accounting & financial reporting
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Accounting & Financial Reporting. BUSG 503 Michael Dimond. Financial Accounting for MBAs. Course Overview Introductions Schedule Resources How do I get an A in this class?. Financial Accounting for MBAs. Accounting Information Who uses it? What does it contain? How is it presented?. - PowerPoint PPT PresentationTRANSCRIPT
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Accounting & Financial Reporting
BUSG 503Michael Dimond
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Michael DimondSchool of Business Administration
Financial Accounting for MBAs
• Course Overview• Introductions
• Schedule
• Resources
• How do I get an A in this class?
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Michael DimondSchool of Business Administration
Financial Accounting for MBAs
• Accounting Information• Who uses it?
• What does it contain?
• How is it presented?
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Michael DimondSchool of Business Administration
Financial Statements
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Michael DimondSchool of Business Administration
Basic Financial Analysis
• Financial figures are related, and they can reveal many details about a company, its performance, and its value
• Accounting figures are prepared according to specific rules and certain distortions exist.
• There are so many numbers… where shall we begin?
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Michael DimondSchool of Business Administration
Meaningful Ratio Analysis
• Analysis means to break something down to understand it.• Ratio analysis should be used to answer a specific question
or set of questions.
• If you were examining the financial statements for a company, you might start with this basic question:
“Is this a good use of investors’ money?”
• What financial ratio would answer this question?
How about Return on Equity?
• How do you compute Return on Equity (ROE)?
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Michael DimondSchool of Business Administration
Analyzing ROE
• ROE = NI ÷ Equity and answers the question, “is this a good use of investors’ money?”
• If you were to break this down, there are three basic questions to answer:
How profitable is this business?
How efficiently are assets being used?
How much does financial leverage help the investors?
• What financial ratios would answer these questions?
Profit Margin (PM)
Total Asset Turnover (TAT)
Equity Multiplier (EM)
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Michael DimondSchool of Business Administration
Drivers of ROE
• Profit Margin (PM) = NI ÷ Sales and answers the question, “How profitable is this business?”
• Total Asset Turnover (TAT) = Sales ÷ Total Assets and answers the question, “How efficiently are assets being used?”
• Equity Multiplier (EM) = Total Assets ÷ Equity and answers the question, “How much does financial leverage help the investors?”
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Michael DimondSchool of Business Administration
The DuPont Identity
• ROE is directly driven by profitability, efficiency and leverage.
• ROE = PM x TAT x EM
How does that work?
• The numerators and denominators cancel to reduce the equation to NI ÷ Equity
ROE = PM x TAT x EM
NI NI Sales Total AssetsEquity Sales Total Assets Equity
NI NI Sales Total AssetsEquity Sales Total Assets Equity
= x x
= x x
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Michael DimondSchool of Business Administration
A word about ROA
• ROA = Return on Assets• What’s the difference between Equity & Assets?
• Leverage
• What’s the difference between ROE & ROA?• Leverage
• ROE = PM x TAT x EM• EM represents leverage
• ROA = PM x TAT• No leverage
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Michael DimondSchool of Business Administration
Digging Deeper with Financial Ratios
• How would you analyze profitability, efficiency and leverage?• How do profitability, efficiency and leverage relate?
• What affects profitability?
• What drives sales?
• What is the composition of assets?
• How were assets paid for?
• How are liabilities managed?
• Where shall we begin?
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Michael DimondSchool of Business Administration
Common-Size Financial Statements
• Shows each line item as a percent of an appropriate total.• Common-size balance sheet
• % of Total Assets
• Shows the composition of assets
• Liabilities & equity items are also shown as % of total assets
• Debt Ratio = Total Liabilities ÷ Total Assets
• Common-size income statement• % of Sales
• PM = Net Income as % of Sales
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Michael DimondSchool of Business Administration
Common-Size Income Statement
100%
5.77%7.19%
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Michael DimondSchool of Business Administration
Common-Size Balance Sheet
100%
44.34%45.68%
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Michael DimondSchool of Business Administration
We don’t make a common-size CF Statement
There are other ways to examine
relevant information which would be
more helpful
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Michael DimondSchool of Business Administration
Vertical & Horizontal Analysis
• Vertical Analysis compares figures as a percent of a relevant total (“common size” financial statements)
• Horizontal Analysis compares the same figure over a series of periods (showing % change or % growth)
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Michael DimondSchool of Business Administration
Measuring growth
• Financial figures change from year to year• To find the % change (“% growth”) over a 1-year period,
divide the difference of the two figures by the first year’s value:• [ending – beginning] / [beginning]
OR
• [ending] / [beginning] - 1
• Measuring growth over more than one period means we need to find the average growth during that time.
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Michael DimondSchool of Business Administration
Using the SEC website for information