Nursery Management

Understanding and Managing Finance

Bulletin 7

Study Notes

In the seventh study session the following topics are covered

  • Analysing Accounts
  • Profitability, Efficiency and Liquidity
  • The Different Types of Ratio
Advice for Students

This session leads into analysis by looking at differences from year to year on a Balance Sheet. The purpose here is to ensure that you are familiar with the ideas, and that when ratios are introduced later on, you can refer back to the individual headings to interpret what the ratios mean. Three areas of focus are introduced and explored: Profitability, Liquidity and Efficiency and the ratios in each of the three areas.

Reading

I would suggest that you should begin the reading this session, by re-reading the following sections:
Balance Sheet:Reading Mc Laney and Atrill, 2nd Edition, pages 51-53.
Profit and Loss Account:Reading Mc Laney and Atrill, 2nd Edition pages 87-90.
Cash-Flow StatementReading Mc Laney and Atrill, 2nd Edition pages 182-185.

or

Balance Sheet:Reading Mc Laney and Atrill, 3rd Edition, pages 55-56.
Profit and Loss Account:Reading Mc Laney and Atrill, 3rd Edition pages 92-97.
Cash-Flow StatementReading Mc Laney and Atrill, 3rd Edition pages 193-197.

The first step in analysing financial statements is to look at the statements themselves and work out what it is that they are telling us; very often the ratios that we calculate can do no more than merely summarise what we know already.

Calculating Ratios Reading Mc Laney and Atrill, 2nd Edition, pages 195-237.

or

  • Calculating Ratios Reading Mc Laney and Atrill, 3rd Edition, pages 205-251
The first section provides the background rationale for why we calculate ratios. The next sections give instructions for calculating a number of ratios.

Guided Learning Activities

You need to be able to perform the following individual calculations:
Profitability:Net profit Margin,
Gross profit margin
Efficiency:Average Stock Turnover,
Average settlement period for debtors,
Average settlement period for creditors
Liquidity:Current Ratio,
Acid Test Ratio

Jane Simmons 1/09/04