Some of the business owners may choose to outsource their accounting-related tasks to an accounting firm in Johor Bahru as they do not know how they should deal with the financial statements. However, if they want to stay on top of the financial position of their business, they need to understand what the financial statement is telling.
The analysis of the balance sheet involves the assessment of the company’s assets, liabilities and shareholder’s equity so that business owners can understand the exact financial position of his business. It is a thorough analysis of balance sheet items at different time intervals; for example, business owners can do so annually or quarterly. The investors, shareholders and financial institution may use the analysis so that they get to know the financial position of the company. In the article below, we will focus on the analysis of assets in the balance sheet.
Business owners can analyse their assets by using different ratios. Firstly, to analyse the non-current assets that a company owns, business owners may calculate the fixed assets turnover ratio. Non-current assets refer to the company’s fixed assets such as land, buildings, as well as property, plant and equipment. The fixed assets turnover ratio can not only help the business owners to analyse the efficiency of the fixed assets (Also see Guide to Operating Assets) but also calculate the earning potential of those assets.
The calculation of the fixed assets turnover ratio involves two elements, which are the company’s net sales and its average fixed assets. Net sales refer to the sum of sales less any discounts and returns. On the other hand, business owners can calculate the average fixed assets (Also see Procedures of Asset Impairment) by summing up the opening and closing fixed assets, then divide the sum by two. So, to calculate the fixed assets turnover ratio, business owners should divide the company’s net sales by its average fixed assets. A high fixed assets turnover ratio indicates that the company is using its fixed assets efficiently.
Business owners can use two different ratios to analyse their current assets. The first one is the current ratio. This is a liquidity ratio which helps in measuring the company’s ability to settle its short-term debts. The formula for the current ratio is to divide the company’s current assets with its current liabilities. The current assets include the cash and cash equivalent that the company has, its accounts receivables, inventories, as well as other assets that it can change into cash in one year. The current liabilities (Also see Limited Liability Partnerships (LLP) in Malaysia) are the sum of short-term debt and the present portion of its long-term debt, as well as the accounts payable.
Another ratio that business owners can use to analyse their company’s current assets is the quick ratio. This is also a liquidity ratio, and it helps to measure the company’s short-term liquidity position by identifying its ability to settle the current liabilities by using the assets with the highest liquidity. The calculation of the quick ratio is quite similar to that of the current ratio. To calculate it, one should divide the quick assets of the company with its current liabilities. The only difference between the current ratio and the quick ratio is instead of using current assets; the quick ratio uses quick assets of the company in its calculation. One can calculate the quick asset of a company by excluding the inventories from its current assets.
The ratios mentioned above are some of the methods that one can use to analyse the assets of a company. Such analysis enables the business owners and the stakeholders to understand the financial position of a business. Also, business owners will be able to know how they should use their assets more efficiently so that their business empire con continue expanding and growing.