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Chapter 15
Accounting and Financial Analysis
Accounting and Financial Analysis
Learning Objectives
Accounting andFinancial Analysis
Evaluate function
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
TheThe Accounting CycleAccounting 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
UseReportingInterpretEvaluate
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
UseReportingInterpretEvaluate
Responsible Financial Reporting
Accounting and Financial Analysis
Roles for Proper Reporting
UseReportingInterpretEvaluate
Auditors
Board of Directors
Sarbanes-Oxley Act
Accounting and Financial Analysis
Income statement’s formulabased 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
UseReportingInterpretEvaluate
Accounting and Financial Analysis
Percentage of Sales
UseReportingInterpretEvaluate
Accounting and Financial Analysis
Accounting Equation
UseReportingInterpretEvaluate
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
UseReportingInterpretEvaluate
Accounting and Financial Analysis
Breakdowns
UseReportingInterpretEvaluate
Accounting and Financial Analysis
Ratio Analysis
UseReportingInterpretEvaluate
Liquidity
Efficiency
Financial Leverage
Profitability
Accounting and Financial Analysis
Liquidity – Current Ratio
UseReportingInterpretEvaluate
Current AssetsCurrent Liabilities
Taylor, Inc example:$2,000,000$1,000,000
Current Ratio = 2.00
Accounting and Financial Analysis
Liquidity – Quick Ratio
UseReportingInterpretEvaluate
Cash + MS + ARCurrent Liabilities
Taylor, Inc example:$1,000,000$1,000,000
Quick Ratio = 1.00
MS = Marketable SecuritiesAR = Accounts Receivable
Accounting and Financial Analysis
Efficiency – Inventory Turnover
UseReportingInterpretEvaluate
Cost of Goods SoldInventory
Taylor, Inc example:$16,000,000$1,000,000
Inventory Turnover = 16.00
Accounting and Financial Analysis
Efficiency – Asset Turnover
UseReportingInterpretEvaluate
Net SalesTotal Assets
Taylor, Inc example:$20,000,000$10,000,000
Asset Turnover = 2.00
Accounting and Financial Analysis
Leverage – Debt to Equity
UseReportingInterpretEvaluate
Long Term DebtOwner’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• Bonds @10% 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• 500,000
Accounting and Financial Analysis
Leverage – Interest Earned
UseReportingInterpretEvaluate
EBITAnnual 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
UseReportingInterpretEvaluate
Net IncomeNet Sales
Taylor, Inc example:$700,000
$20,000,000
Net Profit Margin = 3.50%
Accounting and Financial Analysis
Profitability – Return on Assets
UseReportingInterpretEvaluate
Net IncomeTotal Assets
Taylor, Inc example:$700,000
$10,000,000
Return on Assets = 7.00%
Accounting and Financial Analysis
Profitability – Return on Equity
UseReportingInterpretEvaluate
Net IncomeOwner’s Equity
Taylor, Inc example:$700,000
$4,000,000
Return on Equity = 17.50%
Accounting and Financial Analysis
Ratio Interpretation
UseReportingInterpretEvaluate
Accounting and Financial Analysis
Ratio Interpretation - Taylor
UseReportingInterpretEvaluate
Accounting and Financial Analysis
Ratio Limitations
UseReportingInterpretEvaluate
Difficult
Accounting Practices
Seasonal Swings
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