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Transcript of . Chapter 15 Accounting and Financial Analysis. Learning Objectives Accounting and Financial...
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Chapter 15
Accounting and Financial Analysis
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Accounting and Financial Analysis
Learning Objectives
Accounting andFinancial Analysis
Evaluate function
Interpret Reporting
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Accounting and Financial Analysis
The Key Decisions in Running a Business
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Accounting and Financial Analysis
What is accounting?
• Definition• Person• importance
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Accounting and Financial Analysis
Accounting is the measurement and reporting financial
information to various users
regarding the economic activities of a firm.
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Accounting and Financial Analysis
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.
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Accounting and Financial Analysis
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
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Accounting and Financial Analysis
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
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Accounting and Financial Analysis
How Firms Use Accounting
UseReportingInterpretEvaluate
To report
To support decision
To control operation
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Accounting and Financial Analysis
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?
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Accounting and Financial Analysis
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.
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Accounting and Financial Analysis
To control—managerial
accounting/auditing
• Why is auditing needed?• Two kinds of auditing
(internal and independent)
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Accounting and Financial Analysis
Responsible Reporting
UseReportingInterpretEvaluate
Responsible Financial Reporting
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Accounting and Financial Analysis
Roles for Proper Reporting
UseReportingInterpretEvaluate
Auditors
Board of Directors
Sarbanes-Oxley Act
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Accounting and Financial Analysis
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)
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Accounting and Financial Analysis
revenue
• Sales• Rents received• Interests• loyalties
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Accounting and Financial Analysis
Costs of goods sold
• Purchase• Transportation• Storing
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Accounting and Financial Analysis
Operating expenses
• Rents• Salaries• Supplies• Insurance• Depreciation• Marketing • Distribution
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Accounting and Financial Analysis
Income Statement
UseReportingInterpretEvaluate
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Accounting and Financial Analysis
Percentage of Sales
UseReportingInterpretEvaluate
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Accounting and Financial Analysis
Accounting Equation
UseReportingInterpretEvaluate
Balance Sheet
Assets = Liabilities + Owner’s Equity
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Accounting and Financial Analysis
Based on liquidity
• Current assets• Fixed assets• Intangible assets
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Accounting and Financial Analysis
Liabilities
• Current liabilities
• Long-term liabilities
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Accounting and Financial Analysis
Common liabilities
• Accounts payable• Notes payable
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Accounting and Financial Analysis
Balance Sheet
UseReportingInterpretEvaluate
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Accounting and Financial Analysis
Breakdowns
UseReportingInterpretEvaluate
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Accounting and Financial Analysis
Ratio Analysis
UseReportingInterpretEvaluate
Liquidity
Efficiency
Financial Leverage
Profitability
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Accounting and Financial Analysis
Liquidity – Current Ratio
UseReportingInterpretEvaluate
Current AssetsCurrent Liabilities
Taylor, Inc example:$2,000,000$1,000,000
Current Ratio = 2.00
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Accounting and Financial Analysis
Liquidity – Quick Ratio
UseReportingInterpretEvaluate
Cash + MS + ARCurrent Liabilities
Taylor, Inc example:$1,000,000$1,000,000
Quick Ratio = 1.00
MS = Marketable SecuritiesAR = Accounts Receivable
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Accounting and Financial Analysis
Efficiency – Inventory Turnover
UseReportingInterpretEvaluate
Cost of Goods SoldInventory
Taylor, Inc example:$16,000,000$1,000,000
Inventory Turnover = 16.00
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Accounting and Financial Analysis
Efficiency – Asset Turnover
UseReportingInterpretEvaluate
Net SalesTotal Assets
Taylor, Inc example:$20,000,000$10,000,000
Asset Turnover = 2.00
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Accounting and Financial Analysis
Leverage – Debt to Equity
UseReportingInterpretEvaluate
Long Term DebtOwner’s Equity
Taylor, Inc example:$5,000,000$4,000,000
Debt to Equity Ratio = 1.25
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Accounting and Financial Analysis
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
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Accounting and Financial Analysis
Leverage – Interest Earned
UseReportingInterpretEvaluate
EBITAnnual Interest Expense
Taylor, Inc example:$1,500,000$500,000
Times Interest Earned = 3.00
EBIT = Earnings Before Interest and Taxes
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Accounting and Financial Analysis
Profitability – Net Profit
UseReportingInterpretEvaluate
Net IncomeNet Sales
Taylor, Inc example:$700,000
$20,000,000
Net Profit Margin = 3.50%
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Accounting and Financial Analysis
Profitability – Return on Assets
UseReportingInterpretEvaluate
Net IncomeTotal Assets
Taylor, Inc example:$700,000
$10,000,000
Return on Assets = 7.00%
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Accounting and Financial Analysis
Profitability – Return on Equity
UseReportingInterpretEvaluate
Net IncomeOwner’s Equity
Taylor, Inc example:$700,000
$4,000,000
Return on Equity = 17.50%
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Accounting and Financial Analysis
Ratio Interpretation
UseReportingInterpretEvaluate
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Accounting and Financial Analysis
Ratio Interpretation - Taylor
UseReportingInterpretEvaluate
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Accounting and Financial Analysis
Ratio Limitations
UseReportingInterpretEvaluate
Difficult
Accounting Practices
Seasonal Swings