. Chapter 15 Accounting and Financial Analysis

Learning Objectives Accounting and Financial Analysis Evaluatefunction Interpret Reporting

Accounting and Financial Analysis The Key Decisions in Running a Business

Accounting and Financial Analysis What is accounting? Definition Person importance

Accounting and Financial Analysis Accounting is the measurement and reporting financial information to various users regarding the economic activities of a firm.

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.

Accounting and Financial Analysis The Accounting Cycle Analyze Source Documents Record Transactions in Journals Post Journal Entries to Ledger Take a Trial Balance Prepare Financial Statements Analyze Financial Statements

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

Accounting and Financial Analysis How Firms Use Accounting Use Reporting Interpret Evaluate To report To support decision To control operation

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?

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.

Accounting and Financial Analysis To control— managerial accounting/auditing Why is auditing needed? Two kinds of auditing (internal and independent)

Accounting and Financial Analysis Responsible Reporting Use Reporting Interpret Evaluate Responsible Financial Reporting

Accounting and Financial Analysis Roles for Proper Reporting Use Reporting Interpret Evaluate Auditors Board of Directors Sarbanes-Oxley Act

Accounting and Financial Analysis Income statement’s formula based on GAAP Revenue – cost of goods sold gross profit (gross margin) – operating expenses net income before taxes – taxes net income (or loss)

Accounting and Financial Analysis revenue Sales Rents received Interests loyalties

Accounting and Financial Analysis Costs of goods sold Purchase Transportation Storing

Accounting and Financial Analysis Operating expenses Rents Salaries Supplies Insurance Depreciation Marketing Distribution

Accounting and Financial Analysis Income Statement Use Reporting Interpret Evaluate

Accounting and Financial Analysis Percentage of Sales Use Reporting Interpret Evaluate

Accounting and Financial Analysis Accounting Equation Use Reporting Interpret Evaluate Balance Sheet Assets = Liabilities + Owner’s Equity

Accounting and Financial Analysis Based on liquidity Current assets Fixed assets Intangible assets

Accounting and Financial Analysis Liabilities Current liabilities Long-term liabilities

Accounting and Financial Analysis Common liabilities Accounts payable Notes payable

Accounting and Financial Analysis Balance Sheet Use Reporting Interpret Evaluate

Accounting and Financial Analysis Breakdowns Use Reporting Interpret Evaluate

Accounting and Financial Analysis Ratio Analysis Use Reporting Interpret Evaluate Liquidity Efficiency Financial Leverage Profitability

Accounting and Financial Analysis Liquidity – Current Ratio Use Reporting Interpret Evaluate Current Assets Current Liabilities Taylor, Inc example: $2,000,000 $1,000,000 Current Ratio = 2.00

Accounting and Financial Analysis Liquidity – Quick Ratio Use Reporting Interpret Evaluate Cash + MS + AR Current Liabilities Taylor, Inc example: $1,000,000 $1,000,000 Quick Ratio = 1.00 MS = Marketable Securities AR = Accounts Receivable

Accounting and Financial Analysis Efficiency – Inventory Turnover Use Reporting Interpret Evaluate Cost of Goods Sold Inventory Taylor, Inc example: $16,000,000 $1,000,000 Inventory Turnover = 16.00

Accounting and Financial Analysis Efficiency – Asset Turnover Use Reporting Interpret Evaluate Net Sales Total Assets Taylor, Inc example: $20,000,000 $10,000,000 Asset Turnover = 2.00

Accounting and Financial Analysis Leverage – Debt to Equity Use Reporting Interpret Evaluate Long Term Debt Owner’s Equity Taylor, Inc example: $5,000,000 $4,000,000 Debt to Equity Ratio = 1.25

Accounting and Financial Analysis Making decision on using financial leverage Raise 10% by selling stock Raise 90% by issuing bonds Common stock $50,000 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

Accounting and Financial Analysis Leverage – Interest Earned Use Reporting Interpret Evaluate EBIT Annual Interest Expense Taylor, Inc example: $1,500,000 $500,000 Times Interest Earned = 3.00 EBIT = Earnings Before Interest and Taxes

Accounting and Financial Analysis Profitability – Net Profit Use Reporting Interpret Evaluate Net Income Net Sales Taylor, Inc example: $700,000 $20,000,000 Net Profit Margin = 3.50%

Accounting and Financial Analysis Profitability – Return on Assets Use Reporting Interpret Evaluate Net Income Total Assets Taylor, Inc example: $700,000 $10,000,000 Return on Assets = 7.00%

Accounting and Financial Analysis Profitability – Return on Equity Use Reporting Interpret Evaluate Net Income Owner’s Equity Taylor, Inc example: $700,000 $4,000,000 Return on Equity = 17.50%

Accounting and Financial Analysis Ratio Interpretation Use Reporting Interpret Evaluate

Accounting and Financial Analysis Ratio Interpretation - Taylor Use Reporting Interpret Evaluate

Accounting and Financial Analysis Ratio Limitations Use Reporting Interpret Evaluate Difficult Accounting Practices Seasonal Swings