MM 2.00 Understand Financial Analysis

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Presentation transcript:

MM 2.00 Understand Financial Analysis 2.02 Acquire a foundational knowledge of accounting to understand its nature and scope.

What is financial information? Financial information is information required to support financial decisions or to meet financial requirements. Accounting is the activity within an organization that provides much of the raw financial information. Accounting can be defined as: "The recording of financial transactions over a period of time and the communication of the resulting information to interested parties."

Financial Information Should Be… Credible Transparent Timely Understandable Comparable Reliable

Who is responsible for maintaining financial information? CEO (Chief Executive Officer) CFO (Chief Financial Officer) Finance director Finance department Company accountant Bookkeeper Company secretary (small company)

How do managers use financial information? Helps determine whether a business is at a loss or a profit, how much debtors owe, how much a business owes others Helps managers create: Planning strategies Executing strategies Feedback from the execution of the strategy

How is financial information useful in identifying trends? Types of trends that financial statements can show – growth and decline of sales, profit or loss, changes in costs and expenses, changes in assets and liabilities. Shows current financial state Can make predictions about its future

How does financial data aid in accounting? Income statements and balance sheets Show profits or loss for the time period Info comes from bookkeeping records

How does analysis of financial data aid in verifying information? Info is needed for cost ascertainment, planning, budgeting and forecasting. Book-keeping records are regarded by the tax authorities as reliable Book keeping records determine taxes owed

How does financial data aid in determining variance? The variance is the difference between your forecasts and the actual final numbers For example- Projected sales were 10,000 units, and actual sales were 8,000. There is a variance of 2,000 units.

How does financial data guide financial decision making? Profit and Loss accounts providing details of whether the business is making efficient use of financial resources. Balance Sheet providing details of a businesses assets and liabilities, as well as the liquidity of the business.

How does financial data guide financial decision making? up-to-date information helps to make appropriate decisions about: how to reduce costs how to increase sales how to raise profitability when to purchase new capital assets the best sources of finance, and duration, etc.