1. Auditing and Analyzing

2. Auditors Independent 3 rd party that reports/investigates financial statements from a company – Checking for accuracy – Puts a “stamp of approval” on statements when finished if done correctly.

3. Who hires them? A business must hire an auditor if they are presenting their financial information to the public Relationship: Auditor wants to be hired/paid, company wants that stamp of approval. Puts the auditor in a difficult position. Why?

4. Example You had to hire a teacher to mark your papers to get credit for the course. You want it marked but you don’t want to pay too much. – Different teachers would develop reputations for who marked easier. – You would chose the easier one if the price was the same. Same thing in the business world.

5. Analyzing Financial Statements Questions a stakeholder might want to get answers for from a statement. – How much money is the business making (Profitability) – How well can the business pay its bills. (Liquidity) – Growth over the past year vs. lifetime of the company – Potential competition.

6. Financial Ratios To even the playing field between large business’s and small business’s, we use financial ratios. – Helps give accurate data – Reflects the business itself, not just the “bottom line”

7. Profitability Ratio’s Return on Assets (ROA) – Net Income / Total Income. – The higher the % the better a company is doing. Profit Margin – Net Income vs. Total Revenue – The higher the % the better a company is doing.

8. Liquidity Ratio’s Liquidity refers to how quickly a business can turn its assets into cash – I.E. a vehicle or furniture might have high liquidity while a building or land would have lower liquidity. Current Ratio: – Current assets / Current Liabilities – Higher the better Acid Test Ratio (Quick Ratio) – Cash / Current Liabilities – Higher the better.

9. Make or Buy? Should a business make an item themselves or contract it out? – Ultimately comes down to cost – How can we save the most money?

10. Example A car plant needs to have manual transmissions for its new model truck. To make them, the costs involve a new building at the plant for $1,250,000, and labour costs of $40/ transmission, materials of $180/ transmission, and other variable costs of $40/ transmission. A nearby company can make them for us for $350/ transmission. If we need 5000, should we make them or buy them?

11. VolumeMakeBuy 5000 1,250,000 + (260)5,000 2,550,000 BUY!350(5,000) 1,750,000 10000 1,250,000 + (260)10000 3,850,000 BUY! 350(10,000) 3,500,000 150001,250,000 + (260)15,000 5,150,000 MAKE!350(15,000) 5,250,000