Chapter 1

Statement of Comprehensive Income (SCI): Summary of revenues & expenses (Revenue - Expense =
Profit)
Statement of Financial Position (SFP): Summary of resources a business has control over, & sources
of funds
(Asset = Liability + Owners' Equity)
 
Revenue: Earned through sale of goods.
Expenses: Costs of doing business.
 
Asset: Resources that business owns.
Liability: Funds provided by non-owners.
Owners' Equity: Funds provided by owners.

Chapter 2

Operating Revenue: Sales generated from company's business activities.

Non-Operating Revenue: Other income from non-business activities. e.g. Dividend income
Cost of Goods Sold (CoGS)
Gross Profit=Operating Revenue−CoGS
 
Expenses
Operating
 Selling & Distribution expenses (Advertising, Shop rent)
 General & Administrative (Office rent, Legal fees)
Non-Operating
 Financial (Interest expense)
 
Assets & Liabilities
 Current (Less than 12 months of balance sheet date)
 Non-current (Exceeding 12 months)
 
Owners' Equity
 Share Capital/Capital (Funds that a company raises in exchange for issuing an ownership
interest in the company in the form of shares)
 Retained Earnings (Cumulative Earnings, profits or loss, of company retained since 1st day
the company started)
Retained Earnings ( End )=Retained Earnings ( Start )+ Profit for period+ Dividends Paid ( if any )

 
 
Chapter 3

Fixed costs do not change regardless of number of units sold (e.g. do not need to pay higher
rent if sell more bowls of noodle)
 
Variable costs are proportionate to the number of units sold (e.g. as number of bowls sold increases,
the total costs to buy the noodles increases as more noodles are needed when more bowls are sold)
 
Profit is whatever you have left of your earnings after you have accounted for all your costs.
Profit = Total Revenue (TR) - Total Costs (TC)
= Total Revenue - [Total Variable Costs (TVC) + Total Fixed Cost (TFC)]
= Unit Selling Price (USP) x Volume - [Unit Variable Costs (UVC) + TFC] x Volume
= [(USP - UVC) x Volume] - TFC
 
Total Revenue = Unit Selling Price x Volume
Total Costs = Total Fixed Costs + Total Variable Costs
UVC = Total Variable Costs (TVC) / Volume
 
Contribution Margin
Relevant if a business is selling more than one line of product & wants to see how much each
product contributes to profit.
 
Total Contribution Margin (TCM)
Looks at how much the entire line of product contributes to profit
TCM = Total Revenue - Total Variable Costs
= UCM x Units Sold
 
Unit Contribution Margin (UCM)
Looks at how much each unit sold contributes to profit
UCM = Selling price per unit - Unit Variable Costs
 
Breakeven Point is when your sales volume is high enough to cover your total costs
When price of variable cost increases, breakeven vol increases.
When price of fixed cost increases, breakeven vol increases.
Total Revenue = Total Costs
Breakeven Vol x USP = Total Variable Costs + TFC
Breakeven Vol x USP = UVC x Breakeven Vol + TFC
Breakeven Vol = TFC/[USP - UVC] or (UCM)
 
Margin of Safety is number of units sold in excess of your Breakeven volume, a buffer before you
start making a loss
When price of variable cost increases, margin of safety decreases.
When price of fixed cost increases, margin of safety decreases.
Margin of Safety = Actual Sales Vol - Breakeven Vol
 
Target Volume to Achieve Target Profit
 Have to make sure we sell enough units to cover all costs & still have enough excess
Revenue on top of that to meet the targeted profit
TOTAL REVENUE IS SELLING PRICE x NO. OF UNITS SOLD
Total Revenue - Total Costs = Target Profit
Total Revenue - TVC - TFC = Target Profit
Selling Price per unit x No. of Units - UVC x No. of Units - TFC = Target Profit
UCM x No. of units - TFC = Target Profit
No. of units = (TFC + Target Profit)/UCM

Chapter 4

3 Major types of business

1. Manufacturing
 Using machinery or labour to convert raw materials into tangible finished goods
 E.g. Sony, Toyota, F&N
2. Merchandising
 Distributing tangible good
 E.g. NTUC, Watsons
3. Service
 Involves delivering marketable service to the customers
 E.g. medical, accounting, haircut
 
Sole Proprietorship
 Business owned & operated by one person
 Amount contributed to the business by the owner is called capital
 Owner liable for all business debts
 
Partnership
 Two or more individuals who join as co-owners of a business (max 20)
 Limited Partnership, one or more partners having limited liability. Not liable for debts &
obligations of the firm. Do not take part in management of the limited partnership & should
not have the power to bind the limited partnership (investors)
 Limited Liability Partnership, comprises two or more people. Liable for its own debts &
partners & managers of the LLP cannot be made liable for such debts
 If Limited Partnership or normal partner, not LLP, need to pay tax on their share for the
partnership profit
 
Companies
 An entity that is registered under the Company Act.
 Has its own legal personality that is distinct from its members & the people who manage the
company
 Companies can own property & sue or be sued in their own names
 Recognised as taxable entitles in their own right
a. Private Companies
 Restricts right of members to transfer their shares in the company
 Transferring of shares requires transfer to be first approved by company's board of directors
 Max 50 members
b. Public Companies
 May or may not be listen on stock exchange
 If listed, have to comply to the rules & regulations of the stock exchange on which they are
listed
 

 
Horizontal Analysis
 It is a financial statement analysis technique that show changes in the amounts of
corresponding financial statement items over a period of time. It is a useful tool to evaluate
the trends of situations.
 
Vertical Analysis
 Shows each item on a statement as a percentage of a base figure within the statement
 
 
 
 
Different businesses generate distinct business transactions e.g. CoGS (retail/trading operations)
Cost of Warranties (retail/trading)
 
Business Structure
Choosing the type of business structure (or 'legal ownership') is a key decision when registering a
business.
 
Structure affects:
 Taxes payable
 Personal liability of owners
 Sources of finance
 
Chapter 5

Liquidity
Liquidity looks at the business' ability to meet its short-term obligations, such as whether it can pay
its suppliers and bills.
Some analysts feel that it is even more important than profitability at times.
E.g. You could earn a profit of $300 000 from Customer A but he could only pay you in 6 months.
You could earn a profit of $100 000 from Customer B but he could pay you in 1 month
Choose Customer B as if you wait 6 months to receive Customer A's money in order to pay your
suppliers, suppliers will not provide you with goods and you cannot continue your business. This is
why liquidity is sometimes more important than profitability.
 
Measuring Liquidity
Current Assets
Current Ratio= ∨Current Assets :Current Liabilities
Current Liabilities
 
It can also be expressed as how many dollars of current assets does the business have to be able to
pay for each dollar of current liability.
E.g. If Current Ratio is 2, it can be expressed as:
Current Assts :Current Liabilities
$ 2: $ 1
There is $2 of current assets available to cover every $1 of current liabilities or short term
obligations.
 Cash+ Marketable Securities+ Accounts Receivable
Quick Ratio=
Current Liabilities
 
Inventory is excluded from the quick ratio as out of all the current asset items, inventory is the most
difficult to convert to cash. This means that there will be less current asset to cover every dollar of
current liability if you take out inventory. Quick ratio won’t be as high as the Current Ratio.
 
Therefore, Quick ratio is considered a stricter measure of liquidity compared to Current Ratio. It can
be expressed as the number of dollars of every liquid current assets that the business has for every
dollar of current liability or short term obligation.
 
If difference between Current Ratio and Quick Ratio is vast, liquidity of company is not good as it
indicates most of company's current assets are made up of inventory. Inventory is not as easily sold
for cash as other current assets.
 
Cash+ Marketable Securities
Cash Ratio=
Current Liabilities
Cash Ratio is even more stringent
 
Efficiency
Efficiency looks at business' speed at converting assets into cash or sales.
E.g. Both Company A & B has $3m sales
A uses $2m assets to achieve this whilst B uses $1m assets.
Choose B to invest in as B uses less resources to achieve the same sales as A.
A business may have a lot of sales but that doesn't indicate its potential to sell more with its existing
assets.
 
Measuring Efficiency
Efficiency Ratios inform investors about a business' ability to use what it has to generate the most
sales possible for owners and shareholders
 
Sales
Total Asset Turnover Ratio= ∨Sales:Total Assets
Total Assets
 
It can also be expressed as for every $1 of Total Assets, how many $ of Sales is generated.
E.g. If Total Asset Turnover Ratio is 2, it can also be expressed as
Sales : Total Assets
$2 : $1
For every $1 of Total Assets, the business is able to generate $2 of Sales.
The assets turnover ratio is an efficiency ratio that measures a company's ability to generate sales
from its assets by comparing net sales with average total assets. In other words, this ratio shows
how efficiently a company can use its assets to generate 
 
Cost of goods sold
Inventory Turnover =
Inventory
 
Inventory Turnover looks at how fast a business sells its inventory. This is expressed as how many
times inventory turns over in a year .It calculates the rate at which inventory is sold or the number of
times it has been replaced during the period
E.g. If Inventory = $300, CoGS = $3000, Inventory Turnover = 10 times. This means that the business
bought and sold $300 worth of Inventory 10 times during the year.
Companies aim to sell inventories faster so as not to tie up capital in inventories and void stock
becoming obsolete.
365 Days
Invenotry Days=
Inventory Turnvoer
Inventory Turnover of 10 times is 36.5 days.
 
Credit Sales
Accounts Receivable Turnover=
Accounts Receivable
 
-This looks at how fast the business collects debts from its customers. It is expressed as the number
of times Accounts Receivable turns over in a year.
-E.g. If Accounts Receivable = $200 and Credits Sales = $4000, Accounts Receivable Turnover = 20
times. This means the business collected $200 worth of Accounts Receivable 20 times during the
year.
-Accounts receivable turnover is the number of times per year that a business collects its
average accounts receivable. The ratio is intended to evaluate the ability of a company to efficiently
issue credit to its customers and collect funds from them in a timely manner.
 
 
 
 
365 Days
Account Receivable Days=
Account Receivable Turnover
An Accounts Receivable Turnover of 20 times is 18.3 days.
 
 
Gearing and Leverage
Gearing and Leverage looks at the company's reliance on debt financing. In other words, how much
of the company's funds come from borrowing either from the bank or creditors.
 
E.g. Company A has $4m assets and all of it is bought from borrowings.
Company B also has $4m assets but all of it is bought from using shareholders' funds.
Regardless of performance for the year, A has to pay interest expenses for its borrowings, if A
doesn't manage to pay it will eventually go bankrupt or become insolvent.
If B doesn’t perform well for the year, it can simply reduce dividends or not declare dividends for the
year. The risk of becoming insolvent or going bankrupt is not as high as A.
 
Measuring Gearing & Leverage
 
Long term Debt
Long term Debt Ratio=
Long term Debt + Equity
Long term Debt Ratio looks at how much of long -term financing is made up of long-term debt.
Equity is considered as long-term financing because investors or shareholders typically put their
money in a business for more than a year.
 
Long term Debt
Long Term Debt ¿ Equity Ratio=
Equity
Higher the ratio, higher the leverage of the company, the higher the expected returns. However,
higher leverage will also be associated with higher risk of insolvency.
It tells you how much debt a company has relative to its net worth
 
Total Liabilities
Total Debt Ratio= ∨Total Liabilities :Total Assets
Total Assets
It can also be expressed as for every $1 of assets, how much of that $1 is made up of borrowings
from banks/creditors?
E.g. If Total Debt Ratio is 0.5, it can also be expressed as
Total Liabilities : Total Assets
$0.50 : $1
For every $1 of Total Assets, $0.50 of it or half of that dollar is funded from borrowings.
It can be interpreted as the proportion of a company’s assets that are financed by debt.
 
 
Total Liabilities
Debt ¿ Equity Ratio=
Shareholder s ' Equity
Indicates the relative proportion of debt to equity. Like Long-term debt to equity ratio, higher the
ratio, higher the reliance on external funds
It is a debt ratio used to measure a company's financial leverage. The D/E ratio indicates how much
debt a company is using to finance its assets relative to the value of shareholders’ equity.
 
 
Earningsbefore Interest∧Tax
¿ Interest Earned Ratio=
Interest payments
Times Interest Earned Ratio looks at how many times of interest payments the business can cover
with its earnings. It is a measure of how close the business is to insolvency in event of an increase in
interest rates by the bank.
$ 300 000
E.g. ¿ Interest Earned Ratio=
$ 3000
¿ 100
$ 300 000
¿ Interest Earned Ratio=
$ 30 000
¿ 10
Originally, a business was earning $300 000 before interest and tax and had $3000 of interest
payments, its Times Interest Earned ratio was 100 times.
When the bank increased interest rates and caused interest payments to increase to $30 000, its
Times Interest Earned ratio dropped to 10 times.
If it drops any further, the business will face a higher risk of insolvency when it is unable to pay its
obligations to its creditors or bank.
 
Profitability Ratios
Performance is important because it determines investment returns and provides a good indicator
of the risk of bankruptcy.
Profitability can be expressed in terms of sales, capital or assets
 
Net Profit After Tax
Net Profit Margin=
Sales
Measures the profitability per dollar of sales
 
Earnings before Interest∧Tax
Operating Profit Margin=
Sales
Also known as Earnings Before Interest & Tax (EBIT) or Operating Income. Important as it is an
indirect measure of efficiency. Higher the Operating Profit, the more profitable a company's core
business is. Several things affect profit, e.g. pricing strategy, prices for raw materials, labour costs.
Also a measure of managerial flexibility & competency, particularly during tough economic times.
-It indicates how much of each dollar of revenue is left over after both costs of goods sold
and operating expense are considered.
 
 
 
Net Profit After Tax Net Profit After Tax
Return on Equity= ∨
Equity Average Equity
Represents return per dollar invested by shareholders. Operating performance affects the return to
the owners equity. Also influenced by financial structure. Company will add value to shareholders
when return on equity greater than cost of equity.
 
Long term Capital=Total Capitalisation
¿ Long term Debt +Shareholder s' Equity

Earnings before Interest ∧Tax

Return on Capital=
Long term Debt + Equity
It measures the return that an investments generates for capital contributors, i.e. stockholders.
Return on capital indicates how effective a company is at turning capital into profits.
 
 
 

Return on Assets=
 
Net Profit After Tax
¿
Total Assets
 
Measures the income available to debt & equity holders per dollar of the company's total assets.
Amount of total assets should be greater than total capital as the total capital does not include
current liabilities.
-measures the amount of profit the company generates as a percentage of the value of its total
assets.
 
 
 
 
 
Investment Ratios
Used to assess performance of a company's shares. Measures relationship between an amount of
money invested & the return made from investment
Performance of the company on a per share basis is measured in EPS, PE, Dividend Yield
 
Net Profit after Tax
Earnings Per Share=
Number of Ordinary Shares
Measures net profit on a per share basis. Can be compared to share price, which is also on per share
basis.
Earnings per share (EPS) is the portion of a company's profit allocated to each outstanding share of
common stock. Earnings per share serves as an indicator of a company's profitability. 
 
 
 
Market Price Per Share
Price Earnings Ratio=
Earnings per share
P/E ratio indicates how many years' earnings it will take before the total earnings generated is equal
to, or will pay back the current share price.
High P/E ratio reflects willingness by investors to pay a high price in relation to current earnings
because of the confidence in the growth of future profits.
Low P/E ratio indicates unprofitable or very risky companies.
Higher P/E ratio means higher confidence the market has on the business future and is more
expensive to buy the share.
 
Dividends Per Share
Dividend Yield=
Market Price Per Share
Measures the dividend component of shareholders' returns.
 
Dividends per share
Dividend Payout=
Earnings per share
Gauges the portion of current earnings that is paid out in dividends
 
Total Asssets−Total Liabilities
Net Asset Value per share=
Total Number of Ordinary Shares
Reflects the net asset backing per share. Shows net worth per share. Signals whether the company is
overvalued or undervalued.