accounting and financial analysis(1)
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Accounting-and-Financial-AnalysisTRANSCRIPT
Accounting and Financial Analysis: An Owner-Manager Perspective
Dennis E. Beard, CPA, MBA Tim C. Hoerr, CPA, CMA
Serra Ventures, Inc.
Agenda
Introduction Goals Basic Financial Statements Accrual Basis vs. Cash Basis Accountants’ Reports Financial Analysis Q & A
About Serra Ventures, Inc.
Offers Professional Advisory Services in: Business strategy Capital formation Transitional executive leadership Organization development
Specializes in high technology enterprises Founded by Tim Hoerr, CEO.
Goals What You Need To Know:
1. To understand the structure and analytical uses of the basic financial statements.
2. To understand accrual-basis financial statements and how they differ from cash-basis statements.
3. To be able to prepare a Balance Sheet and Income Statement from basic, unorganized financial information
Goals, cont.
4. Understand a Statement of Cash Flows. 5. To be able to compute estimated break-even
sales from an income statement. 6. To be able to prepare an initial and/or pro
forma balance sheet that will incorporate a variety of financial/capital structures.
7. To understand the levels of assurance services provided by CPA firms.
Why Today’s Seminar?
“Accounting is the language of business”
Basic Financial Statements
Balance Sheet Why prepare a balance sheet? What is shown? What is an asset? What is a liability? What is equity? What are its shortcomings?
Basic Financial Statements
Income Statement Why prepare one? What is revenue? When is revenue recorded? What is an expense? When is expense recorded? What are shortcomings?
Basic Financial Statements
Statement of Cash Flows What is a statement of cash flows? Why prepare one? What is shown? What are its shortcomings?
Accrual v. Cash Basis Accounting
The Concept Why accrual basis is important Why cash basis is important
Matching Principle Accounting period
Accrual v. Cash Basis Accounting
Depreciation & Amortization Method of spreading the recognized cost of a
long-lived asset over an estimated useful life of the asset.
Depreciation for tangible assets and amortization for intangible assets.
Depreciation Example
Truck purchased Cost = $20,000 Useful Life = 5 years Est. residual value @ end of life = 0
“Straight-line method” of depreciation: recognize $4,000 of expense per year for 5 years.
Accrual v. Cash Basis Accounting
Working Capital = current assets minus current liabilities Cash & short term investments Accounts Receivable Inventory Accounts Payable
Accrual v. Cash Basis Accounting
Accounts Receivable
Credit Sales
Accounts Receivable
Cash Collections
Accrual v. Cash Basis Accounting
Inventory
Materials Purchases
Inventory
Cost of Goods Sold
Accrual v. Cash Basis Accounting
Accounts Payable
Purchases & expenses
incurred
Accounts Payable
Cash Disbursemen
ts
External Reporting
Independent Accounts’ Reports Sometimes requested or required by lenders,
investors or regulators
External Reporting, cont.
Compilations Accountants “compile” or assemble financial
statements from data provided by management. No assurance provided by accountant that statements are accurate.
This is the least costly of the services
External Reporting, cont.
Reviews Accountants provide some assurance testing
of management’s financial statements through selective testing and analysis of data.
This costs more than a compilation but less than an audit.
External Reporting, cont.
Audits Significant level of work by accountants
Verification Confirmation Analysis Representation of Management Controls
External Reporting, cont.
Audits Types of Opinions offered:
Unqualified Opinion Qualified Opinion Adverse Opinion
Internal Reporting
“The Key to Good Management Decisions” In-house vs. Outside Accountants Frequency Software Special Reports
Flash Reports Key Measures
Financial Analysis, cont.
Common-sized Statements Expressing balance sheets line item amounts as a %
of total assets Expressing income statement line item amounts as a
% of total revenues (sales)
Assets Co 1 Co 4 Co 5 Cash 15.1% 17.5% 10.5%
A/C Rec 6.0 5.6 4.3 Inventory 56.2 7.6 1.4 Oth Cur 3.2 5.7 3.9 PP & E 12.6 41.3 52.3 Other 6.9 22.3 27.6
100.0% 100.0% 100.0%
Liab/Eq
A/C Pay 20.2% 10.2% 3.5% ST Note 4.9 3.4 2.4 Oth Cur 9.4 17.3 11.1 LT Note 12.8 24.5 44.6 Equity 52.7 44.6 38.4
100.0% 100.0% 100.0%
Sales 304.4 411.5 76.4 GR Pft % 36.0% 52.5% 64.8% Nt Pft % 4.1 3.2 6.8
Analysis of Financial Data
Financial Analysis, cont.
Ratio Analysis Liquidity ratios Leverage ratios Activity ratios Profitability ratios
Common Ratios
Liquidity Ratios Current ratio = current assets/current liabilities Quick ratio = (cash + marketable securities +
accounts receivable) / current liabilities
Common Ratios, cont.
Activity Ratios Accounts receivable turnover = sales/accounts receivable Average collection period = (365 x accounts receivable)/sales Inventory turnover = costs of goods sold/inventory Average inventory holding period = (365 x inventory)/cost
of sales Accounts payable turnover = (cost of goods sold + operating
expenses)/accounts payable Average purchases credit period = (365 x accounts payable) /
(costs of goods sold + operating expenses) Asset turnover = sales/assets
Common Ratios, cont.
Leverage Ratios Debt-to assets ratio = debt/assets Debt-to-equity ratio = debt/equity Times interest earned ratio = EBIT/interest Return on equity = net income/equity Gross ROA = EBIT/assets Net ROA = EBIT(1-t)/assets Earnings per share = net income/number of shares
Financial Analysis, cont.
Trend Analysis $’s %’s Ratios
Financial Analysis, cont.
Comparables/Industry Analysis e.g. Risk Management
Association Annual Financial Statement Surveys
Break-Even Analysis
Breakeven Total
Variable Costs
Fixed Cost
BE = Fixed Costs/ (1- Variable Costs / Sales)
ABC Company, LLC Example of Sales Breakeven Analysis
Based upon Projections for year ended 12/31/20XX
Total Fixed Variable Sales $ 760,000
Cost of Sales $ 415,000 $ 415,000 Management Salaries 85,000 $ 85,000 Sales Commissions 112,000 112,000 Rent 30,000 30,000 Advertising 27,500 27,500 Utilities 14,400 14,400 Payroll Taxes 16,000 16,000 Supplies 9,000 9,000 Insurance 5,000 5,000 Depreciation 6,000 6,000 Professional Fees 2,500 2,500 Interest 10,000 10,000 total $ 732,400 $ 205,400 $ 527,000
Projected Breakeven: Fixed Costs $ 205,400 divided by (1 - Variable cost / Sales) 30.66% = estimated breakeven sales for the year $ 669,974
Questions???
Contact Us
Tim Hoerr [email protected] 217.819.5201
Dennis Beard [email protected] 217.819.5202
Alyssa Hoerr [email protected] 217.819.5203