Monday, June 29, 2009

Reduce Inventory Cash Position

What will happen if a  company reduces its inventory without adversely affecting sales? What kind of effect would this have on the company's cash position in the (1) short run and (2) in the long run? 

Accounting Answer:

If company can successfully reduce its inventories without affecting their overall sales,  the effect would be that the company has an increase in net working capital.  Having an increase in net working capital may help the company utilize their daily operations. For example, they will have an easier time paying the creditors, spending on regular expenses, utilities, etc.

However,  thinking long term, there are chances that company may get tied up huge working capital which may be used for some very profitable financing activities which of course will increase the profitability of company. For example, the company could invest in other companies or types of securities that provide it cash flow. Cash management is very important to a company and maintaining the ideal amount of net working capital is essential for an accountant to do. 

Thursday, June 11, 2009

Net Worth of Business

How do you find the net worth of a business?

Generally, assets are not the net worth of a business. The net worth of a business equals share capital plus retained earnings. This in turn is equal to assets less liabilities other than share capital plus retained earnings.

The share capital and retained earnings represent the value of property rights at their historic cost and the assets less other liabilities represent the property owned less claims on the property owned i.e.net assets.

Monday, June 8, 2009

Calculate Pretax Margin

What is the Pretax Margin?

In accounting, the pretax margin is a number that measures the operating efficiency of a company by using its accounting records. The pretax margin is expressed as a percentage of revenues earned. Since pretax margin illustrates the relationship between operating income and revenues, it is a measure of the profitability of the company.

Calculate Pre-tax Margin

Pretax margin = (Operating income + other income − interest)/ Sales

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