1. Copyright © 2007 South-Western. All rights reserved. Chapter 15 Accounting and Financial Analysis

2. Copyright © 2007 South-Western. All rights reserved. Learning Objectives Accounting and Financial Analysis EvaluateUse Interpret Reporting

3. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. The Key Decisions in Running a Business

4. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. How Firms Use Accounting Use Reporting Interpret Evaluate Accounting Public Accountants CPAs Bookkeeping Financial Accounting

5. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. Reporting Accounting Use Reporting Interpret Evaluate Investors Online Reporting Creditors

6. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. Decision Support & Control Use Reporting Interpret Evaluate Managerial Accounting Auditing Internal Auditors

7. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. Responsible Reporting Use Reporting Interpret Evaluate Responsible Financial Reporting

8. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. Roles for Proper Reporting Use Reporting Interpret Evaluate Auditors Board of Directors Sarbanes-Oxley Act

9. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. Income Statement Use Reporting Interpret Evaluate

10. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. Percentage of Sales Use Reporting Interpret Evaluate

11. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. Accounting Equation Use Reporting Interpret Evaluate Balance Sheet Assets = Liabilities + Owner’s Equity

12. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. Balance Sheet Use Reporting Interpret Evaluate

13. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. Breakdowns Use Reporting Interpret Evaluate

14. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. Ratio Analysis Use Reporting Interpret Evaluate Liquidity Efficiency Financial Leverage Profitability

15. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. Liquidity – Current Ratio Use Reporting Interpret Evaluate Current Assets Current Liabilities Taylor, Inc example: $2,000,000 $1,000,000 Current Ratio = 2.00

16. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. 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

17. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. 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

18. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. Efficiency – Asset Turnover Use Reporting Interpret Evaluate Net Sales Total Assets Taylor, Inc example: $20,000,000 $10,000,000 Asset Turnover = 2.00

19. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. 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

20. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. 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

21. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. Profitability – Net Profit Use Reporting Interpret Evaluate Net Income Net Sales Taylor, Inc example: $700,000 $20,000,000 Net Profit Margin = 3.50%

22. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. 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%

23. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. 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%

24. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. Ratio Interpretation Use Reporting Interpret Evaluate

25. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. Ratio Interpretation - Taylor Use Reporting Interpret Evaluate

26. Accounting and Financial Analysis Copyright © 2007 South-Western. All rights reserved. Ratio Limitations Use Reporting Interpret Evaluate Difficult Accounting Practices Seasonal Swings