10388 learner guide

7/24/2019 10388 Learner Guide

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Working together for a skilled tomorrow

Learning Materials

Unit Standard Title: Interpret basic financial statements

Unit Standard No: 10388

Unit Standard Credits: 3

NQF Level: 4

Learner Guide

This outcomes-based learning material was

developed by

INHLE Business Solutions

and reviewed by

Metropolitan Life and

Moentu

with funding from INSET!in "#to$er%&&'.

The material is generic in nature.

Its purpose is to serve as a guide for the further development

and customiation of company-specific! learner-specific

and situation-specific learning interventions.

Disclaimer:

Whilst every effort has been made to ensure that the learning material is accurate, INSETA takes no resonsibilityfor any loss or damage suffered by any erson as a result of the reliance uon the information contained herein!

I"#$%T final materials 31&10&03


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'nit #tandard "o.10388 (age )

Ta$le of Contents

INTRODUCTION AND OVERVIEW OF THE MODULE...................................................................5

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SPECIFIC OUTCOME 1.........................................................................................................................8

ANALYSE THE BASIC ELEMENTS OF AN INCOME AND EXPENDITURE STATEMENT...........8

INCOME AND EXPENDITURE STATEMENTS..................................................................................9

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CASE STUDY 1.1: THE INCOME AND EXPENDITURE STATEMENT OF A PRIVATE

INDIVIDUAL..........................................................................................................................................10

EXERCISE 1.1.........................................................................................................................................11

CASE STUDY 1.2: THE INCOME AND EXPENDITURE STATEMENT OF A COMPANY... .... ..12

SOURCES OF INCOME AND EXPENDITURE.................................................................................14

FINANCIAL VIABILITY.......................................................................................................................21

SPECIFIC OUTCOME 2.......................................................................................................................29

ANALYSE THE BASIC ELEMENTS OF A BALANCE SHEET..........................................................29

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COMMON ELEMENTS OF A BALANCE SHEET............................................................................0

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-"/" THE%O&%EPTOF$&$SSET""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""/3

-"2" THE%O&%EPTOF$!I$0I!IT(""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""/,

SPECIFIC OUTCOME .......................................................................................................................49

COMPILE A PERSONAL ASSETS AND LIABILITIES STATEMENT...............................................49

.1. COMPILIN! A PERSONAL ASSETS AND LIABILITIES STATEMENT................................50

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SPECIFIC OUTCOME 4.......................................................................................................................5"

USING THE EVIDENCE IN FINANCIAL STATEMENTS TO MAKE A FINANCIAL DECISION..5"

%$SESTU( 2"+" 0$'SOFH$MMERS6PT(7 !T""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#3%$SHF!OW$&!I4UIIT("""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""**



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Introdu#tion and overvie( of t)e odule

The purpose of this module

*elcome to the 'nit #tandard+ Interpreting ,asic inancial #tatements with I"#%

The purpose of the module is to provide learners with /nowledge and s/ills to enablethem to interpret basic financial statements of companies.

The teaching strategy

The focus of our teaching role is on facilitating your learning eperiences towardachieving specific assessment criteria. urthermore! for each of the topics thatcomprise this module! the learning eperiences are designed with the aim of enablingyou to master the learning content at a predetermined competence level.

LE!*NING "UTC"MES+ !SSESSMENT C*ITE*I! !N, LE-ELS "F M!STE*.

ach topic dealt with in this module contains a statement of the learning outcomesthat we wish to accomplish for the particular topic. In broad terms these tell you aboutthe /nowledge and s/ills we epect you to have mastered by the time you havecompleted your study of each topic. The assessment criteria indicate a re2uired endresult! which is what you should be able to do once you have completed the studyunit. The formulated assessment criteria are based on various levels of mastery thatyou are re2uired to achieve when mastering the study material. The re2uired levelsof mastery for this module vary from /nowledge and comprehension to theintegration of /nowledge under given circumstances. The following levels of mastery

are distinguished for the purposes of this module (lease note that these levels arenot eact duplications of those provided by #%%! but summaries thereof.+

Level 1: Knowledge and comprehensionThis calls for a /nowledge and understanding of facts! methods! processes andstructures and an ability to list and eplain them. It involves memorising as well as anawareness! immediate discovery! recall or recognition of relevant information invarious forms. % limited degree of interpretation is re2uired.

Level 2: ApplicationThis calls for a /nowledge and understanding of the bac/ground and of related topicsand the ability to apply rules! principles! techni2ues and methods to a problem in

order to find a solution based on the information that is provided.

Level 3:IntegrationThis calls for a full factual /nowledge of the topic! of the bac/ground and of relatedtopics and an ability to carry out integration functions! such as analysis!interpretation! synthesis and evaluation. It includes the application of multi-disciplinary /nowledge and problem solving in cases where there are variousacceptable solutions. In this sense it constitutes creative thin/ing! comprising fluency!fleibility! originality! critical awareness and independent thought.

The module is aimed at critical cross-field and development outcomes that are theob5ectives of the module. They aim to facilitate your mastery of the sub5ect matter byapplying a cross-section of s/ills and assist your development with definedoutcomes.



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Critical Cross ield and !evelopmental "utcomes

6ou are able to identify! solve problems and ma/e decisions based on the informationin basic financial statements.6ou are able to communicate effectively using visual! mathematics and languages/ills in the modes of oral and written presentation when evaluating the strengths andwea/nesses of an entity.6ou are able to organise and manage yourself effectively compiling a personal assetsand liabilities statement.

#astering the study material

This module re2uires careful and dedicated study. 6ou must become proficient in theinterpretation and analysis of basic financial statements! which re2uires diligence andthoroughness.



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#pecific utcomes

This module is made up of four specific outcomes! which are further bro/en out intoassessment criteria. The four specific outcomes are+

S"/: !nal0se t)e $asi# eleents of an in#oeand e1penditure stateent

S"%: !nal0se t)e $asi# eleents of a $alan#es)eet

S"': Copile a personal assets and lia$ilities

stateent

S"2: Use t)e eviden#e in finan#ial stateents toa3e a finan#ial de#ision

ercise 2uestions are included as you progress through the #pecific utcome.% #elf-%ssessment 2uestionnaire will be given to conclude the #pecific utcome.



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Spe#ifi# "ut#oe /

Analyse the $asic elements of an income and e%penditurestatement

Learning out#oes

,y the end of this module you should be able to do! define or provide the following:

1. The purposes of an income and ependiture statement are eplained and anindication is given of how often these statements are re2uired for two casestudies.

). #ources of income and ependiture are identified for three different types of

financial statements.

3. #ources of income and ependiture are eplained with reference to anincome and ependiture statement.

4. Three income and ependiture statements are eamined and evaluated interms of financial viability of the enterprise.



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'nit #tandard "o.10388 (age ;

In#oe and e1penditure stateentsIncome and ependiture statements are a report of the money you made and themoney that you spent during a period of time. 6ou can do a statement for a month! a2uarter or a year or any time period.

!efinitions

1&1& Incomeor the purposes of this module! income is defined as one0 t)at )as $een adewithin the time period of the statement. It is an important accounting concept tocorrectly account for income within the time period of the financial statement. Thismeans that you should include in your income calculation money that you have madebut not yet received. or eample! if you were a trader and sold goods but had notyet received the money because you had given your customer some credit termsyou should nonetheless include the sale as income for the period! even if thecustomer only pays you after the end of the period.

1&2& '%penditureor the purposes of this module! ependiture is defined as t)e #osts t)at )ave $eenin#urredwithin the time period of the statement. %s with the concept of income! youshould accrue for ependitures incurred within the time-period even if you have notpaid for them. If! for eample! you were doing a household income and ependiturestatement for the end of #eptember and you had not received your water and lightsbill nor paid it for #eptember! you should nonetheless include it or a reasonableestimate in the income and ependiture statement for #eptember. This ensures thatyou have an accurate statement of the real ependitures incurred within the period.

%t the end of the income and ependiture statement! you subtract penditure fromIncome and the remaining portion is what an enterprise would call (rofit. Ifependitures were more than Income! the negative difference is what an enterprisewould call


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C!SE STU,. /4/: T)e In#oe and E1penditure Stateent of a privateindividual4

#unny is a private individual who wor/s in an office as a consultant. #he wishes toobtain a loan from ,ig #har/s ban/ to finance the purchase of a new car. ,ig #har/shas re2uested that #unny produce an income and ependiture statement todemonstrate to them that she has the income necessary to meet the repayments ofthe loan which amount to A1000 per month.

#unny has drawn up the following statement+

Stateent of In#oe and E1penditure for Sunn0For t)e period / 5an %&&' to '/ ,e# %&&'Income A

%nnual #alary after Taation 100!000penditure

,ond Aepayments on Bouse A30! 000ood A)0! 000=lothing A7! 000*ater C


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'nit #tandard "o.10388 (age >

E1er#ise /4/#tate how often #unny in the case study above has to produce an income andependiture account



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Case Stud0 /4%: T)e In#oe and E1penditure Stateent of a #opan0

FL!-!66 Ltd

lava 78 and continue to run as a family owned private business.,ecause they are incorporated as a company! they are re2uired to produce %nnual

inancial #tatements. Interested parties! such as the owners of the company! clientsand suppliers who do business with them and #%A#! the Aeceiver of Aevenue! mayreview these financial statements and ma/e decisions on the results accordingly.

Flava77 LtdStateent of In#oe and E1penditureFor t)e period / Septe$er %&&% to '/ "#to$er %&&'

A#ales 1!700!000


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E1er#ise /4/

Indicate how often income and ependiture statements are re2uired for companies



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'nit #tandard "o.10388 (age 1)

Sour#es of in#oe and e1penditure

Income and ependiture sources are as varied as the types of industries andbusinesses in operation. (eople too! derive their income and spend their money in allpossible ways. The ways of income are many and varied+ it is your tas/ to identifythese in the financial statements and be able to recognise the income from the costs.

C!SE STU,. /4': Tedd08s To0s In#

Teddy?s Toys has a shop in a shopping mall. They sell toys! educational devices andchildren?s party tric/s. Teddy! the proprietor! has had the following statement ofincome and ependiture prepared for ta purposes.

Tedd08s To0s In#Stateent of In#oe and E1penditureFor t)e period / Mar#) %&&% to %9 Fe$ruar0 %&&'

A

#ales 170!000=ost of #ales 70!000

pening #toc/ 7!000%dd+ (urchases 71!700


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E1er#ise /4%

Identify the sources of income and ependiture for Teddy?s Toys Inc.



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Case Stud0 /42: Ferr08s Fast Foods

erry?s fast foods is a vendor of burgers! fries! chic/en and cold drin/s. They catermainly to the lunchtime crowd in the office par/ where their outlet is situated.

,elow is a copy of erry?s ast oods Income #tatement prepared by theiraccountant for ta purposes.

Ferr08s Fast FoodsStateent of In#oe and E1penditureFor t)e period / Mar#) %&&% to %9 Fe$ruar0 %&&'

A#ales 370! 000%dd+ (urchases 80! 000

@ross (rofit );0! 000


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E1er#ise /4'

Identify the sources of income and ependiture for erry?s ast oods



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Case Stud0 /4: *is3 Insuran#e Consultants

Ais/ Insurance =onsultants cater to the short-term insurance mar/et. They sellpolicies for medical! motor and household insurance. They have an office in a city-centre office bloc/.

*is3 Insuran#e ConsultantsStateent of In#oe and E1penditureFor t)e period / Mar#) %&&% to %9 Fe$ruar0 %&&'

A=ommission Aeceived 370! 000


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'nit #tandard "o.10388 (age 1;

E1er#ise /42

irstly! identify the sources of income and ependiture for Ais/ Insurance =onsultantsand when you have identified these sources provide and eplanation of each of thesesources that you have identified.



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/4 Identif0 t)e Sour#es of In#oe and E1penditure



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'nit #tandard "o.10388 (age 1>

No( e1plain t)ese sour#es of In#oe and E1penditure



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'nit #tandard "o.10388 (age )0

Finan#ial -ia$ilit0

The concept of the going concern is an important accounting concept. inancial#tatements are usually prepared with the assumption that the enterprise is a goingconcern! without evidence to the contrary. This assumption implies that the businesswill continue its operations for the foreseeable future.

inancial viability implies that+ The concern will continue its operations in the foreseeable future.

The enterprise is sufficiently profitable or will be in the future to continue its

operations. There is inherent worth in continuing operations. This is related to the concept of

ongoing profits. It is important to note that sometimes companies do not ma/e aprofit every year F especially in the first few years of operations. %businessperson would eamine financial statements for their financial viabilityand also ta/e a view on the inherent worth. % full assessment or analysis of a

company does not 5ust loo/ at one year in isolation+ many years of operationalresults need to be eamined for a fundamental analysis.



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E1er#ise /4;

amine =ase #tudy 1.3 Teddy?s Toys! =ase #tudy 1.4 erry?s oods and =ase#tudy 1.7 Ais/ =onsultants. rom the evidence evaluate whether the businesses arecurrently financially viable. 6ou should loo/ at the profit or loss each statement showsand decide whether the company is viable based on the evidence.



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'nit #tandard "o.10388 (age ))

Self

Ta)e some time to reflect on what you have learnt in this module and assessyour )nowledge against the following pointers& *rite down your answers&(hould you not $e a$le to complete each of these statements+ go $ac) to yournotes and chec) on your understanding& ,ou can also discuss the answerswith a colleague&

o =an you eplain the purpose of an income and ependiture statementG

o =an you indicate how often these statements are re2uiredG

o =an you identify sources of income and ependitureG

o =an you eplain sources of income and ependitureG

o =an you evaluate financial statements in terms of financial viabilityG



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Suative !ssessent

1. Income is+

a $oney that the enterprise has made within the timeperiod under review

b $oney the enterprise collected within the timeperiod under review

c $oney the company had to spend within the timeperiod under review

d $oney the company will spend net year

e %ll of the above

). penditure is+

a =osts that will be incurred net year

b =osts that the company incurred during the timeperiod under review

c =osts the company was supposed to incur during the timeperiod underreview

d $oney the company actually spent during the timeperiod under review

e a and b

3. (rofit is

a The money a company made in total

b The money an enterprise has in its ban/ account

c The positive difference between income and ependiture

d The amount of money the company paid to creditors

e The money the company spent

4. % =ompany shows a loss when

a Income eceeds ependiture

b The company made too much money

c penditure eceeds income

d The company paid out too much

e The owner too/ too much money


In the following eercise carefully read each statement and decide which answeror statement best matches the 2uestion. Indicate this by mar/ing it onto the


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7. The purpose of an Income and penditure #tatement is

a To prove you have a company

b to clearly show how much money was made and how much was spent withina given time period

c to clearly show the amount of money the company owes is creditors

d to clearly show who owns a company

e to show what the company owns

9. It is better to

a Bave more income than ependiture

b Bave more income than assets

c Bave less income than costs

d Bave less income than debtors

e "ot ma/e money because you 5ust have to pay taes

;. %n individual is re2uired to produce inancial #tatements

a very year

b *hen as/ed to do so by an eternal party

c very si months

d very month

e "ever

8. % company is re2uired to produce inancial #tatements

a very year

b *hen as/ed to do so by an eternal party

c very si months

d very month

e "ever

>. (urchases mean

a %ll money spent

b The losses a company ma/es

c The cost of goods ac2uired for resale

d "et penditure

e %ll of the above



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10. The calculation for =ost of #ales is+

a pening #toc/


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Module /

!ns(er S)eet

48estion $nswer

+"+"

% , = E +"-"

$ 0 % E

+"/"$ 0 % E

+"2"$ 0 % E

+"#"$ 0 % E

+"*"$ 0 % E

+"3" $ 0 % E

+"9"$ 0 % E

+","$ 0 % E

+"+1"$ 0 % E



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'nit #tandard "o.10388 (age );

Spe#ifi# "ut#oe %

Analyse the $asic elements of a $alance sheet

Learning "ut#oes

,y the end of this module you should be able to perform! complete and understandthe following:

1. The purpose of a balance sheet is eplained and an indication is given of howoften a balance sheet is necessary for two case studies.

). % balance sheet is analysed and evaluated in terms of e2uity or financial networth.

3. The concept of an asset is eplained and the assets in a balance sheet areclassified in terms of fied and current assets.

4. The concept of a liability is eplained and the liabilities in a balance sheet areclassified in terms of long term and current liabilities.

7. ,alance sheets for an entity are compared and evaluated in terms ofperformance over two years and a decision is made based on evidence in thebalance sheet.



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2&1& The purpose of a $alance sheetThe purpose of a balance sheet is to reflect the financial position of a company orenterprise at a point in time. It is different from a statement of income C ependiturein that the balance sheet is as at a specific date! whereas the income statement is fora period of time. 'sually! the income statement will cover! say! a financial year! andthe corresponding balance will reflect the financial position on the last day of the yearunder review.

%s part of the %nnual inancial #tatements! companies are re2uired to produce,alance #heets every year. Individuals need not prepare balance sheets unlessre2uested to do so by a ban/ or the Aeceiver of Aevenue.

Coon Eleents of a $alan#e s)eet

% balance sheet is separated into two distinct parts+ The Capital Eplo0edsectionand the Eplo0ent of Capitalsection. ,ased on the basic accounting e2uation%DH< %ssets D wners 2uity H


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'nit #tandard "o.10388 (age )>

'mployment of Capital sectionThe term employment of capitalJ means what has been done with the money thatthe owners of the business have invested in the operations. This is the calculation ofnet %ssets less


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E1er#ise %4/

Indicate how often balance sheets are re2uired for the following two case studies+

Case Stud0 %4/4 "range Fruits Ltdrange ruits


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Case Stud0 %4% Sall0 S(ales#ally is an individual who wishes to lend money from ,ig #har/s ,an/. They havere2uested a balance sheet from her in order to assess her financial situation.

Indicate how often #ally would normally be re2uired to produce her balance sheet.



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2&2 The Analysis of $alance sheets,alance sheets are invaluable tools for the analysis of companies? net worth. ,yunderstanding and interpreting the clues within the balance sheet! the analyst canevaluate the value of the company! and ma/e decisions accordingly.

Group dis#ussion


In groups! discuss who would loo/ a balance sheet and why. $a/e notes for


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Case stud0 %4/ *u$08s S)oes CC

Auby?s #hoes sells shoes and footwear through a shop in a shopping mall. They areincorporated as a close corporation and have been trading for 8 years. Theaccountant has compiled the annual financial statements! which contains thefollowing balance sheet.*u$08s S)oes CCBalan#e S)eet as at %9 Fe$ruar0 %&&' *

Capital Eplo0ed#hare =apital 100


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E1er#ise %4%4

%nalyse the e2uity of Auby?s #hoes! indicating what the e2uity is comprised of



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2&3& The Concept of an Asset

%ssets are things that the business o"ns. They can ta/e the form of ied %ssets!which are the things used in the production of income! li/e office furniture ande2uipment! motor vehicles! tools and machinery! or software on the computers! or=urrent %ssets. =urrent assets are generally short-term collectibles and can be

li2uidated within a period of less than 3 months. Eebtors! cash in ban/! fied depositsand suchli/e! all comprise the company?s current assets.

"ote that particularly these days! fied assets need not be physical assets. Thespecial section of intellectual property laws allows that patents! copyrights! researchand development and suchli/e are regarded as intellectual assets! and as such donot have a physical presence! but do have a real value to the business.

%n important implication of ied %ssets is that the value of the asset is written downover a period of years through the calculation of the mechanism called dereciation.Eepreciation is charged to the income statement as an epense. or eample! theAeceiver of Aevenue allows that motor vehicles may be written down over a 4-yearperiod. That means that the value of the car is charged to the income statement overfour years. It is beyond the scope of this module to eamine the compleities ofdepreciation in detail! but it is important for you to /now that the value of ied %ssetsdecreases with time through the calculation of depreciation.

In #ummary+

ied %ssetso


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E1er#ise %4'

=lassify the following list of %ssets into ied and =urrent %ssets

!sset Ti#3 For Fi1ed!ssets

Ti#3 forCurrent!ssets

% =hair

=omputer #oftware

% Tractor

=ash at ,an/

)4-hour notice account

% Eebtor

% =omputer

% $otor Lehicle

% ,uilding

% Ees/

% iling =abinet



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'nit #tandard "o.10388 (age 3;

2&/& The Concept of a Lia$ility


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E1er#ise %4'4

=lassify the following items into either long-term or current liabilities

Lia$ilit0 Ti#3 for Long


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'nit #tandard "o.10388 (age 3>

Croo3ed !l8s To$a##onists Ltd

=roo/ed %l?s Tobacconists have three retail outlets in shopping malls in,loemfontein. They supply tobacco! cigarettes and smo/ing accessories tocustomers. =roo/ed %l?s was incorporated as a limited company in 1>>3.

amine the following balance sheets for =roo/ed %l?s Tobacconists 7! 400"et Aetained Income ))7! 400

Total Capital Eplo0ed %%+ &&

Eplo0ent "f Capitalied %ssets ))3! 000

urniture C ittings 10! 000ffice 2uipment 13! 000=omputer 2uipment )0! 000$otor Lehicles 180! 000

=urrent %ssets 7! 700=ash 7! 000%ccounts Aeceivable 700

=urrent


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Croo3ed !l8s To$a##onist8s LtdBalan#e S)eet as at %9 Fe$ruar0 %&&% *

Capital Eplo0ed#hare =apital 100

Aetained Income b&f ))7! 400%dd+ Aetained income from current year 70! 000

"et Aetained Income );7! 400


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Self


o plain the purpose of a balance sheet and indicate how often a balance

sheet is necessaryo %nalyse and evaluate a balance sheet in terms of e2uity or financial worth

o plain the concept of an asset and classify assets in terms of fied and

current assetso plain the concept of a liability and classify liabilities in terms of long-

term and current liabilitieso =ompare balance sheets and evaluate in terms of performance and ma/e

decisions based on evidence in the balance sheet



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Suative !ssessent

).1. *hich of the following is&are correctG

a % businessMs resources are termed its assets.

b


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).4. penditure which must be shown on a company?s Income statement

a Is made up of the personal costs of the owner

b Is made up of costs incurred in the ordinary course of business

c Is the same as last year

d Is not necessarily disclosable

e "one of the above

).7. inancial viability implies that

a 6ou would epect the enterprise to fail

b 6ou epect the company to continue as a going concern

c 6ou can see the company earns moneyd The company ma/es sufficient profits

e b and d

).9. The purpose of a balance sheet

a is to hide money from the Aeceiver of Aevenue

b to prove the company ma/es a profit

c to reflect the financial position of a company at a point in timed a and c

e %ll of the above

).;. % company is re2uired to produce a balance sheet

a very month

b %ll the time

c very 6eard *henever it is as/ed to

e a and d

).8. The ,asic %ccounting 2uation is

a %D H ?t0@ LtdIn#oe Stateent for t)e .ear Ended %9 Fe$ruar0 %&&%Item No Item Note $ %%%&s1 Turnover 1 100!8;9) ther perating Income ) 1)0

3 "et perating Income 100! >>94 penditure 3 70! >>9

7 (rofit from perations 70! 0009 traordinary Item 4 4! 000Income from #ubsidiary 7 170! 000

; "et arnings before Taation )04! 0008 =ompany Taation 9 ;7! 000

> "et (rofit available for Eistribution 1)>! 000

Notes to t)e in#oe stateentNote /TurnoverTurnover is derived from the ordinary operations of the enterprise. This consists ofthe sale and supply of chic/en and chic/en by-products to retail outlets in the ma5or

metropolitan areas of #outh %frica.

Note %Interest $eceivedInterest received is derived from cash balances held at ban/ for the year underreview

Note 'E'enditurependiture is made up of ordinary ependiture incurred in the course of operations.

Note 2E'traordinary ItemEuring the year under review! the company disposed of land! buildings and farme2uipment ma/ing up arm 4)! =oc/erel Erive! Bennops Aiver. The company hasdecided to rationalise its holdings in farmland and will continue to do so in theforeseeable future.



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Note Income from SubsidiaryBarry?s ggs has a controlling interest in it?s subsidiary! *al/y-Tal/ies (ty


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Cash low and li0uidityThe final statement in the %nnual inancial #tatements is the cash flow statement.or reference sa/es! an old name for this was the #ource and %pplication of undswhich lin/s up with the eercises that you did in #1 of this module. The cash flowstatement is aimed at showing interested parties where money came from and whereit went. *hen a cash flow statement is done! non-cash items! such as thedepreciation epense! are removed from the calculation to reflect the movement ofcash through the enterprise.

The concept of li2uidity can be understood as such+ if! for eample! your family hasthree houses! but no money in the ban/! your family might suffer a cash flowproblem. Technically spea/ing! the family is wealthy+ it has a net asset value of thesum of the values of the houses assuming there are no liability claims over it. ,utwith no money in the ban/! li2uidity is a problem! as all the money the family has istied up in the houses. *hen you have cash in the ban/! you are said to be li2uid.*hen you don?t have cash in the ban/! but your money is tied up in assets! you aresaid to be illi2uid. The concept of current assets in #) refers+ current assets are

easily li2uidated within three months. That means you epect the cash within ashort period of time.

#o! the concept of cash flow in terms of li2uidity is how much money is coming intoand going out of your ban/ account.



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Self


%nalyse the financial strengths and wea/nesses of an entity and suggest

ways to improve income and reduce costs plain the concept of the cost to income ratio and suggest how to improve

the ratio plain the relationship between turnover! income! revenue! sales&earnings

and profit plain the concept of cash flow in terms of li2uidity



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Suative !ssessent

4.1. 6ou can improve a company?s income bya #pending lessb %dvertising and $ar/etingc =utting =osts

d Aeducing Eebte "one of the above

4.). 6ou can reduce costs bya #tarting a mar/eting campaignb =ollecting Eebts outstandingc pening a new branchd "egotiating Eiscountse b and e

4.3. The cost to income ratioa Is an indication of company profitabilityb Belps reduce debtsc #hows when financial statements are dued Tests current assetse "one of the above

4.4. The sales&earnings ratioa Includes costsb Includes profitsc Is an indication of profitability

d a and ce a and b

4.7. The term =ash flow refers toa The sales of goods and servicesb The amount of money the company madec Bow much money comes in and goes out of the companyd "one of the abovee %ll of the above


In the following eercise carefully read each statement and decide which answeror statement best matches the 2uestion. Indicate this by mar/ing it onto the


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Module 2

!ns(er S)eet

48estion $nswer

2"+"

% , = E 2"-"

$ 0 % E

2"/"$ 0 % E

2"2"$ 0 % E

2"#"$ 0 % E

10388 learner guide

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