Question. 2)Explain the meaning of
fund flow statement. How would you compute funds from operations in order to
prepare sources and usage statement of funds?
Ans :
Afund flow statement, better known as a cash
flow statement, is an important document in the accounting world. A fund flow
statement shows a company's inflows and outflows of funds. It is used to show
investors, stakeholders or owners where the company's money came from and where
it went.
Importance
- A
fund flow statement is an important tool used in evaluating a company's
performance. A fund flow statement is a statement that shows all money
coming in to a company and all money leaving a company during an
accounting period. This statement is used by investors when considering
investing in a company. The fund flow statement shows problems a company
has if the cash flow is negative.
Occurance
- Fund
flow statements are prepared as often as needed. Small businesses prepare
them more often, usually monthly, quarterly and annually. Larger businesses
typically prepare them less often, usually quarterly and annually.
Two Methods
- The
two methods for preparing fund flow statements are the direct method and
the indirect method. The direct method is used less often, making the
indirect method the preferred way of preparing it.
Content
- A
fund flow statement is prepared by comparing two accounting period's
balance sheets. The statement is divided into three sections; cash flows
from operations, cash flows from investing activities and cash flows from
financing activities. The indirect statement begins by taking net income
from the balance sheet. All other items are compared using the balance
sheets and the differences are either added or subtracted to net income
to find the total. The statement concludes with the net increase or
decrease in cash.
Interpreting Information
- When
this statement is completed and analyzed, an investor sees the increase
or decrease in cash for a specific period. This statement shows where the
money came from and went. If there is a decrease in cash for the period,
the investor sees whether it's from paying off debt, investing in new
assets or failing to collect assets owed. This statement speaks loudly to
investors as to the condition of the company. Generally, a company with
poor cash flow is not a good company to invest in.
- Investors
often ignore or misunderstand real estate investment trusts (REITs),
because the methods used to evaluate their performance are often very
different from the more familiar ways that investors analyze retailing,
manufacturing, and technology companies.
- In
reality, REITs such as Public Storage (NYSE: PSA ) , Kimco (NYSE: KIM ) , andEquity
Office Properties Trust (NYSE: EOP ) aren't
much more difficult to evaluate financially than a retailer such as Target.
One particular metric can provide investors with a good start toward
gauging an REIT's performance. Funds from operations (FFO) allow investors
a more accurate look at "earnings" for REITs.
(1)
|
We compute FFO as shown in the calculation
above. Such calculation begins with income from continuing operations or, if
such amount is the same as net income, with net income. Our calculation of
FFO differs from the National Association of Real Estate Investment Trusts,
or NAREIT, definition of FFO because we include deferred percentage rent in
FFO as discussed in Note 3 below. We consider FFO to be an appropriate
measure of performance for a REIT along with net income and cash flow from
operating, investing and financing activities. We believe that FFO provides
useful information to investors because by excluding the effects of certain
historical costs, such as depreciation expense and gain or loss on sale of
properties, FFO can facilitate comparison of current operating performance
among REITs. FFO does not represent cash generated by operating activities in
accordance with generally accepted accounting principles, or GAAP, and should
not be considered an alternative to net income or cash flow from operating
activities as a measure of financial performance or liquidity. FFO is one
important factor considered by our board of trustees in determining the
amount of distributions to shareholders. Other important factors include, but
are not limited to, requirements to maintain our status as a REIT,
limitations in our revolving bank credit facility and public debt covenants,
the availability of debt and equity capital to us and our expectation of our
future performance.
|
2)
|
Net income includes legal expenses incurred
related to the HealthSouth litigation of approximately $390,000 and $400,000
for the quarters ended March 31, 2006 and 2005, respectively.
|
(3)
|
We recognize percentage rental income
received during the first, second and third quarters in the fourth quarter.
Although recognition of revenue is deferred until the fourth quarter for
purposes of calculating net income, the calculation of FFO for the first
three quarters includes estimated amounts with respect to those periods. The
fourth quarter FFO calculation excludes the amounts recognized during the
first three quarters.
Question. 3)What is CVP analysis?
How does it differ from break-even analysis?
Ans :
|
CPV analysis is a system used for
checking how changes in the volume of production affect the costs and thus the
profits. It is an expanded form of break-even analysis, which simply
identifies the breakeven point. CVP analysis is somewhat
simplified and relies on some assumptions that do not hold in reality, meaning
it is best used for simple "big picture" analysis rather
than detailed examination.
Breakeven analysis takes account of
the fact that production incurs both fixed and variable costs. Fixed costs
include machinery, factory real estate and, to some extent,
marketing. Variable costs include labor and raw materials; more of these
resources are used as more products are made. The break-even point is calculated
as the fixed costs divided by the contribution per unit. The contribution per
unit is the price the company sells the product at, minus the specific variable
costs associated with producing that individual unit.
CVP analysis takes its name from
cost, volume and profit. The associated analysis plots two lines on a
graph with a horizontal axis that shows the total number of units produced. The
two lines represent the total revenue and the total cost for that number of
units. In virtually every case, the revenue line will start out higher than the
cost line, but go up at a steeper angle and eventually narrow the gap before
overtaking the cost line and then widening its lead. This represents increasing
sales lowering losses, hitting the breakeven point and then producing
increasing profits.
There are several significant limitations to
these figures which result from simplified assumptions in the process. One
obvious one is that it assumes that every unit produced will automatically be
sold. This is often not the case in reality, and the more units that are
produced, the greater the risk of being left with unsold stock.
Another problem
with CVP analysis is that in reality there is some crossover
between fixed and variable costs. For example, the fixed cost of machinery will
increase once it is running at full capacity and production is then increased.
Meanwhile variable costs don't always vary perfectly in line with the volume of
production. A business may be able to increase production without increasing labor
costs to the same extent if it is able to pick up some slack in the staff's
workload.
CVP analysis also has the
limitation that it fails to account for all the ways figures may vary. The
sales price is treated as a constant, but in the real world, increased sales
may entail some buyers getting a bulk discount. Similarly, the variable cost
per unit may not be consistent, for example, if materials can be bought in
large quantities at a lower price.
- Definition
Cost Volume Profit Analysis (CVP Analysis) is one of the most powerful
tools that managers have at their command. It helps them to understand the
relationship between cost, volume, and profit in an organization by
focusing on interactions among the different elements.
- 3.
These five elements are:- Price of products Volume or Level of activity
Per unit variable cost Total fixed cost Mix of product sold
- 4.
CVP Analysis help managers to take various decisions regarding business
i.e : What product to manufacture or sell What pricing policy to follow
What marketing strategy to employ What type of productive facilities to
acquire
- 5.
Components of CVP Analysis are:- Level or volume of activity Unit selling
prices Variable cost per unit Total fixed cost Sales Mix
- 6.
Assumptions CVP assumes the following: Constant sales price; Constant
variable cost per unit; Constant total fixed cost; Constant sales mix;
Units sold equal units produced.
- 7.
Limitations CVP is a short run, marginal analysis It assumes that unit
variable costs and unit revenues are constant, which is appropriate for
small deviations from current production and sales. Assumes a neat
division between fixed costs and variable costs, though in the long run
all costs are variable. For longer-term analysis that considers the entire
life-cycle of a product, one therefore often prefers activity-based
costing or throughput accounting.
- 8.
The following formula’s are used to solve profit/volume ratio:- P/V Ratio=
Contribution/Sales or, P/V Ratio = Fixed Cost + Profit/Sales or, P/V Ratio
= Change in Profit or Contribution/ Change in Sales
- 9.
Example Sales Rs. 1,00,000 Profit Rs. 10,000 Variable cost 70% Find out
(i) P/V Ratio, (ii) Fixed Cost, (iii) Sales volume to earn a profit of Rs.
40,000
- 10.
Break Even Point The break even point (BEP) is the point at which cost or
expenses and revenue are equal: there is no net loss or gain, and one has
“broken even”. A profit or a loss has not been made, although opportunity
costs have been paid, and capital has received the risk-adjusted.
- 11.
Methods of computing BEP Equation Approach Contribution approach Graphical
Approach
- 12.
Applications The break even point is one of the simplest yet least used
analytical tools in management. It helps to provide a dynamic view of the
relationships, between sales, cost and profit.
- 13.
Limitations Break Even analysis is only a supply side (i.e costs only)
analysis, as it tells you nothing about what sales are actually likely to
be for the product at these various prices. It assumes that fixed cost
(FC) are constant .Although this is true in short run, an increase in the
scale of production is likely to cause fixed cost to rise. In
multi-product companies. It assumes that the relative proportions of each
product sold and produced are constant (ie.,the sales mix is constant).
- 14.
The following formulae’s are used to calculate Break Even Point:- Break
Even Point (as % of capacity) = Fixed Cost/Total Contribution Break Even
Point (in units)= Fixed Cost/Selling Price Per Unit-Variable Cost Break
Even Point (in sales value)=Fixed Cost* Sales/Sales-Variable Cost
- 15.
Example From the following information, calculate the break even point in
units and in sales value: Output = 3,000 units Selling price per unit =
Rs.30 Variable Cost Per unit = Rs.20 Total Fixed Cost = Rs.20,000
- 16.
Applications of Marginal Costing Managerial Decision Relating to
Determination of Optimum Selling Price
- 17.
To check the Effect of Reducing of Current Price on profit
18. Choose of Good Product Mix Calculation of
Margin of Safety Decision Regarding to Sell goods at Different Prices to
Different Customers
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