Presentation on theme: "Financial Accounting Management"— Presentation transcript:
1 Financial Accounting Management Financial Statements for Management and Operations
2 Our Focus The main focus of this course is to analyze and use financial statementsfor the purposes of:Speaking with lendersInternal managementTax returns
3 The Basic Financial Statements You should prepare and understand threebasic financial statements:the balance sheet, which is a record of assets, liabilities and capital at a specific point in time;the income (profit and loss) statement, which is a summary of your earnings, expenses and net profit (or loss) over a given period of time; andthe cash flow projection, which shows the actual inflows and actual outflows of cash into and out of your business.
4 The Balance SheetThe balance sheet is a snapshot of the company's financial standing at an instant in time. The balance sheet shows the company's financial position, what it owns (assets) and what it owes (liabilities and net worth). The "bottom line" of a balance sheet must always balance (i.e. assets = liabilities + net worth). The individual elements of a balance sheet change from day to day and reflect the activities of the company.
5 The Balance SheetAssets represent the company's use of funds. The company uses cash or other funds provided by the creditor/investor to acquire assets. Assets include all the things of value that are owned or due to the business.Liabilities represents a company's obligations to creditors while net worth represents the owner's investment in the company.
6 Current AssetsCurrent assets are those which mature in less than one year. They are the sum of the following categories:CashAccounts Receivable (A/R)Inventory (Inv)Notes Receivable (N/R)Prepaid ExpensesOther Current Assets
7 Fixed AssetsFixed assets represent the use of cash to purchase physical assets whose life exceeds one year. They include assets such as:LandBuildingMachinery and EquipmentFurniture and FixturesLeasehold Improvements
8 Calculating Fixed Assets When a fixed asset is purchased for use in the operations of the business it is recorded at cost. As the asset wears out, an amount is charged to expense and accumulated annually in a contra- account known as accumulated depreciation. The gross fixed asset (purchase price) less the accumulated depreciation equals the Net Fixed Asset Value (also known as book value). Gross Fixed Assets (Purchase Price) - Accumulated Depreciation = Net Fixed Assets (Book Value)
9 IntangiblesIntangibles represent the use of cash to purchase assets withan undetermined life and they may never mature into cash.For most analysis purposes, intangibles are ignored as assetsand are deducted from net worth because their value isdifficult to determine.Intangibles consist of assets such as:Research and DevelopmentPatentsMarket ResearchGoodwillOrganizational Expense
10 Current LiabilitiesCurrent liabilities are those obligations that willmature and must be paid within 12 months.Current liabilities consist of the following obligationaccounts:Accounts Payable -- Trade (A/P)Accrued ExpensesNotes Payable -- Bank (N/P Bank)Notes Payable -- Other (N/P Other)Current Portion of Long term Debt
11 Non-Current Liabilities Non-current liabilities are those obligationsthat will not become due and payable in thecoming year. There are three types of non-current liabilities, only two of which arelisted on the balance sheet:Non-current Portion of Long Term Debt (LTD)Subordinated Officer Loans (Sub-Off)Contingent Liabilities
12 Equity Equity or Net Worth represents the owners‘ share in the financing of all the assets. Itconsists of two types of equity; purchasedequity, and earned equity. Purchased equityconsists of:Preferred Stock (P/S)Common or Capital Stock (C/S)Paid in Capital
13 The Income StatementThe Income Statement is also known as the “P&L” (Profit and Loss) A company's income statement is a record of its earnings or losses for a given period. It shows all of the money a company earned (revenues) and all of the money a company spent (expenses) during this period.
14 An ExampleIncome Statements for the Years Ending 2003 and 2004 Sales $800,000 $850,000 Less Cost of Goods Sold (200,000) (250,000) Gross Profit on Sales 600, ,000 Less General Operating Expenses (180,000) (200,000) Less Depreciation Expense (50,000) (50,000) Operating Income 370, ,000 Other Income 60,000 90,000 EBIT 430, ,000 Less Interest Expense (50,000) (30,000) Less Taxes (50,000) (60,000) Net Earnings 330, ,000 Less Dividends Paid (70,000) (80,000) Retained Earnings 260, ,000
15 Explanations Gross Profit on Sales = Gross Margin GPS = NS – COGS Operating Income = GP – OE –DepreciationEBIT (Earnings Before Interest & Taxes) = OE +/- OI(OL) +/- Extraordinary Income/Loss
16 Explanations Net Earnings (Loss) = EBIT – Interest – Taxes Retained Earnings = Net Earnings - Dividends
17 Statement of Cash FlowCash flow from an operating perspective is most important for the business manager/owner in a small privately-held company. It is critical to operate "profitability" and not operate with negative or break-even cash- flow. Therefore, managing cash-flow is critical.
18 Statement of Cash Flows The statement of cash flow reports the movementof cash into and out of a business in a given year.Cash Flow Statements are broken down intothree sections:Operating activitiesInvesting activitiesFinancing activities
19 Cash ReceiptsCash Receipts from Customers: Net Sales + Beginning A/R (1/1/00) - Ending A/R (12/31/00) = Cash Receipts from Customers
20 Cash Payments for Inventory Cash Payments for Inventory: Ending Inventory (12/31/00) - Beginning Inventory (1/1/00) + Beginning A/P (1/1/00)- Ending A/P (12/31/00) = Cash Paid for Inventory
22 Cash Paid for Interest Expense Cash Paid for Interest Expense: Interest Expense per P&L + Beginning Interest Payable - Ending Interest Payable = Cash Paid for Interest Expense
23 Net Cash Provided (Used) by Operating Activities A company generates cash from operating its business. A key number is netCash provided from operating activities. This total includes some items fromthe statement of earnings; such as:net earnings, showing the company’s profit (or loss); anddepreciation expense.Net cash provided from operating activities also includes changes in someitems from the statement of financial position:Inventory changes. (Increases in inventories use cash and reductions provide cash).Changes in accounts receivable, the sales the company has not yet been paid for. (Increases use cash and decreases provide cash).Changes in accounts payable. (Increases provide cash and decreases use cash).The statement of cash flows adds the net cash from each type of operating activity and reports the company’s total net cash provided (or used) by all operating activities.
24 Net Cash Provided (Used) by Investing Activities might include investments in property (land), plant(factories and assembly plants) and equipment(machines, trucks, computer systems, telephonesystems). Investing in such assets is a use of cash.selling them is a source of cash.The Statement of Cash Flows adds the net cashFrom each type of investing activity and reports thecompany’s total net cash provided (or used) by allinvesting activities.
25 Working CapitalWorking Capital = Current Assets – Current Liabilities. Working Capital measures how much the Company has in liquid assets to grow its business.
26 Net Cash Provided (Used) by Financing Activities includes the sources and uses of cash for financingactivities. Sources of cash include what a companyraises by selling stocks and bonds and by borrowingfrom banks.The Statement of Cash Flows adds the net cashFrom each type of financing activity and reports thecompany’s total net cash provided (or used) by allfinancing activities.
27 Sources of Working Capital Sources of additional working capital includethe following:Existing cash reservesProfits (when you secure it as cash !)Payables (credit from suppliers)New equity or loans from shareholdersBank overdrafts or lines of creditLong-term loans
28 Some Ratios Liquidity Ratios - a company's ability to meet its short-term obligationsCurrent Ratio = current Assets/current liabilitiesAcid Test (Quick Ratio - no inventory) = current assets-inventory/current liabilitiesWorking Capital = current assets -current liabilities (how much cash is available to grow the company)
29 Some Ratios There are many ratios that can be used to analyze a company's financial position.Profitability Ratios - the primary measure of acompany's success. These include:Return on Equity = earnings after taxes/equityReturn on Assets = earnings after taxes/total assetsReturn on Sales = earnings after taxes/total sales
30 More Profitability Ratios A profit margin measures how much acompany earnings relate to its sales.A net profit margin measures earnings after taxes.The return on assets (ROA) is a snapshot of the performance of the management of the company (not from a stockholder perspective).The return on equity (ROE) is important from a stockholder perspective.
31 Leverage RatiosHow much debt is a company using to support its obligations?What is the debt to equity?The debt to equity (debt or financial leverage) ratio indicatesthe extent to which the business relies on debt financing.Upper acceptable limits of the debt to equity (debt or financialleverage) ratio is usually 2:1; with no more than one-third ofdebt in long-term borrowings.A high financial leverage or debt to equity ratio indicatespossible difficulty in paying interest and principal whileobtaining more funding.Make sure the leverage ratios are as low as possible.
32 SummaryThe financial accounting principles in this course are importantto understand terminology and build a foundation tounderstanding financial statements.It is important to understand a company's profitability, itsearning power and control over expenses. Is a companymanaging its operations correctly?What is the current status of the cash flow management of thecompany and how does it relate to operations andmanagement?