Meaning of Accounting Ratios and Their Purposes
Accounting ratios are metrics used to compare two or more financial data points from a company’s financial statements to measure its profitability, efficiency, and overall financial health. These ratios are typically expressed in various forms, such as proportions, fractions, percentages, or terms of the number of times one value relates to another. Equation for Ratios:…
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What are working capital sources and working capital management?
Working capital is the operating capital of a business which is used in its day-to-day operations, calculated as the current assets minus the current liabilities. The positive working capital commonly indicates that a company can pay off its short-term liabilities almost immediately. Sources of working capital are Share Capital, retained profits, debentures, long-term loans, and…
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The difference between Reserves and Provisions explained
Both reserves and provisions refer to the amount retained by an organization to deal with all possible contingencies in the future. In accounting parlance, reserves are appropriations out of profits and provisions are charges against profits. Although the IFRS Standards sometimes call provisions a ‘reserve’, they are not the same thing – a provision is…
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What is a common size balance sheet?
A common size financial statement is an income statement or balance sheet in which all items are expressed as percentages of a common base figure rather than as absolute numerical figures. For example, in a common-size income statement you will find the income and expenditure amounts as percentage of net sales. Similarly, a common size…
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Method of Calculating length of holding period for stocks and receivables
(A manufacturing unit needs to hold the stock of raw material, work-in-process, finished goods for a length of time in the workplace before dispatching the final products to the customers. This article explains how to calculate holding period for stocks and book debts collection) The working capital cycle (WCC) is the time it takes for…
How to compute working capital limits under Turn-over method/Nayak committee
(Nayak Committee norms for computation of working capital limits) The term working capital means sum of the funds invested at various current assets used in the operating cycle, by the industrial and trading establishments. Operating cycle means the length of time required to convert ‘Non-Cash current assets’, (like raw material (RM), work in process (WIP), finished goods (FG),…
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