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A look at the important concepts in finance

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About the document

Shaharu B.
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  1. Introduction
  2. Meaning of financial statements
    1. Income statement or trading and profit and loss account
    2. Position statement or balance sheet
  3. Importance of financial statement
  4. Financial analysis
    1. Meaning
    2. Meaning of ratio
    3. Significance of ratio analysis
    4. Limitation of ratio analysis
  5. Types of ratios
    1. Financial ratios
    2. Current ratio
    3. Acid test ratio
    4. Capital ratio
    5. Equity ratio
    6. Proprietory ratio
    7. Return on investment ratio
    8. Gross profit ratio
    9. Operating ratio
    10. Activity ratios
    11. Capital turnover ratio
    12. Working capital turnover ratio
    13. Debtors turnover ratio
    14. Stock turnover ratio
    15. Debt payment period
  6. Operational definitions

RAY G. JONES and DEAN DUDLEY observe that the word finance comes indirectly from the Latin word Finis. Finance is defined as the ?Issuance of the distribution of and the purchase of liability and equity claim issued for the purpose of generating revenue-producing assets. These claims are commonly referred to as financial claims?.

According to PAUL.G.HASINGS -?Finance? Is the management of the monitory affairs of the company. It includes determining what has to be paid for and when, raising the money on the best terms available, and devoting the available funds to the best uses.

Financial analysis is the process of scanning the financial statements with a view of getting the necessary information.

In other words, it is the methodical classification of the data found in the financial statements into simple component part or elements and establishment of relationships between the classified component parts and the explanation of the significance of relationships between the classified component parts as to the provide a full diagnosis of the profitability and the financial strength of a firm.

[...] Ratio are helpful in assessing the financial position and profitability of a concern. Ratio analysis also helps in effective control of business measuring performance, control of cost etc., effective control is a key stone of better management. Ratio analysis helps the investors in making investment decisions to make a profitable investment. It helps to know the relationship between different related items of financial statement. It helps in investigating the factors responsible for financial soundness / deterioration of a particular situation. [...]


[...] The important Liquidity Ratios are: CURRENT RATIO: Current Ratio is calculated by dividing CURRENT ASSETS by CURRENT LIABILITIES. It indicates the availability of current assets in rupees for every one rupee of current liability. The current ratio represents the Margin of safety for creditors. The standard Current Ratio is which means that for every rupee of current liability at least two rupees of current assets must be there. CURRENT RATIO = CURRENT ASSETS/ CURRENT LIABILITIES ACID TEST RATIO: This ratio establishes a relationship between liquid assets and current liabilities. [...]


[...] At same time a very high turnover ratio is also injurious to the firm's health since, it indicates over-trading. CAPITAL TURNOVER RATIO: This ratio indicates the number of times the capital is rotated in the business operation. This ratio is computed by comparing sales with capital employed. Always a higher capital turnover ratio is preferred because it indicates effective utilization of capital. CAPITAL TURNOVER RATIO = SALES/ CAPITAL EMPLOYED FIXED ASSET TURNOVER RATIO: This ratio indicates how effectively fixed assets are utilized to generate sales. [...]

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