1. Understanding Financial Analysis.
Essential Standard 6.00
Understanding Financial Analysis.

2. Objective 6.01
Acquire a foundational knowledge of accounting to understand its nature and scope.

3. The Accounting Cycle
Identify the transaction or other recognizable event.
Prepare the transaction’s source document such as purchase order or invoice
Analyze the transaction.
Record the transaction by making entries in the appropriate journal

4. The Accounting Cycle
Post general journal entries to the ledge accounts
Prepare a trial balance to make sure the debits equal credits. The trial balance is a list of all the ledger accounts with the debits on the left and the credits on the right.
Correct any discrepancies in the trial balance. If columns are not in balance look for errors

5. The Accounting Cycle 8. Prepare the adjusted trial balance.
9. Prepare financial statements.
Income statement-prepared from the revenue, expenses, gains, and losses.
Balance sheet – Prepared from the assets liabilities, and equity accounts
Statement of retained earnings; prepared from net income and dividend information
Cash flow statement- derived from the other financial

6. The Accounting Cycle
10. Prepare closing journal entries that close temporary accounts such as revenues, expenses, gains, and losses.
11. Post closing entries to the ledger accounts
Prepare the after closing trial balance to make sure the debits equals the credits.

7. Financial planning

8. Financial Planning Why should a business do financial planning?
Reduces financial uncertainties
Increases control of financial activities
Provides a ‘map of finances’ for business
Makes it easier to ‘stick’ to financial processes and goals.
What are the phases of business financial planning?
Start-up, Operation, Expansion
Why should a business do financial planning?
Reduces financial uncertainties
Increases control of financial activities
Provides a ‘map of finances’ for business
Makes it easier to ‘stick’ to financial processes and goals.
What are the phases of business financial planning? What happens during each phase?
Start-up
Financial planning includes determining the amount of money needed to start and operate the business until a profit is made. Also the major sales and expenses are determined.
Operation
Financial planning includes determining whether they are making enough money to operate. The basic formula used is Revenue – Expenses = Profit or Loss.
Expansion
Financial planning includes determining whether enough money is made to cover growth opportunities.

9. What happens during each phase of business financial planning?
Start-up
Financial planning includes determining the amount of money needed to start and operate the business until a profit is made. Also the major sales and expenses are determined.
Operation
Financial planning includes determining whether they are making enough money to operate. The basic formula used is Revenue – Expenses = Profit or Loss.
Expansion
Financial planning includes determining whether enough money is made to cover growth opportunities.

10. Financial Planning continued
What is the basic financial equation?
Revenue – Expenses = Profit or Loss
In order to have a profit, which will be greater?
Profit = Revenue > Expenses
In order to have a loss, which will be greater?
Loss = Revenue < Expenses
In order to have a profit, which will be greater?
Profit = Revenue > Expenses
In order to have a loss, which will be greater?
Loss = Revenue < Expenses

11. Business budgets

12. Business Budgets Types of business budgets:
Start-up budget used by a new business or during expansion of a business until profits are made.
Operating budget used for ongoing business operations for a specific period.
Cash budget used to estimate cash flow in and out of a business
Types of business budgets:
Start-up budget used by a new business or during expansion of a business until profits are made.
Operating budget used for ongoing business operations for a specific period.
Cash budget used to estimate cash flow in and out of a business.

13. Business Budgets continued
Steps for preparing a business budget:
Prepare a list of income and expense items.
Gather accurate information from business records.
Create the budget.
Clearly communicate the budget to key employees in order to make sound business decisions.

14. Financial records and statements

15. Financial Records and Statements
What is the purpose of financial records?
Financial records provide specific information about business activities that is used to analyze the financial performance of a business.
Financial records used by businesses:
Asset records
Depreciation records
Inventory records
Records of accounts
Cash records
Payroll records
Tax records
What is the purpose of financial records?
Financial records provide specific information about business activities that is used to analyze the financial performance of a business.

16. Financial Records and Statements continued
What are assets?
Assets are what a company owns.
What are liabilities?
Liabilities are what a company owes.
What is owner’s equity?
Owner’s equity is the value of the owner’s investment in the business. Owner’s Equity = Assets – Liabilities. Another name for owner’s equity is stockholder’s equity.
What are assets?
Assets are what a company owns.
What are liabilities?
Liabilities are what a company owes.
What is owner’s equity?
Owner’s equity is the value of the owner’s investment in the business. Owner’s Equity = Assets – Liabilities. Another name for owner’s equity is stockholder’s equity.
What are financial statements?
Financial statements provide a picture of the financial performance of a business.
What is the difference between a balance sheet and an income statement?
A balance sheet includes assets, liabilities, and owner’s equity. An income statement includes sales, expenses, and net profit or loss.

17. Financial Records and Statements continued
What are financial statements?
Financial statements provide a picture of the financial performance of a business.
What is the difference between a balance sheet and an income statement?
A balance sheet includes assets, liabilities, and owner’s equity. An income statement includes sales, expenses, and net profit or loss.

18. Financial performance ratios

19. Financial Performance Ratios
What are financial performance ratios?
Financial performance ratios are comparisons using a company’s financial data to determine how well a business is performing.
The four main types of financial ratios:
Current ratio
Debt to equity ratio
Return on equity ratio
Net income ratio
What are financial performance ratios?
Financial performance ratios are comparisons using a company’s financial data to determine how well a business is performing.

20. Financial Performance Ratios continued
Current ratio
How is current ratio calculated?
Equals current assets/current liabilities
What does this ratio represent?
Represents hows ability of company to pay debts as they become due. Ideally, this ratio should be over 1.0.
Which is more favorable, higher or lower?
Normally, the higher the ratio, the more favorable it is for the company.
Current ratio assets that the business could convert into cash in < 1 year compared to liabilities that it must pay in < 1 year; s
How is current ratio calculated?
Equals current assets/current liabilities
What does this ratio represent?
Represents hows ability of company to pay debts as they become due. Ideally, this ratio should be over 1.0.
Which is more favorable, higher or lower?
Normally, the higher the ratio, the more favorable it is for the company.
Debt to equity ratio
How is debit to equity ratio calculated?
Equals total liabilities/owner’s equity
What does the ratio represent?
Shows how much the business relies on money borrowed externally versus money from within the business. Ideally, this ratio should be less than 2.0.
Normally, the lower this ratio, the more favorable it is for the company.

21. Financial Performance Ratios continued
Debt to equity ratio
How is debit to equity ratio calculated?
Equals total liabilities/owner’s equity
What does the ratio represent?
Shows how much the business relies on money borrowed externally versus money from within the business. Ideally, this ratio should be less than 2.0.
Which is more favorable, higher or lower?
Normally, the lower this ratio, the more favorable it is for the company.

22. Financial Performance Ratios continued
Return on equity ratio
How is current ratio calculated?
Equals net income/owner’s equity (Net income can also be called net profit according to the text.)
What does this ratio represent?
Indicates the rate of return the owners/stockholders are receiving on their investments. There is not an ideal ratio; however, it is used to compare with other types of investments to see if there may be another investment that is more desirable.
Which is more favorable, higher or lower?
Normally, the higher the ratio, the more favorable it is for the company.
Return on equity ratio
How is current ratio calculated?
Equals net income/owner’s equity (Net income can also be called net profit according to the text.)
What does this ratio represent?
Indicates the rate of return the owners/stockholders are receiving on their investments. There is not an ideal ratio; however, it is used to compare with other types of investments to see if there may be another investment that is more desirable.
Which is more favorable, higher or lower?
Normally, the higher the ratio, the more favorable it is for the company.
Net income ratio
Equals total sales/net income (Hint: This is only total SALES, not total income.)
Shows the amount of sales needed for each dollar of net income. While there is not an ideal ratio, managers use this number to compare to past periods to determine how changes in sales affect net income.
Normally, the lower the ratio, the more favorable it is for the company, as it takes less in sales to generate net income.

23. Financial Performance Ratios continued
Net income ratio
How is current ratio calculated?
Equals total sales/net income (Hint: This is only total SALES, not total income.)
What does this ratio represent?
Shows the amount of sales needed for each dollar of net income. While there is not an ideal ratio, managers use this number to compare to past periods to determine how changes in sales affect net income.
Which is more favorable, higher or lower?
Normally, the lower the ratio, the more favorable it is for the company, as it takes less in sales to generate net income.