chapter 15 accounting and financial analysis. learning objectives accounting and financial analysis...

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Chapter 15

Accounting and Financial Analysis


Learning Objectives

Accounting andFinancial Analysis

Evaluate function

Interpret Reporting


The Key Decisions in Running a Business


What is accounting?

• Definition• Person• importance


Accounting is the measurement and reporting financial

information to various users

regarding the economic activities of a firm.


Importance

• Accounting reports and financial statements reveal as much as about a business’s health as pulse rate and blood pressure readings tell us about a person’s health.


TheThe Accounting CycleAccounting Cycle

Analyze Source Documents

Record Transactions

in Journals

Post Journal Entries to Ledger

Take a Trial Balance

Prepare Financial

Statements

Analyze Financial

Statements


Financial Statements(财务报表）

Balance Sheet( 资产负债表） - Statement of Financial Position

Income Statement （损益表） - Statement of Revenues & Expenses

Statement of Cash Flows （财务状况表 / 现金流量表） – Statement of Cash coming in & going out of


How Firms Use Accounting

UseReportingInterpretEvaluate

To report

To support decision

To control operation


To report—financial accounting财务会计

• Whom should it report to ?• Why is the report needed?• What rules should be

observed and why?• Who make the rules?


To support decision—Managerial accounting (管

理会计）

• How does the accounting information support decision making?

• The differences between financial accounting and managerial accounting.


To control—managerial

accounting/auditing

• Why is auditing needed?• Two kinds of auditing

(internal and independent)


Responsible Reporting


Responsible Financial Reporting


Roles for Proper Reporting


Auditors

Board of Directors

Sarbanes-Oxley Act


Income statement’s formulabased on GAAP

• Revenue• – cost of goods sold• gross profit (gross margin)• – operating expenses• net income before taxes• – taxes• net income (or loss)


revenue

• Sales• Rents received• Interests• loyalties


Costs of goods sold

• Purchase• Transportation• Storing


Operating expenses

• Rents• Salaries• Supplies• Insurance• Depreciation• Marketing • Distribution


Income Statement



Percentage of Sales



Accounting Equation


Balance Sheet

Assets = Liabilities + Owner’s Equity


Based on liquidity

• Current assets• Fixed assets• Intangible assets


Liabilities

• Current liabilities

• Long-term liabilities


Common liabilities

• Accounts payable• Notes payable


Balance Sheet



Breakdowns



Ratio Analysis


Liquidity

Efficiency

Financial Leverage

Profitability


Liquidity – Current Ratio


Current AssetsCurrent Liabilities

Taylor, Inc example:$2,000,000$1,000,000

Current Ratio = 2.00


Liquidity – Quick Ratio


Cash + MS + ARCurrent Liabilities


Quick Ratio = 1.00

MS = Marketable SecuritiesAR = Accounts Receivable


Efficiency – Inventory Turnover


Cost of Goods SoldInventory


Inventory Turnover = 16.00


Efficiency – Asset Turnover


Net SalesTotal Assets


Asset Turnover = 2.00


Leverage – Debt to Equity


Long Term DebtOwner’s Equity


Debt to Equity Ratio = 1.25


Making decision on using financial leverage

• Raise 10% by selling stock• Raise 90% by issuing bonds • Common stock $50,000• Bonds @10% interest) $450,000• Earnings $125,000• Less bond interest 45,000• Net earning $ 80,000• Return on equity 80,000• 50,000

• Raise 100%by selling stock

• Common stock $50,000

• Earnings $125,000

• Net earning $125,000• Return on equity 125,000• 500,000


Leverage – Interest Earned


EBITAnnual Interest Expense

Taylor, Inc example:$1,500,000$500,000

Times Interest Earned = 3.00

EBIT = Earnings Before Interest and Taxes


Profitability – Net Profit


Net IncomeNet Sales

Taylor, Inc example:$700,000

$20,000,000

Net Profit Margin = 3.50%


Profitability – Return on Assets


Net IncomeTotal Assets


$10,000,000

Return on Assets = 7.00%


Profitability – Return on Equity


Net IncomeOwner’s Equity


$4,000,000

Return on Equity = 17.50%


Ratio Interpretation



Ratio Interpretation - Taylor



Ratio Limitations


Difficult

Accounting Practices

Seasonal Swings