Lecture 13

Question 1

Why is NZ productivity low?

Answer 1

• weak international connections
• underinvestment in knowledge, innovation and ideas
• other, including low skills

Question 2

Two of the most important financial statements

Answer 2

• income statement (or Profit & Loss Account)

- balance sheet

Question 3

Purpose of income statement

Answer 3

• to show whether or not a company’s business is profitable
• shows profit or loss over a period of time
• usually comparison between figures of most recent year and year before

Question 4

Steps of Income Statement

Answer 4

1. Establish the revenue
2. Deduct direct cost of making that revenue (cost of sales) to get Gross Profit or Gross Margin
3. Further deduct the cost of being in business (operating expenses) to get Operating Profit
4. Further deduct any financing costs or income to get the Profit before Income Tax
5. deduct tax to get Net profit for the period

Question 5

Purpose of Balance Sheet

Answer 5

shows a company’s financial position at a point in time (end of fiscal year), a snap shot

Question 6

3 major items in a balance sheet

Answer 6

• assets
• liabilities
• equity (or called net worth)

Question 7

Total Assets is the sum of

Answer 7

• total current assets

- fixed or non-current assets

Question 8

Examples of total current assets

Answer 8

• cash
• inventory (materials)
• investments
• accounts receivable

Question 9

Examples of fixed or non-current assets

Answer 9

-total value (depreciable assets) of property, plant equipment etc. minus the accumulate depreciation to get ‘net’ fixed assets

Question 10

Liabilities is the sum of

Answer 10

• current liabilities

- non-current or long term liabilities

Question 11

examples of current liabilities

Answer 11

• accounts payable
• accrued expenses
• excess billings for work not done yet
• bank overdraft and short term loan

Question 12

examples of non-current or long term liabilities

Answer 12

• long-term bank loans

- mortgages of equipment, buildings, land, cars/trucks

Question 13

Current liabilities

Answer 13

debts a company has to pay within a year

Question 14

long term liabilities

Answer 14

obligations with a payback period of more than a year

Question 15

Accounting Equation

Answer 15

Equity = Assets - Liabilities

Question 16

Working Capital equation

Answer 16

= current assets - current liabilities

Question 17

working capital definition

Answer 17

• a measure of the short term financial strength of a construction company
• liquidity of working capital is high

Question 18

increase working capital by:

Answer 18

• making profit, selling equipment, long term loans

Question 19

decrease working capital by:

Answer 19

• losing money on a project
• purchasing equipment
• repaying long term loans

Question 20

To stay a healthy company, volume of unfinished work:

Answer 20

• of all projects in hand should be at most ten times the working capital
• of the biggest project in hand should be at most five times the working capital

Question 21

current ratio equation

Answer 21

= current assets / current liabilities

Question 22

current ratio definition

Answer 22

ratio for a construction company’s liquidity or its ability to fulfil short term financial obligations
- should be 1.3 or higher

Question 23

underbilling

Answer 23

• expressed in balance sheet under current assets

- estimated work done but not billed yet

Question 24

overbilling

Answer 24

• expressed under current liabilities

- excess billings for work not done yet

Question 25

Gross Profit Margin Ratio

Answer 25

gross profit / revenue | - goal of 25% minimum

Question 26

Net Profit Margin Ratio

Answer 26

net profit before tax / revenue | - goal of 5% minimum

Question 27

Return on Equity Ratio

Answer 27

net profit before tax / owners' equity | - should be between 15% and 40%

Question 28

Current Ratio

Answer 28

current assets / current liabilities | - should be higher than 1.3

Question 29

Acid Test Ratio

Answer 29

(cash + accounts receivable) / current liabilities | - should be higher than 1.1

Question 30

Current Assets to Total Assets Ratio

Answer 30

current assets / total assets | - should be between 60% and 80%

Question 31

Working Capital Turnover

Answer 31

revenue / working capital | - should be between 8 and 12

Question 32

Net Profit to Working Capital Ratio

Answer 32

net profit before tax / working capital | - should be between 40% and 60%

Question 33

Debt to equity Ratio

Answer 33

total liabilities / owner's equity | - should be lower than 2.5

Question 34

Leverage

Answer 34

``` total assets / owner's equity or (total liabilities + owner's equity) / owner's equity or debt to equity ratio + 1 - should be lower than 3.5 ```

Question 35

Break Even Point

Answer 35

income from sales is equal to total expenses

Question 36

Degree of Operating Leverage

Answer 36

degree of operating leverage is the percentage change in profit per percentage change in sold items