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Transcript of Part VI: Financial Management Introduction to Business 3e 15 Copyright © 2004 South-Western. All...
Copyright © 2004 South-Western. All rights reserved.
Part VI: Financial ManagementPart VI: Financial Management
Jeff MaduraIntroduction to
Business 3e
Introduction to Business 3e
1515Accounting and Accounting and Financial AnalysisFinancial AnalysisAccounting and Accounting and
Financial AnalysisFinancial Analysis
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Financial ManagementFinancial Management
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Learning GoalsLearning Goals•Explain how firms use accounting.
•Explain how to interpret financial statements.
•Explain how to evaluate a firm’s financial condition.
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Accounting and Financial Accounting and Financial AnalysisAnalysis
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AccountingAccounting•Accounting involves the summary and analysis of a firm’s financial condition
•How firms use accounting– In the reporting of accurate financial
information to shareholders and creditors (financial accounting) Bookkeeping records financial transactions. Publicly owned firms must have their
financial statement audited and certified as accurate.
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How Firms Use AccountingHow Firms Use Accounting•Use financial information to support decisions—managerial accounting– Use historical revenue and cost information
to support budgeting decisions– Use sales information to evaluate impact of
promotion strategy– Use seasonal sales information to determine
future production level
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business onlinebusiness online ee -- businessbusiness
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Uses of AccountingUses of Accounting•Use financial information to maintain control:– Monitor performance of individuals, divisions,
and products.– Monitor production efficiency.– Identify firm’s strengths and weaknesses.– Audit records to ensure accuracy.
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Interpreting Financial Interpreting Financial StatementsStatements
• Income statement– Indicates firm’s revenue, costs, and earnings
over a period of time.
•Balance sheet– Reports book value of all the firm’s assets,
liabilities, and owner’s equity at a given point in time.
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Income StatementIncome Statement•Net sales•Cost of goods sold•Gross profit•Operating expenses•Earnings before interest and taxes•Earnings before taxes•Net income (earnings after taxes)
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Example of Income Example of Income Statement: Taylor, Inc.Statement: Taylor, Inc.
Exhibit 15.1
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Income Statement Items as a Income Statement Items as a Percentage of Net Sales for Percentage of Net Sales for
Taylor, Inc.Taylor, Inc.
Exhibit 15.2
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Balance Sheet ItemsBalance Sheet Items•Assets•Liabilities•Owner’s equity
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AssetsAssets•Assets are anything owned by the firm– Current assets are those that will be
converted into cash within a year Cash, marketable securities, accounts
receivable, and inventories
– Fixed assets will be used for more than a year The value of plant and equipment is
depreciated to reflect the reduced value (useful life) of the assets over time.
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LiabilitiesLiabilities•Liabilities include all of the firm’s debts– Current (short-term) Liabilities
Will be repaid within a year.– Accounts payable– Notes payable
– Long-term liabilities (debt) Will not to be fully repaid within a year.
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Liabilities and Owner’s Liabilities and Owner’s EquityEquity
•Owner’s equity– Par (stated) value of all common stock
issued, additional paid-in capital, and retained earnings.
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Example of Example of Balance Balance Sheet for Sheet for
Taylor, Inc.Taylor, Inc.
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Breakdown of Balance Sheet Breakdown of Balance Sheet for Taylor, Inc.for Taylor, Inc.
Exhibit 15.4
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Basic Accounting EquationBasic Accounting Equation
Assets = Liabilities – Owner’s Equity
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Responsible Financial Responsible Financial ReportingReporting
•Accounting methods that provide the most accurate indication of a firm’s financial condition– Helps gain credibility with existing and
potential stockholders– Makes it easier for managers to detect and
correct deficiencies
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Financial ReportingFinancial Reporting•Role of Auditors
– Certify that financial reports are accurate and within generally accepted reporting guidelines.
•Role of Board of Directors
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Ratio AnalysisRatio Analysis•Evaluate the relationships between financial statement variables– Compare ratios with other companies in the
same industry– Assess change in ratios over time– Common ratios
Liquidity Efficiency Financial leverage Profitability
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Measures of LiquidityMeasures of Liquidity•The firm’s ability to meet short-term obligations
sLiabilitieCurrent
AssetsCurrent RatioCurrent
sLiabilitieCurrent
ARs Securities Cash RatioQuick
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Measures of EfficiencyMeasures of Efficiency
Inventory
goods ofCost turnoverInventory
Assets Total
salesNet overAsset turn
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Measures of Financial Measures of Financial LeverageLeverage
•The degree to which firm uses borrowed funds to finance its assets
EquityOwner
Debt term-Long ratioEquity -to-Debt
ExpenseInterest Annual
TaxesandInterest BeforeEarnings
Earned
Interest
Times
ExpenseInterest Annual
TaxesandInterest BeforeEarnings
Earned
Interest
Times
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Measures of ProfitabilityMeasures of Profitability
SalesNet
IncomeNet Margin Profit Net
Assets Total
IncomeNet Assetson Return
Equity Owners
IncomeNet Equity on Return
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Ratio AnalysisRatio Analysis•Comparing ratios
– Evaluate how a firm’s financial condition compares to other firms in the industry.
•Limitations of ratio analysis– Firms might operate in more than one
industry - makes comparisons difficult.– Accounting practices vary among firms– Seasonality can impact ratios
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Ratio AnalysisRatio Analysis•Sources of information on ratios
– Robert Morris Associates– Dun and Bradstreet
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Chapter SummaryChapter Summary• Firm’s financial condition is important to financial managers, creditors and stockholders.
• Income statement and balance sheet are the most important financial statements used to evaluate a firm’s financial condition.
• Financial ratios help evaluate a firm’s liquidity, efficiency, profitability, and financial leverage.