1. Financial Statements القوائم المالية F.S Last step (business cycle) The focus of the F. report Five major accounts The results of financing, investing, and conducting profitable operations.

2. Financial Management PHCL-420 Male + Female Campus

3. (1)Financing (2)Investment (1)Assets (3) Conducting Profitable Operations (4)Revenue (5)Expenses (1)Owner (3) Owner Equity (2)Creditors (2)Liabilities Financial statements R Financial statements Reporting – last step in B cycle

4. ASSETS: Valuable resources which are owned or controlled by the business and which were acquired at a measurable costs Categorized in to either 1.Current: those will be sold, consumed or converted to cash within the current operating cycle of the business. 2.Non current (fixed) asset: those under normal condition are not sold, consumed or converted to cash within the normal operating cycle of the business = purchase for use in the business. Computers, Instruments, building, cars. Accounts listed in order of their liquidity for examples:

5. 1.Current appears in the following order: Cash - Account receivable- Inventories - Prepaid expenses - Short term investment. Cash is most liquid assets (coin, check or any thing that bank will accept as deposit). Account receivable = amount owed to the pharmacy by its customers or third party as a result of ordinary extension of credit. Inventories are two types: merchandise inventories = purchased for resale: It is the largest and most important. Supplies inventory = purchased for use (bags, ribbons and labels...) - When only inventory is mentioned it's the merchandise? Short term investment = excess cash invested temporary for that particular year. Prepaid expenses = any thing that required to be pre paid in advanced (rent – down payment,…)

6. Liabilities : Defined as claims against the assets of the business (business debts). It arises from purchasing goods or services or from borrowing money for financing the business operation. Current liabilities: dept that will come due during the current operating cycle of the business such as. Account payable = debt arise from purchasing of goods or services on credit and for pharmacy mostly from purchasing inventory. Short term notes Accrued expenses Current portion of long term dept Non current liabilities: debt that come due after the current operating cycle of the business: cars loan paid off over 5 years

7. Owner Equity Net worth = capital: amount left over after liabilities subtracted from assets. Arise from = 1.Invested capital as a result of the transfer of cash from owner account in to business account or cash withdrawal. 2.Retained earnings (profit (or loss) that the business had made during its year of operation) Because Owner equity considered as obligation on the business owned to the owner it included under liability. Accounting equation Assets = Liabilities + Owner equity

8. ASSETS 14311430 Current - Cash - Account receivable - Inventory - Prepaid expenses - S.T investment 150,000 75,000 450,000 25,000 50,000 Total Current750,000 Non Current (Fixed) Furniture& Equipments150,000 Total Non current 150,00 Total Assets900,000 29/07/14318Professor T najjar - PHCL-420

9. LIABILITIES14301431 Current Wholesalers Delayed salaries Current portion 75,000 10,000 15,000 Total current100,000 Non current -Loans50,000 Total non current50,000 Total Liabilities150,000 Owner Equity -Starting Capital -Owner Invest. -Owner withdrawal -Returned (E/L) 350,000 300,000 (100,000) 200,00 -Total O.E750,000 Total L & O.E900,000 29/07/14319Professor T najjar - PHCL-420

10. Balance Sheet (F.P.S) Balance Sheet (F.P.S) Financial status of the business at a given point in time Shows what a business owns (its assets), what it owes (its liabilities), and how much left after (owner equity). Acc. Eq. Assets = Liabilities + owner equity Decrease or increase in A. must be offset with corresponding decrease or increase in either L. O.E or the sum of the two. Make decision: For example a lot of assets … need to expand Balance Sheet (F.P.S) Balance Sheet (F.P.S) Financial status of the business at a given point in time Shows what a business owns (its assets), what it owes (its liabilities), and how much left after (owner equity). Acc. Eq. Assets = Liabilities + owner equity Decrease or increase in A. must be offset with corresponding decrease or increase in either L. O.E or the sum of the two. Make decision: For example a lot of assets … need to expand 29/07/1431Professor T najjar - PHCL-42010

11. Shows the values of assets, liabilities, and shareholders’ equity. Snapshot where it does not reveal much about what caused these values to change over the course of the year including (R. earning). Prepared at end of a fiscal year or at any point in time (e.g., at the end of a month or a quarter). Total assets must equal the total liabilities plus shareholders’ equity at all times. Profitable operations …. increases assets …. increase in shareholders’ equity Can be reported as a statement. Shows the values of assets, liabilities, and shareholders’ equity. Snapshot where it does not reveal much about what caused these values to change over the course of the year including (R. earning). Prepared at end of a fiscal year or at any point in time (e.g., at the end of a month or a quarter). Total assets must equal the total liabilities plus shareholders’ equity at all times. Profitable operations …. increases assets …. increase in shareholders’ equity Can be reported as a statement. 29/07/1431Professor T najjar - PHCL-42011

12. Revenue Revenues refer to all sales both cash and credit of merchandise normally sold by business. The sale of a car is not considered revenue for a pharmacy because its not normal part of its business. Several sales accounts one for each of the inventory departments.

13. Expenses It is the cost necessary for the business to make sales or earn revenue. COGS (next slide) Depreciation: Defined as decline useful value of the asset due to wear and tear. Real cost should be included to reduce tax Remind owner to replenish the capital that being used Cash in the pocket which should not be used and remain in the capital account Ways of calculation : linear method / non linear methods Pharmacy own computer worth SR 9,000 with useful life of 3 years and salvage prices of zero. Linear method: 12000/3 = SR 4,000 (each year subtracted from the assets) Non linear method: 12000x 3/6=6000, 12,000x 2/6=SR 4000, and 12,000x1/6=SR 2000 during the first, second and third year respectively. Other expenses: salaries, benefits, utilities, supplies, rent, insurance, taxis, zakat, ……… Zakah calculated: Owner equity – fixed assets or Or current assets – current liabilities.

14. COGS Expenses: Costs necessary for the business to make sales or earn revenue. Major E (pharmacies ~ 60-70% of expenses). Merchandise when purchased is inventory (asset), and when sold its expenses (COGS) Indirect E calculated from three Two methods: Periodic method: BI+ Purchase- EI= COGS BI+ Purchase = GAFS Perpetual method: computer records for all stoked items (problems arises when prices are not the same during the year). I.S. of service firms such clinics, consultant (N.A). Next to sale …. Variable expenses ….. Gross Margin (G.M)=Sale - COGS Contribution M. (C.M) = (all variable expenses) COGS Expenses: Costs necessary for the business to make sales or earn revenue. Major E (pharmacies ~ 60-70% of expenses). Merchandise when purchased is inventory (asset), and when sold its expenses (COGS) Indirect E calculated from three Two methods: Periodic method: BI+ Purchase- EI= COGS BI+ Purchase = GAFS Perpetual method: computer records for all stoked items (problems arises when prices are not the same during the year). I.S. of service firms such clinics, consultant (N.A). Next to sale …. Variable expenses ….. Gross Margin (G.M)=Sale - COGS Contribution M. (C.M) = (all variable expenses) 29/07/1431Professor T najjar - PHCL-42014

15. I.S 29/07/143115 Revenue1,000,000 COGS675,000 GM325,000 Expenses -Salaries -Benefits -Allowances -Utilities -Housekeeping -Advertisement -Rent -Depreciation 350,000 100,000 60,000 25,000 20,000 45,000 60,000 50,000 Total before zakah710,000 Net income290,000 Professor T najjar - PHCL-420

16. I.S Net income (loss): Revenue - all expenses (including COGS) GM-operating expenses Net income is added to owner equity (later.. preparation) Managerial accounting Controllable / Non controllable Fixed (not changed during the year) versus variable In general: Business cycle (transactions) are fit in to five major accounts (assets, liabilities, owner equity, revenue and expenses) Several individual accounts under each: depends on the type of business and the management requirements. I.S Net income (loss): Revenue - all expenses (including COGS) GM-operating expenses Net income is added to owner equity (later.. preparation) Managerial accounting Controllable / Non controllable Fixed (not changed during the year) versus variable In general: Business cycle (transactions) are fit in to five major accounts (assets, liabilities, owner equity, revenue and expenses) Several individual accounts under each: depends on the type of business and the management requirements. 29/07/1431Professor T najjar - PHCL-42016

17. Income - expenses = N.I, N. profit, earnings. Dynamic document provides information about money coming into an organization (income) and money necessary to obtain that income (expenses). Tells what happens to an organization over a period of time. Shorter periods (quarters, months, weeks, or even over a single day). Income - expenses = N.I, N. profit, earnings. Dynamic document provides information about money coming into an organization (income) and money necessary to obtain that income (expenses). Tells what happens to an organization over a period of time. Shorter periods (quarters, months, weeks, or even over a single day). 29/07/1431Professor T najjar - PHCL-42017

18. Inaccurate net income observed when the revenue and expenses are not recognized in the proper accounting period. For example ….. Solve d with either the cash or accrual methods. Cash method: Revenues and expenses recognized when cash received, or payment done respectively. Accrual method: Cash and credit sale recognized as revenue at the time the sale is made, not necessarily when payment is received. Hence, expenses are recognized either in the same accounting period as the associated revenue or in the period when the associated good or service is used. Gives accurate measurement of the net income. Inaccurate net income observed when the revenue and expenses are not recognized in the proper accounting period. For example ….. Solve d with either the cash or accrual methods. Cash method: Revenues and expenses recognized when cash received, or payment done respectively. Accrual method: Cash and credit sale recognized as revenue at the time the sale is made, not necessarily when payment is received. Hence, expenses are recognized either in the same accounting period as the associated revenue or in the period when the associated good or service is used. Gives accurate measurement of the net income. 29/07/1431Professor T najjar - PHCL-42018

19. In general F.S is prepared: Book keeper Designed & used: managerial accounting Help in D.M Provide information to DM Report for DM results of previous decision Keep track of wide range of financial items (cash,.. ) Efficient use increase in competitive markets Pharmacies like others prepared two major Financial position statement (balance sheet) Income statement. Why: provides essential information for financial management and required by the regulations. In general F.S is prepared: Book keeper Designed & used: managerial accounting Help in D.M Provide information to DM Report for DM results of previous decision Keep track of wide range of financial items (cash,.. ) Efficient use increase in competitive markets Pharmacies like others prepared two major Financial position statement (balance sheet) Income statement. Why: provides essential information for financial management and required by the regulations. 29/07/1431Professor T najjar - PHCL-42019

20. F.S PREPARATION Transaction tracking 1.Recording 2.Reporting 29/07/1431Professor T najjar - PHCL-42020

21. F.S Preparation F.S Preparation Regular records Two books: a)Journal for daily recording of transactions. b)Ledger for posting of journal records on a weekly or monthly basis. Ledger is a list of all accounts (indexed) in the general ledger, where each is given a serial number and whether major or branch account. Prepared at the end of the year: a)Trial balance and b)Financial statement. F.S Preparation F.S Preparation Regular records Two books: a)Journal for daily recording of transactions. b)Ledger for posting of journal records on a weekly or monthly basis. Ledger is a list of all accounts (indexed) in the general ledger, where each is given a serial number and whether major or branch account. Prepared at the end of the year: a)Trial balance and b)Financial statement. 29/07/1431Professor T najjar - PHCL-42021

22. Transaction Transaction Any business activity in which goods, or services, or money are provided by one person to another which could be either: 1.Cash and/or 2.Credit. Such event has economic impact on the business Sale of merchandise, purchase of inventory, and payment of salaries, and utilities. Before F.S preparation the followings should occur: 1.Analysis of transactions 2.Journal recording 3.Ledger posting 4.Trial balance preparation Transaction Transaction Any business activity in which goods, or services, or money are provided by one person to another which could be either: 1.Cash and/or 2.Credit. Such event has economic impact on the business Sale of merchandise, purchase of inventory, and payment of salaries, and utilities. Before F.S preparation the followings should occur: 1.Analysis of transactions 2.Journal recording 3.Ledger posting 4.Trial balance preparation 29/07/1431Professor T najjar - PHCL-42022

23. Case Study Business is usually performs thousands of transactions. Because of that a system (Journal, Ledger) is required to keep records of these transactions. The case Day 1-1-2014: owner invested SR 20,000 Day 1-1-2014: owner invested SR 20,000 Day 10-1-2000: pharmacy service worth SR 1500 (1000 paid cash and 500 later). Day 10-1-2000: pharmacy service worth SR 1500 (1000 paid cash and 500 later). Day 15-1-2000 the owner withdraws SR 2000. Day 15-1-2000 the owner withdraws SR 2000. Day 20-1-2000: pharmacy pay SR 4000 the rent of January. Day 20-1-2000: pharmacy pay SR 4000 the rent of January. Day 29-1-2000 received phone expenses bills of SR 350 Day 29-1-2000 received phone expenses bills of SR 350 Case Study Business is usually performs thousands of transactions. Because of that a system (Journal, Ledger) is required to keep records of these transactions. The case Day 1-1-2014: owner invested SR 20,000 Day 1-1-2014: owner invested SR 20,000 Day 10-1-2000: pharmacy service worth SR 1500 (1000 paid cash and 500 later). Day 10-1-2000: pharmacy service worth SR 1500 (1000 paid cash and 500 later). Day 15-1-2000 the owner withdraws SR 2000. Day 15-1-2000 the owner withdraws SR 2000. Day 20-1-2000: pharmacy pay SR 4000 the rent of January. Day 20-1-2000: pharmacy pay SR 4000 the rent of January. Day 29-1-2000 received phone expenses bills of SR 350 Day 29-1-2000 received phone expenses bills of SR 350 29/07/1431Professor T najjar - PHCL-42023

24. Recording: Journal (daily) Ledger (weekly or monthly) Record that takes many physical forms (i.e. loose leaf folders – 2) notebook - 3) computer files) 1.Trial balance preparation 2.Financial statements preparation.

25. 1.Journal Recording Record all transactions on daily basis: i.e. chronological listing Transaction: date, definition, accounts affected, amount of effect / debit or credit. Transactions are belonged to the five major accounts Separate account for every: assets, liability, capital, revenue and expenses. Asset accounts: Cash- account receivable-short term investment inventory – and prepaid expenses, as well as the fixed assets. The system of accounts depends on: 1.Type of business as well as on the 2.Level of management The accounts name and their serial numbers are listed on special table as reference for each business. 1.Journal Recording Record all transactions on daily basis: i.e. chronological listing Transaction: date, definition, accounts affected, amount of effect / debit or credit. Transactions are belonged to the five major accounts Separate account for every: assets, liability, capital, revenue and expenses. Asset accounts: Cash- account receivable-short term investment inventory – and prepaid expenses, as well as the fixed assets. The system of accounts depends on: 1.Type of business as well as on the 2.Level of management The accounts name and their serial numbers are listed on special table as reference for each business. 29/07/1431Professor T najjar - PHCL-42025

26. Concepts Transaction recorded in a way where always assets equal the sum of liabilities and owner equity. The recording system (called: debits and credits system) Rules Debits records (left side) = debit the receiver 1. An increase in the assets 2. Decrease in liabilities or owner equity 3. Expenses transactions Credits records (Wright side) = credit the giver 1. Decrease in assets 2. Increase in liabilities or owner equity 3. Revenues transactions C givers and D receivers Concepts Transaction recorded in a way where always assets equal the sum of liabilities and owner equity. The recording system (called: debits and credits system) Rules Debits records (left side) = debit the receiver 1. An increase in the assets 2. Decrease in liabilities or owner equity 3. Expenses transactions Credits records (Wright side) = credit the giver 1. Decrease in assets 2. Increase in liabilities or owner equity 3. Revenues transactions C givers and D receivers 29/07/1431Professor T najjar - PHCL-42026

27. F.S.R Each transaction must be recorded separately After each: Assets = Liabilities + Owner equity. dual entry Each transaction will affect at least two accounts (dual entry accounting). For example: Owner invested $ 1000 Accounts affected (cash & capital)..two accounts. Services worth $ 500 (200 cash and 300 credit) Accounts affected (cash, account receivable and revenue).. three accounts. Each transaction must be recorded in the journal such that debits and credits equal F.S.R Each transaction must be recorded separately After each: Assets = Liabilities + Owner equity. dual entry Each transaction will affect at least two accounts (dual entry accounting). For example: Owner invested $ 1000 Accounts affected (cash & capital)..two accounts. Services worth $ 500 (200 cash and 300 credit) Accounts affected (cash, account receivable and revenue).. three accounts. Each transaction must be recorded in the journal such that debits and credits equal 29/07/1431Professor T najjar - PHCL-42027

28. NoDate/explanationAcc. affectedDebitCredit 1.1/1/2014 - Owner Investment Cash20,000 Capital20,000 2.10/1/2014 - service provided to client Cash10,000 Acc. receivable2500 Revenue12,500 3.15/1/2014 – owner withdrawal Owner W2000 Cash2000 4.20/1/2014 January rent J. Rent4000 Cash4000 5.29/1/2014 Tel. BillPhone expenses350 Acc. payable350 Total24,250

29. 2. Ledger Posting Main book Records all transactions that affected that particular account as it posted on weekly or monthly basis from the Journal. Contains separate page or space for each account Appear in the same order as in the financial statements Assets (current and non current), Liabilities (current and non current), Capital (owner equity), Revenue and Expenses. Useful for trial balance Posting process 2. Ledger Posting Main book Records all transactions that affected that particular account as it posted on weekly or monthly basis from the Journal. Contains separate page or space for each account Appear in the same order as in the financial statements Assets (current and non current), Liabilities (current and non current), Capital (owner equity), Revenue and Expenses. Useful for trial balance Posting process 29/07/1431Professor T najjar - PHCL-42029

30. Page Number Acc. Name Account Name Debit Credit 1. Cash Accounts 20,000- 10,000- -2000 -4000 24,000 20. Account receivable 2500- 2500 25. Account Payable -350 350 30. Capital -20,000 20,000 35. Owner withdrawals -2000 2000 41. Revenue -12500 12500 52. Phone expenses 350- 350 55. Rent -4000 4000

31. Entries Adjusting Transactions begin in one year and not concluded until the 2 nd year. Required for the following three types of transactions: 1.Fixed assets ………. depreciation 2.Prepaid expenses Separate account (assets) 3.Accrued expenses …..Separate account liabilities Closing Income statement accounts accumulate transactions for a set of period usually one year then become zero (nominal). B.S accounts accumulate transactions over the life of business (ending balance become next year beginning balance). The closing process has two effects 1.Net income in to capital account 2.Establish zero balances in each of the income statement accounts Entries Adjusting Transactions begin in one year and not concluded until the 2 nd year. Required for the following three types of transactions: 1.Fixed assets ………. depreciation 2.Prepaid expenses Separate account (assets) 3.Accrued expenses …..Separate account liabilities Closing Income statement accounts accumulate transactions for a set of period usually one year then become zero (nominal). B.S accounts accumulate transactions over the life of business (ending balance become next year beginning balance). The closing process has two effects 1.Net income in to capital account 2.Establish zero balances in each of the income statement accounts 29/07/1431Professor T najjar - PHCL-42031

32. 3. Trial Balance 3 rd step (i.e. end of the year) All transactions have been posted to the ledger. List of accounts as appear in the ledger (debits or credits balance). Two reasons: 1.To check for errors When sum of debits and credits columns are not equal Equal sum does not give conclusive proof 2.Put data in convenient form for preparation F.S. F.S is prepared using trial balance accounts: 3. Trial Balance 3 rd step (i.e. end of the year) All transactions have been posted to the ledger. List of accounts as appear in the ledger (debits or credits balance). Two reasons: 1.To check for errors When sum of debits and credits columns are not equal Equal sum does not give conclusive proof 2.Put data in convenient form for preparation F.S. F.S is prepared using trial balance accounts: 29/07/1431Professor T najjar - PHCL-42032

33. Trial Balance Account nameDebitCredit Cash Account receivable Account payable Capital Withdrawal Revenue Rent expenses Phone expenses 24,000 2500 - 2000 - 4000 350 - 350 20,000 - 12500 - Balance32,850 29/07/143133Professor T najjar - PHCL-420

34. Income Statement Revenue 12,500 ExpensesPhone350 Rent4,000 Total4,350 Net Income8,150

35. BALANCE SHEET Assets Cash 24,000 Account receivable 2500 Total assets26500 Liabilities Account payable350 Total liabilities350 Owner Equity Capital 20,000 O Withdrawals(2,000) R. earning 8,150 Total26,150 Total (L. + O.E) 26,500

36. F INANCIAL R ATIOS 29/07/143136Professor T najjar - PHCL-420

37. F. Ratios Organizations, investors, creditors, individuals Financial performance. Most ratios; from B.S and I. Statement Reflect Profitability Liquidity: how much cash is available to pay the bills (how well the organization is converting its accounts receivable to cash). Turn over Not used in isolation from other F. reports. Validity from that of the F.S (audit) Mindful of their limitations F. Ratios Organizations, investors, creditors, individuals Financial performance. Most ratios; from B.S and I. Statement Reflect Profitability Liquidity: how much cash is available to pay the bills (how well the organization is converting its accounts receivable to cash). Turn over Not used in isolation from other F. reports. Validity from that of the F.S (audit) Mindful of their limitations 29/07/1431Professor T najjar - PHCL-42037

38. Understand Limitations 1.Compared to a reference point (i.e. historical values of the same company). 2.Keep in mind seasonal factors that may distort the ratio. 3.Understand how the values used in calculating the ratios were obtained... Understand Limitations 1.Compared to a reference point (i.e. historical values of the same company). 2.Keep in mind seasonal factors that may distort the ratio. 3.Understand how the values used in calculating the ratios were obtained... 29/07/1431Professor T najjar - PHCL-42038

39. Profitability Measures overall F. success = level of success in generating profits. Most common 1.Gross profit margin (GPM) G.P.M= (Sales — GOGS) /total sales Company’s ability to generate gross profits. Higher desirable (funds availability for other Exp.). 2.Net profit margin (NPM) Profitability Measures overall F. success = level of success in generating profits. Most common 1.Gross profit margin (GPM) G.P.M= (Sales — GOGS) /total sales Company’s ability to generate gross profits. Higher desirable (funds availability for other Exp.). 2.Net profit margin (NPM) 29/07/1431Professor T najjar - PHCL-42039

40. Profitability 2)N.P.M = Net income (after taxes) / total sales Fraction net profit generated for every dollar sales How well it manages its operating expenses. Compare performance Both from I.S 3) 3) Return on assets = net income / average total assets Ability to generate profits using the assets. Reflect effective use of assets (profit sources) Profitability 2)N.P.M = Net income (after taxes) / total sales Fraction net profit generated for every dollar sales How well it manages its operating expenses. Compare performance Both from I.S 3) 3) Return on assets = net income / average total assets Ability to generate profits using the assets. Reflect effective use of assets (profit sources) 29/07/1431Professor T najjar - PHCL-42040

41. Profitability 4) Return on equity = net income ÷ average owner’s equity Known = ROI How well it can make profits from funds provided by owners or investors. High is desirable because investors are interested in maximizing their profits. Gauge manager’s performance. Better decision lead to higher ROE, ROA Profitability 4) Return on equity = net income ÷ average owner’s equity Known = ROI How well it can make profits from funds provided by owners or investors. High is desirable because investors are interested in maximizing their profits. Gauge manager’s performance. Better decision lead to higher ROE, ROA 29/07/1431Professor T najjar - PHCL-42041

42. Liquidity Ability to meet short-term F. obligations. Popular = current ratio & quick ratio. C.R = C. assets / C. liabilities. High = fewer risks in meeting F. obligations. Case of high cash and low debit High are desirable > 5.0 is too high not investing for growth <2.0 may result in bankruptcy Liquidity Ability to meet short-term F. obligations. Popular = current ratio & quick ratio. C.R = C. assets / C. liabilities. High = fewer risks in meeting F. obligations. Case of high cash and low debit High are desirable > 5.0 is too high not investing for growth <2.0 may result in bankruptcy 29/07/1431Professor T najjar - PHCL-42042

43. Quick Ratio Q.R = acid test Quick ratio = (C. assets - inventories - prepaid expenses) ÷ C. liabilities Assets that are easily converted to cash Inventories and prepaid expenses are not included in calculation Better picture of liquidity and ability to meet F. obligations. Quick Ratio Q.R = acid test Quick ratio = (C. assets - inventories - prepaid expenses) ÷ C. liabilities Assets that are easily converted to cash Inventories and prepaid expenses are not included in calculation Better picture of liquidity and ability to meet F. obligations. 29/07/1431Professor T najjar - PHCL-42043

44. Q. Ratio At least 1.0. > 1.0 >quick assets than it has C. liabilities. < 1.0 no enough cash to pay all C. liabilities, particularly short-term bills, other obligations. Single ratio rarely provide a comprehensive picture of F. health. Q. Ratio At least 1.0. > 1.0 >quick assets than it has C. liabilities. < 1.0 no enough cash to pay all C. liabilities, particularly short-term bills, other obligations. Single ratio rarely provide a comprehensive picture of F. health. 29/07/1431Professor T najjar - PHCL-42044

45. Turn Over Efficiency of using assets. Considered: 1.Efficiency ratios or 2.Asset utilization ratios. Most common: 1.Inventory turnover 2.Receivables turnover 1) I.T.O = COGS / Average inventory (at cost) How quickly inventories sold. Turn Over Efficiency of using assets. Considered: 1.Efficiency ratios or 2.Asset utilization ratios. Most common: 1.Inventory turnover 2.Receivables turnover 1) I.T.O = COGS / Average inventory (at cost) How quickly inventories sold. 29/07/1431Professor T najjar - PHCL-42045

46. Turn Over High is desirable = able to sell and replace its inventory with high efficiency (generate higher revenues and profits). Result in loss of sales and profits (shortages) High by keeping a very small inventory. 2) Receivables turnover ratio = credit sales ÷ average accounts receivable How quickly receivables are turned into cash. High.. Collect receivables efficiently Turn Over High is desirable = able to sell and replace its inventory with high efficiency (generate higher revenues and profits). Result in loss of sales and profits (shortages) High by keeping a very small inventory. 2) Receivables turnover ratio = credit sales ÷ average accounts receivable How quickly receivables are turned into cash. High.. Collect receivables efficiently 29/07/1431Professor T najjar - PHCL-42046

47. Turn Over R.T.R / 365 = average collection period. # of days credit sales remain in accounts receivable before they are collected. 2 nd important in 3rd party paid(C.P). Lag period = Inc. receivable & depletes cash Problems: 1.absence of large cash reserves to cover expenses (C. liabilities) 2.Unable to influence reimbursement schedules Turn Over R.T.R / 365 = average collection period. # of days credit sales remain in accounts receivable before they are collected. 2 nd important in 3rd party paid(C.P). Lag period = Inc. receivable & depletes cash Problems: 1.absence of large cash reserves to cover expenses (C. liabilities) 2.Unable to influence reimbursement schedules 29/07/1431Professor T najjar - PHCL-42047

48. Profitability Ratios 1.Net Profit MarginNet Income (after tax)/ Total sale= 0.0755 = 7.55% 1.Return on assetsNet Income / Average Total Assets= 90,000/900,000 = 0.1 1.Return on equityNet Income/ Average Owner Equity= 90,000 / 750,000 =0.12 Liquidity ratios 1.CurrentCurrent Assets / Current Liabilities= 750,000/100,000 = 7.5 1.QuickQuick Assets /Current Liabilities= 275,000/100,000 = 2.75 Turn Over Ratios 1.Inventory TurnoverCOGS / Average Inventory= 675,000 / 100,000 = 6.75 1.Receivable Turnover Credit sales / Average account receivable 400,000 / 75,000 = 5.33 29/07/143148Professor T najjar - PHCL-420