bring pressure to bear on statisticians in the countries and in

international organisations to fully develop them. However, despite their importance, these

statistics, like all statistics, have their limitations. This section outlines these limitations, briefly

reflects on the possibility of overcoming them and reports on the Banco de España´s experience in

this regard.

The following are usually quoted as the main limitations of the FAs:

  1. a) Their availability lag is too long.
  2. b) The financial accounts of the sectors present, in certain cases, large differences between

their balancing item (net financial transactions) and the balancing item of their capital

account [net lending (+)/net borrowing (-)]. These differences usually increase

commensurately with the periodicity of the accounts.

  1. c) Usually, there is not seasonally adjusted version of the financial accounts.
  2. d) They do not have all the necessary details for certain important analyses.
  3. e) The use of standard rules can be a disadvantage for certain types of analysis

   

 

QUESTION 2    Explain different ratios coming under:(a) Profitability ratios

Ans:

Profitability Ratio Definition

A profitability ratio is a measure of profitability, which is a way to measure a company´s performance. Profitability is simply the capacity to make a profit, and a profit is what is left over from income earned after you have deducted all costs and expenses related to earning the income. The formulas you are about to learn can be used to judge a company´s performance and to compare its performance against other similarly-situated companies.

Types of Profitability Ratios

Common profitability ratios used in analyzing a company´s performance include gross profit margin (GPM), operating margin (OM), return on assets (ROA) , return on equity (ROE), return on sales (ROS) and return on investment (ROI). Let´s take a look at these in some detail.

Gross Margin

Gross margin tells you about the profitability of your goods and services. It tells you how much it costs you to produce the product. It is calculated by dividing your gross profit (GP) by your net sales (NS) and multiplying the quotient by 100:

Gross Margin = Gross Profit/Net Sales * 100

GM = GP / NS * 100

Example: Imagine that you run a company that sold $50,000,000 in running shoes last year and had a gross profit of $7,000,000. What was your company´s gross margin for the year?

GM = $7,000,000 / $50,000,000 * 100

GM = .14 * 100

GM = 14%

For every dollar in shoe sales, you earned 14 cents in profit but spent 86 cents to make it.

Operating Margin

Operating margin takes into account the costs of producing the product or services that are unrelated to the direct production of the product or services, such as overhead and administrative expenses. It is calculated by dividing your operating profit (OP) by your net sales (NS) and multiplying the quotient by 100:

Operating Margin = Operating Profit / Net Sales * 100

OM = OP / NS * 100

Example: Let´s say you make and sell computers. Last year, you generated net sales of $12,000,000, and your operating income was $100,000,000. What was your operating margin 

OM = OI / NS * 100

OM = $12,000,000 / $100,000,000 * 100

OM = 0.12 * 100

OM = 12%

Out of every dollar you made in sales, you spent 12 cents in expenses unrelated to the direct production of the computers.

Return on Assets

Return on assets measures how effectively the company produces income from its assets. You calculate it by dividing net income (NI) for the current year by the value of all the company´s assets (A) and multiplying the quotient by 100:

Return on Assets = Net Income / Assets * 100

ROA = NI/A * 100

Example: Imagine that you are the president of a large company that manufactures steel. Last year, your company had net income of $25,000,000, and the total value of its assets, such as plant, equipment and machinery, totaled $135,000,000. What was your return on assets last year?

ROA = $25,000,000 / $135,000,000 * 100

ROA = 0.185 * 100

ROA = 18.5%

This means that you generate 18.5 cents of income for every dollar your company holds in assets.

Return on Equity

Return on equity measures how much a company makes for each dollar that investors put into it. You calculate it by taking the net income earned (NI) by the amount of money invested by shareholders (SI) and multiplying the quotient by 100:

Return on Equity = Net Income / Shareholder Investment * 100

ROE = NI / SI * 100

Example: Imagine that your social media company just went public last year, resulting in a total investment of $100,000,000. Your company´s net income for the year was $10,000,000. What is the return on equity?

ROE = $10,000,000 / 100,000,000 * 100

ROE = 0.10 * 100

ROE = 10%

Your company is generating a dime in profit for every dollar invested.

 

 

(b) Overall measure of efficiency ratio

Ans: 

An efficiency ratio is a measure of a bank´s overhead as a percentage of its revenue.

HOW IT WORKS (EXAMPLE):

The formula varies, but the most common one is:

Efficiency Ratio = Expenses* / Revenue

*not including interest expense 

For example, if Bank XYZ´s costs (excluding interest expense) totaled $5,000,000 and its revenues totaled $10,000,000, then using the formula above, we can calculate that Bank XYZ´s efficiency ratio is $5,000,000 / $10,000,000 = 50%. This means that it costs Bank XYZ $0.50 to generate $1 of revenue.

As we said earlier, the formulas vary but the idea is to look at costs as a percentage of revenue. Costs include salaries, rent and other general and administrative expenses. Interest expenses are usually excluded because they are investing decisions, not operational decisions.

Revenue includes interest income and fee income, though some banks exclude their provision for loan losses from revenue or add their tax equivalent net interest income to revenue when calculating the efficiency ratio.

WHY IT MATTERS: 

The efficiency ratio is a quick and easy measure of a bank´s ability to turn resources into revenue. The lower the ratio, the better (50% is generally regarded as the maximum optimal ratio). An increase in the efficiency ratio indicates either increasing costs or decreasing revenues.

It is important to note that different business models can generate different efficiency ratios for banks with similar revenues. For instance, a heavy emphasis on customer service might lower a bank´s efficiency ratio but improve its net profit. Banks that focus more on cost control will naturally have a higher efficiency ratio, but they may also have lower profit margins. 

In addition, the more a bank generates in fees, the more it may concentrate on activities that carry high fixed costs (and thus create worse efficiency ratios). The degree to which a bank is able to leverage its fixed costs also affects its efficiency ratio; that is, the more scalable a bank is, the more efficient it can become. For these reasons, comparison of efficiency ratios is generally most meaningful among banks within the same model, and the definition of a "high" or "low" ratio should be made within this context.

Efficiency ratios measure a company´s ability to use its assets and manage its liabilities effectively. Some efficiency ratios include the inventory turnover ratio, asset turnover ratio and receivables turnover ratio. These ratios measure how efficiently a company uses its assets to generate revenues and its ability to manage those assets.

The inventory turnover ratio measures a company´s ability to manage its inventory efficiently. The ratio is calculated by dividing its cost of goods sold by its average inventory. For example, suppose company ABC sells computers and reported cost of goods sold (COGS) at $5 million. The average inventory of ABC is $20 million. The inventory turnover ratio for ABC is 0.25 ($5 million/$20 million). This indicates that company ABC is not managing its inventory properly, because it only sold a quarter of its inventory for the year.

The asset turnover ratio measures a company´s ability to generate revenues from its assets efficiently. The ratio is calculated by dividing a company´s revenues by its total assets. For example, suppose a company has an asset turnover ratio of 5. Each dollar of the company´s assets generates $5 of revenue. This indicates that the company is efficient when using its assets to generate sales.

The receivables turnover ratio measures how efficiently a company can actively collect its debts and extend its credits. The ratio is calculated by dividing a company´s net credit sales by its average accounts receivable. Generally, a company with a higher accounts receivables turnover ratio, relative to its peers, is favorable. A higher receivables turnover ratio indicates the company is more efficient than its competitors when collecting accounts receivable, or it operates on a cash basis.

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