© 2006 Pearson Education Canada Inc. Chapter 13 - 1

Chapter 13Chapter 13

Analyzing and Analyzing and Using Financial Using Financial

InformationInformation

© 2006 Pearson Education Canada Inc. Chapter 13 - 2

What Is Accounting?What Is Accounting?CommunicationCommunication

Mea

surin

gM

easu

ring

InterpretingInterpreting

FinancialFinancialAccountingAccountingFinancialFinancial

AccountingAccountingManagementManagementAccountingAccounting

ManagementManagementAccountingAccounting

Decision MakingDecision Making

© 2006 Pearson Education Canada Inc. Chapter 13 - 3

What Accountants What Accountants DoDo

What Accountants What Accountants DoDo

Tax Tax AccountingAccounting

Tax Tax AccountingAccounting

BookkeepingBookkeepingBookkeepingBookkeeping

FinancialFinancialAnalysisAnalysis

FinancialFinancialAnalysisAnalysis

Cost Cost AccountingAccounting

Cost Cost AccountingAccounting

© 2006 Pearson Education Canada Inc. Chapter 13 - 4

Ten Most Important Ten Most Important Accounting SkillsAccounting Skills

• Analytical

• Problem solving

• Interpersonal

• Listening

• Communication

• Leadership

• Decision making

• Time management

• Teamwork

• Computer

© 2006 Pearson Education Canada Inc. Chapter 13 - 5

Types of Types of AccountantsAccountants

• Private or (Corporate) accountants work for a businesses other than a public accounting firm

• Public accountants, are independent of the clients they serve

• Most are employed by accounting firms

• Members of the firm are generally CA’s

PrivatePrivate PublicPublic

© 2006 Pearson Education Canada Inc. Chapter 13 - 6

Types of Types of AccountantsAccountants

Chartered Accountant

Certified Management Accountant

Certified General Accountant

© 2006 Pearson Education Canada Inc. Chapter 13 - 7

Accounting RulesAccounting Rules

Generally AcceptedAccounting Principles

(GAAP)

Financial Accounting Standards Board

(FASB)

Canadian Institute of Chartered Accountants

(CICA)

© 2006 Pearson Education Canada Inc. Chapter 13 - 8

Fundamental Fundamental Accounting Accounting ConceptsConcepts

The AccountingEquation

Double-EntryBookkeeping

The MatchingPrinciple

© 2006 Pearson Education Canada Inc. Chapter 13 - 9

The Accounting EquationThe Accounting Equation

Owner’s Equity:

Accounting Equation:

Assets = Liabilities + Owner’s Equity

Assets – Liabilities = Owner’s Equity

© 2006 Pearson Education Canada Inc. Chapter 13 - 10

Basic Accounting Basic Accounting ConceptsConcepts

Double-EntryDouble-EntryBookkeepingBookkeepingDouble-EntryDouble-EntryBookkeepingBookkeeping

Matching Matching PrinciplePrincipleMatching Matching PrinciplePrinciple

CashCashBasisBasisCashCashBasisBasis

AccrualAccrualBasisBasis

AccrualAccrualBasisBasis

CashCashPurchasePurchase

CashCashPurchasePurchase

CreditCreditPurchasePurchase

CreditCreditPurchasePurchase

© 2006 Pearson Education Canada Inc. Chapter 13 - 11

How Are Financial Statements How Are Financial Statements Used?Used?

© 2006 Pearson Education Canada Inc. Chapter 13 - 12

Understanding Understanding Financial Financial

StatementsStatements

Balance SheetBalance Sheet

Income StatementIncome Statement

Cash-Flow StatementCash-Flow Statement

© 2006 Pearson Education Canada Inc. Chapter 13 - 13

The Balance SheetThe Balance Sheet

Assets

Liabilities and Shareholder’s Equity

Current Assets Fixed Assets

Current Liabilities

Long-TermLiabilities

Shareholder’sEquity

© 2006 Pearson Education Canada Inc. Chapter 13 - 14

The Income StatementThe Income StatementThe Income StatementThe Income Statement

Operating Operating ExpensesExpenses

Operating Operating ExpensesExpenses

RevenuesRevenuesRevenuesRevenues

Net IncomeNet IncomeAfter TaxesAfter TaxesNet IncomeNet IncomeAfter TaxesAfter Taxes

Cost of Cost of Goods SoldGoods Sold

Cost of Cost of Goods SoldGoods Sold

© 2006 Pearson Education Canada Inc. Chapter 13 - 15

The Cash-Flow The Cash-Flow StatementStatement

Operations

Investments

Financing

© 2006 Pearson Education Canada Inc. Chapter 13 - 16

Analyzing Financial Analyzing Financial StatementsStatements

Trend AnalysisTrend Analysis Ratio AnalysisRatio Analysis

Consider MoreThan One Ratio

Uncover Business Shifts

Consider ExtraordinaryCircumstances

Check Specific Data

© 2006 Pearson Education Canada Inc. Chapter 13 - 17

Types of Financial Types of Financial RatiosRatios

ActivityActivityActivityActivity LeverageLeverageLeverageLeverage

ProfitabilityProfitabilityProfitabilityProfitability LiquidityLiquidityLiquidityLiquidity

© 2006 Pearson Education Canada Inc. Chapter 13 - 18

Profitability RatiosProfitability RatiosReturn on Sales =

Net Income

Net Sales

Return on Equity =Net Income

Total Owner’s Equity

Earnings per Share =Net Income

Average Shares Outstanding

© 2006 Pearson Education Canada Inc. Chapter 13 - 19

Liquidity RatiosLiquidity RatiosWorking Capital =

Current Assets –

Current Liabilities

Current Ratio =Current Assets

Current Liabilities

Quick Ratio =Current Assets – Liabilities

Current Liabilities

© 2006 Pearson Education Canada Inc. Chapter 13 - 20

Activity RatiosActivity Ratios

Inventory Turnover =Cost of Goods SoldAverage Inventory

Receivables Turnover =Sales

Average Accounts Receivable

© 2006 Pearson Education Canada Inc. Chapter 13 - 21

Leverage RatiosLeverage Ratios

Debt to Equity =Total Liabilities

Total Equity

Debt to Total Assets =Total Liabilities

Total Assets

© 2006 Pearson Education Canada Inc. Chapter 13 - 22

Financial ManagementFinancial ManagementDeveloping and Implementing

a Financial Plan

Monitoring Cash Flow

Developing a Budget

•Amount of funds•Sources of funds•Uses of funds

•Cash •Inventory•Receivables and payables

•Financial control•Capital investments•Capital budgeting