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Some Financial Ratios Used in BRR

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Financial Condition of Owner (FCO) Answers the question: What is owners capacity to put in more money when needed by the business? Personal networth will exclude: Investment in the borrowing enterprise Investment in the borrowing enterprise Personal assets mortgaged or used as Personal assets mortgaged or used as collateral for loan/s collateral for loan/s

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FCO for Corporations With more than 1 major stockholder, get the total networth of all the major stockholders. With more than 1 major stockholder, get the total networth of all the major stockholders. The guidelines for single proprietorships shall thereafter apply. The guidelines for single proprietorships shall thereafter apply. Divide the net networth by the firms total loans payable. Divide the net networth by the firms total loans payable.

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Exercises to Compute FCO For single proprietor Mr. Santos: Personal networth P4,000,000 Personal networth P4,000,000 2 vehicles mortgaged to SB P 850,000 2 vehicles mortgaged to SB P 850,000 Investment in enterprise P1,250,000 Investment in enterprise P1,250,000 Total Liabilities P 750,000 Total Liabilities P 750,000 Compute for the Financial Condition of the Owner. Compute for the Financial Condition of the Owner.

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Answer: Personal NW – Mortgaged Assets – Personal NW – Mortgaged Assets – Investment in the Enterprise divided by Investment in the Enterprise divided by total loans payable = total loans payable = 4,000,000 – 850,000 – 1,250,000 4,000,000 – 850,000 – 1,250,000 750,000 750,000 = 1,900,000 divided by 750,000 = 1,900,000 divided by 750,000 = 2.53 = 2.53 = Score of 4 points = Score of 4 points

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Exercise: FCO for a Corporation. NameNetworth% Assets with Mortgage Inv. in Business Abner 1.500 Mn 5500,00050,000 Dario 2.000 Mn 30750,000300,000 Harold.500 Mn.500 Mn1-10,000 Robert 2.000 Mn 30500,000300,000 Rowena 34-340,000

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Additional Information: Personal Liabilities: Personal Liabilities: Dario - P750,000 Dario - P750,000 Robert – P500,000 Robert – P500,000 Rowena - none Rowena - none Amount of Loan Applied w/SB: P 1Mn

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Answers to the Exercise: 1. Major stockholders: Dario (30%), Robert (30%) & Rowena (34%): Rowena (34%): 2. Computation of individual networth for FCO : Dario: 2 Mn – 750,000 – 300,000 = 950,000 Dario: 2 Mn – 750,000 – 300,000 = 950,000 Robert: 2Mn – 500,000 – 300,000 =1,200,000 Robert: 2Mn – 500,000 – 300,000 =1,200,000 Rowena: 2 Mn – 340,000 = 1,660,000 Rowena: 2 Mn – 340,000 = 1,660,000 Total 3,810,000 Total 3,810,000 3. FCO for the corporation = 3,810,000 divided by the sum total of the liabilities of 3,810,000 divided by the sum total of the liabilities of the firm (1,000,000) = 3.81 the firm (1,000,000) = 3.81 Score: 4 points Score: 4 points

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Ratios to Determine Financial Condition Expressions of relationships between items in the F/S. Expressions of relationships between items in the F/S. When properly interpreted, are useful indicators of financial condition and performance When properly interpreted, are useful indicators of financial condition and performance Could indicate the liquidity, solvency, stability or profitability of a business. Could indicate the liquidity, solvency, stability or profitability of a business.

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Some Ratios used in BRR Current Ratio: Current Assets Current Liabilities Current Liabilities Excl. long overdue ARs and obsolete Inv. Excl. long overdue ARs and obsolete Inv. Debt-Equity Ratio: Debt (TL/TA) Equity (TC/TA) Equity (TC/TA) Debt + Equity is always equal to 100%

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Some Ratios Used in BRR Debt Servicing Capacity: Debt Servicing Capacity: Net Income – Drawings/Dividends+ Interest + Depreciation divided by the principal and interest amortizations of LT and ST loans for one year Net Income – Drawings/Dividends+ Interest + Depreciation divided by the principal and interest amortizations of LT and ST loans for one year Accounts Receivable Level: Accounts Receivable Level: AR/Sales x 360 days = AR level AR/Sales x 360 days = AR level

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Exercise: Santos Enterprise Assets Cash 150,000 AR* 200,000 Inventory 100,000 Other Assets 550,000 Total 1,000,000 *P20,000 is long overdue Liabilities & Capital Accts. Pay. 75,000 Notes Payable 250,000 Capital 6 675,000 Total 1,000,000

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Additional Information Sales P2,500,000 Net Income P450,000 Interest Expense P50,000 Depreciation P50,000 Business Location Baguio City Family of three (has 1 child)

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Compute the ratios and the equivalent scores under BRR: Current Ratio Current Ratio Debt-Equity Ratio Debt-Equity Ratio Debt Servicing Capacity Debt Servicing Capacity Accounts Receivable Level Accounts Receivable Level

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Computation of Current Ratio: Cash 150,000 AR* (200,000-20,000) 180,000 Inventory 100,000 Total Current Assets 430,000 Total Current Liabilities 325,000 CR = 430,000 = 1.32 CR = 430,000 = 1.32 325,000 325,000 Score = 3 points Score = 3 points

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Computation of Debt Equity Ratio: Total Liabilities divided by Total Capital Total Assets Total Assets = 325,000 divided by 675,000 = 325,000 divided by 675,000 1,000,000 1,000,000 1,000,000 1,000,000 = 32.5:67.5 = 32.5:67.5 Score = 7.5 Score = 7.5

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Computation of DSC DSC = NI – Drawings/Dividends+Int.+Depn Prin. & Int. Amort. (1 yr) LT & ST Loans Prin. & Int. Amort. (1 yr) LT & ST Loans DSC = 450,000-200,000+50,000+50,000 250,000+50,000 250,000+50,000 = 350,000/300,000 = 350,000/300,000 = 1.16 Score = 10 pts. = 1.16 Score = 10 pts.

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AR level AR level 2.5Mn divided by 360 days = 6,944.44 2.5Mn divided by 360 days = 6,944.44 200,000 divided by 6,944.44 = 29 days 200,000 divided by 6,944.44 = 29 days Score = 5 points Score = 5 points 200,000/2,500,000 x 360 = 28.8 or 29 200,000/2,500,000 x 360 = 28.8 or 29 days days Score = 5 points Score = 5 points

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