What is Financial Analysis?

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What is Financial Analysis? O What is financial analysis? O Evaluating a company’s performance O Using past data to predict future performance O Analyzing financial statements through the use of ratio analysis, vertical, and horizontal analysis O Uses data to assess the wellness of different areas of a business O Usually a part of the accounting process 3 Copyright © Texas Education Agency, All rights reserved.

Accounting and its Purpose O Accounting O Is the process of planning, recording, analyzing,and interpreting financial information O Provides internal information for management O Provides external information for potential investors or stockholders 4 Copyright © Texas Education Agency, All rights reserved.

Accounting Systems TypeProsCons Manual– accounting procedures without the aid of a computer Costs lessHuman error, takes more time, more difficult to prepare accounting documents and statements Computerized– accounting solely on a computer Less human error, takes less time Costs more Single-entry– similar to a checkbook Simpler, ideal for very small businesses More errors can be made Double-entry– each debit must have a credit More accurate, errors can be easier to identify More complicated 5 Copyright © Texas Education Agency, All rights reserved.

Fields of Accounting FinancialManagerialCostTax 6 Copyright © Texas Education Agency, All rights reserved.

Financial Accounting O Provides an overview of a company’s performance O Follows GAAP (Generally Accepted Accounting Principles) O Mainly for external presentation of information (such as financial statements) 7 Copyright © Texas Education Agency, All rights reserved.

Managerial Accounting O Primarily for internal information purposes O Aids management functions such as O Planning, as in budgets O Organizing, as in carrying out objectives and monitoring activities O Control purposes, as in implementing plans O Decision-making, as in all aspects of product development 8 Copyright © Texas Education Agency, All rights reserved.

Cost Accounting O Actually part of managerial accounting O Purpose is the cost of conducting business O Costs of products and services O Costs of resources O Costs associated with departments 9 Copyright © Texas Education Agency, All rights reserved.

Tax Accounting O Follows IRS rules and regulations O Used to prepare a multitude of tax statements and forms O Looks at profit and loss statements specifically 10 Copyright © Texas Education Agency, All rights reserved.

The Accounting Process INPUTS collecting transaction information through journal entries PROCESSING posting those journal entries to the appropriate ledger accounts OUTPUTS turning the ledger balance information into financial statements 11 Copyright © Texas Education Agency, All rights reserved.

Financial Statements Balance Sheet– contains assets, liabilities, and owner’s equity accounts Income Statement– contains revenue and expense accounts Statement of Changes in Owner’s Equity– shows additions and subtractions to the capital account during an accounting period Cash Flow Statement– records cash flow from operations, from investing activities, and from financing activities 12 Copyright © Texas Education Agency, All rights reserved.

Audiences for Financial Analysis O Outside investors and stockholders O Internal management O Creditors, or potential creditors O Suppliers O Credit rating agencies 13 Copyright © Texas Education Agency, All rights reserved.

Post-Secondary Education O Financial Analysis is important to many different aspects of a person’s future including O College Majors O Industry Certifications 14 Copyright © Texas Education Agency, All rights reserved.

College Majors EconomicsReal EstateInsuranceAccountingFinance 15 Copyright © Texas Education Agency, All rights reserved.

Industry Certifications Chartered Financial Analyst® Certified Financial Planner® Certified Management Accountant 16 Copyright © Texas Education Agency, All rights reserved.

Career Opportunities O Financial Analysts O Evaluate the performance of various types of investments O Budget Analysts O Help institutions organize their finances and prepare budget reports O Insurance Underwriters O Analyze applications for insurance to determine premium and coverage amounts O Financial Advisors O Help people with investment advice and financial decisions 17 Copyright © Texas Education Agency, All rights reserved.

Independent Practice Assignments 18 O Financial Analysis Research Assignment #1 O Divide students in groups of three or four, depending upon your class size. Have students conduct Internet research on accounting and accounting systems. They should record at least 10 facts each. They will then compare each other’s lists and narrow the facts down to one list. The list will be posted in the room along with the other groups’ lists. O Group Presentation Assignment #2 O Divide students into groups of three to four, again depending upon the class size. Assign each group a topic or let them draw out of a hat (or box). Topics can include the fields of accounting, purposes of financial analysis, GAAP principles, or any other topic. Student groups are to create at least a five-slide presentation with a handout (even if it is a note-taking document such as Cornell Notes) for the other students to complete while they are presenting. O Career Opportunities Assignment #3 O Students will research careers involving financial analysis on any of the career websites. They will select three careers and will create a Venn diagram with the three careers in each of the circles. The overlapping sections of the circles should include the duties, job responsibilities, or educational requirements that are the same for those jobs. If all three have the same attribute, that goes in the center overlap. If one particular job has a requirement the same as one of the other jobs, it goes in the overlap between those two jobs, not in the center because it is only particular to two of the three jobs. This can be done on the computer, flip chart paper, or any other medium available. Copyright © Texas Education Agency, All rights reserved.