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Understanding and Using Financial Statements

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1 Understanding and Using Financial Statements
Andrew Graham Queens University School of Policy Studies SPS

2 Structure of the Day Double Entry and the Dreaded Debits and Credits
Accounting Cycle and the Fundamental Accounting Equation Financial Statements Architecture

3 Section 1 The Accounting Cycle

4 Double-Entry Bookkeeping
Each financial event is called a transaction The effect of a transaction is recorded in the accounts by an entry Each entry will affect at least two parts of the accounting record to balance the record – debit and credit This does not mean that the financial event is recorded twice – rather it is balanced against either costs, increased or reduced liability, changes in inventory, etc. The Principle of Balance

5 Double-entry accounting is based on a simple concept: each party in a business transaction will receive something and give something in return. In bookkeeping terms, what is received is a debit and what is given is a credit. The T account is a representation of a scale or balance. Luca Pacioli Developer of Double-Entry Accounting Scale or Balance T account Left Side Receive DEBIT Right Side Give CREDIT Receive DEBIT Give CREDIT

6 Double Entry Bookkeeping
The double-entry system provides checks and balances to ensure that your books are always in balance. In double-entry accounting, every transaction has two journal entries: a debit and a credit. Debits must always equal credits. Because debits equal credits, double-entry accounting prevents some common bookkeeping errors.

7 You provide consulting services, on account, to one of your regular customers, Betty Fry, for $1,500. When you write up the invoice, you would make the following bookkeeping entry in your sales journal: Debit Credit Accounts receivable (Fry) 1,500 Consulting revenue Upon receipt of the invoice, your customer sends you a cheque for $1,500 in payment of her account. When you receive the check, make the following entry in your cash receipts journal: Debit Credit Cash 1,500 Accounts receivable (Fry)

8 Accounting Cycle – within time period
Financial Event Source Record Analyze and Classify Transaction Record through Journal Entry Post to Ledge Accounts

9 Accounting Cycle – at the end of an accounting period
Prepare a Trial Balance Correct Errors and Make Adjustments Adjusting Entries Revised Trial Balance Financial Statements Closing Journal Entries Final Adjustments and Restatements

10 The Accounting Cycle Steps performed throughout the accounting period:
Identify the transaction or other recognizable event. Prepare the transaction's source document such as a purchase order or invoice. Analyze and classify the transaction. Record the transaction by making entries in the appropriate journal. Such entries are made in chronological order. Post general journal entries to the ledger accounts. Because this process is repeated each reporting period, it is referred to as the accounting cycle

11 The Accounting Cycle Steps performed at the end of the accounting period: Prepare the trial balance to make sure that debits equal credits. Correct any discrepancies in the trial balance. If the columns are not in balance, look for math errors, posting errors, and recording errors. Posting errors include: posting of the wrong amount, omitting a posting, posting in the wrong column, or posting more than once.

12 The Accounting Cycle Prepare adjusting entries to record accrued, deferred, and estimated amounts. Post adjusting entries to the ledger accounts. Prepare the adjusted trial balance. This step is similar to the preparation of the unadjusted trial balance, but this time the adjusting entries are included. Correct any errors that may be found. Prepare the financial statements. Income statement: prepared from the revenue, expenses, gains, and losses. Balance sheet: prepared from the assets, liabilities, and equity accounts. Cash flow statement: derived from the other financial statements using either the direct or indirect method. Accrued expense refers to an expense that has been incurred but not yet paid. Examples of accrued expense items might be interest that has accrued on an outstanding note that has not been paid, and taxes that have accrued but not yet been paid. More later.

13 The Accounting Cycle Prepare closing journal entries that close temporary accounts such as revenues, expenses, gains, and losses. Post closing entries to the ledger accounts. Prepare the after-closing trial balance to make sure that debits equal credits. Prepare reversing journal entries (optional). We often hear about accounting adjustments taking place after the fact. This is legitimate provided it is done right. It can also be fraud. The current Nortel trial is an example of accounting adjustments after the fact allegedly to permit the paying of bonuses to executives even though the company was tanking (a really useful accounting term).

14 Section 2 The Fundamental Accounting Equation

15 The accounting equation as a framework for financial reporting
The basic accounting equation is a powerful framework for collecting, organizing and reporting financial information. With this one conceptual tool we can simultaneously: Measure how the company has been doing (income statement) Show where it stands financially at the end of the period (balance sheet) Summarize transactions with its owners (statement of retained earnings or statement of owners’ equity). One further extension allows us to summarize balance sheet changes (statement of cash flows).

16 The Accounting Equation
Assets = Liabilities + Owner’s Equity The resources owned by a business

17 The Accounting Equation
Assets = Liabilities + Owner’s Equity The rights of the creditors, which represent debts of the business

18 The Accounting Equation
Assets = Liabilities + Equity The residual worth

19 The Fundamental Accounting Equation
The Basic Logic of the Equation: What you have minus what you is what you are worth. Assets = Have Economic resources owned by the organization that are expected to be of benefit to it in the future Rights owed that have a monetary value e.g. right to collect fees Cash. Office supplies, inventory, furniture, land and buildings

20 The Fundamental Accounting Equation
Grouping of assets for presentation on Financial Reports: Very liquid – cash and securities Assets for immediate use - inventory Productive Assets – plant and machinery Accounts receivable Fixed Assets – capital holdings Restricted Assets – non-mission holdings or assets held subject to highly restrictive conditions.

21 The Fundamental Accounting Equation
Liabilities = Owe Outsider claims which are economic obligations payable to outsiders Outside parties are called creditors

22 The Fundamental Accounting Equation
Equity = Value to Owners = Worth = Net Debt Insider claims to the organization’s assets From a public sector perspective, it reflects the public holdings that remain after transactions – these can be both assets and debts An owner has a claim to the entity’s assets because he or she has invested in the business Amount of an entity’s assets that remain after the liabilities are subtracted Often referred to as net assets Governments will refer to this portion often as Non-Financial Assets/Debt

23 Section 3 Recording Financial Information

24 Assets = Liabilities + Net Assets
Recording Financial Information A financial event is one that affects the fundamental accounting equation by changing any of its components: Assets = Liabilities + Net Assets A journal is a chronological listing of every financial event that occurs in an organization. Every type of asset, liability, revenue, or expense is referred to as an account. Organizations may have as many accounts as they need.

25 From journal to general ledger
Journal: chronological Ledger: analytical Journal entries are posted (copied), line by line, to corresponding account in the general ledger Use a T-account to represent an account Account name Debit Credit xxx xxx

26 Recording Financial Information – Debits and Credits
Financial events are recorded as a series of debits and credits Increases in assets are recorded by debits and decreases are recorded by credits. Increases in liabilities and in owner's equity are recorded by credits and decreases are recorded by debits.

27 Recording Financial Information – Debits and Credits
Notice that the debit and credit rules are related to an account's location in the balance sheet. If the account appears on the left-hand side of the balance sheet (asset accounts), increases in the account balance are recorded by left-side entries (debits). If the account appears on the right-hand side of the balance sheet (liability and owner's equity accounts), increases are recorded by right-side entries (credits).

28 Debits, Credits and the T-Account
Title of Account Increases are recorded on one side of the T-account, and decreases are recorded on the other side. Left or Debit Side Right or Credit Side A T-account is a visual aid used to depict an account in a general ledger. Above the top portion of the T would be the account title. On the left-side of the base of the T would be any debit amounts; on the right-side would be the credit amounts.

29 Debit Credit A debit in an increase in an asset item; a decrease in a claim or expense item A credit is an increase in a claim item; a decrease in an asset or revenue item. If the words "debits" and "credits" sound like a foreign language to you, you are more perceptive than you realize—"debits" and "credits" are words that have been traced back five hundred years to a document describing today's double-entry accounting system. Under the double-entry system every business transaction is recorded in at least two accounts. One account will receive a "debit" entry, meaning the amount will be entered on the left side of that account. Another account will receive a "credit" entry, meaning the amount will be entered on the right side of that account. The initial challenge with double-entry is to know which account should be debited and which account should be credited. Debit means left Credit means right

30 Debits and credits affect accounts as follows:
Debit and Credit Rules Debits and credits affect accounts as follows: A = L + NA ASSETS Debit for Increase Credit for Decrease LIABILITIES Debit for Decrease Credit for Increase NET ASSETS Debit for Decrease Credit for Increase

31 A Sample Transaction Suppose an agency buys inventory for $2,000. We could just add it to assets. But, that puts the Fundamental Equation out of balance. Assets = Liabilities Net Assets Supplies $2,000 = no change + no change We have not paid for the supplies. Suppose the seller sent a bill. We would record the full transaction as: Assets = Liabilities Net Assets Supplies Accounts Payable + $2, = $2, no change To record a financial event, at least two elements of the fundamental equation must change.

32 Debits = Credits Liability Account Asset Account Accounts Payable
Supplies Debit Credit Debit Credit $2000 $2000 Debits = Credits

33 A One-Sided Change Example
Not every financial event (transaction) results in changes to both sides of the fundamental equation. Suppose the agency paid for the inventory in cash. Then the transaction would have been recorded as follows: Assets = Liabilities Net Assets Inventory Cash $2, $2, = no change + no change The fundamental equation is still in balance. But, all of the changes occurred on the left side of the equation.

34 Debits = Credits Asset Account Asset Account Cash Supplies Debit
$2000 $2000 Debits = Credits

35 Recording Transactions
The first step in recording a transaction is determining what has happened and what accounts will be impacted. Suppose near the end of the year, the agency buys a one-year insurance policy for $100 and pays for the policy in cash. Two things have happened: - Cash has gone down by $100. - The agency owns a new $100 asset called "prepaid insurance." Here's the way the transaction would be recorded: Assets = Liabilities Net Assets P/I Cash + $ $100 = no change no change

36 Another Example Credit Debit
The agency mails a cheque to its bedpan supplier for $2,000 to pay part of the $7,000 it owed them at the start of the year. Two things have happened: - Cash has gone down by $2,000. - The agency’s accounts payable have decreased by $2,000. Here's the way the transaction would be recorded: Assets = Liabilities Net Assets Cash = Accounts Payable $2,000 = $2, no change Credit Debit

37 A Non Transaction A hospital signs a binding contract to buy an X-Ray machine that will cost $50,000. This event will not give rise to a journal entry because it does not meet its rules for recognition. - The value of the transaction is known. - The timing of the transaction is known. - But, the hospital does not yet own the equipment. There has been no exchange. So the hospital does not owe the money. No liability unless we owe the creditor.

38 “A person should not go to sleep at
night until the debits equaled the credits” Friar Luca dal Bargo, founder of modern accounting, 1450

39 “Never call an accountant a credit to his profession; a good accountant is a debit to his profession.” – Sir Charles Lyell. Lyell was a Scottish geologist and friend of Darwin. I have no idea what basis he had for saying this except to be witty.

40 Section 4 Financial Statements

41 Core Financial Statements
Balance Sheet/ Statement of Financial Position Income Statement/ Statement of Operations Statement of Change in Net Debt Statement of Cash Flows

42 Describes where the organization stands at a specific date.
Income Statement Balance Sheet Statement of Cash Flows Describes where the organization stands at a specific date.

43 Depicts the revenue and expenses for a designated period of time.
Income Statement Balance Sheet Statement of Cash Flows Depicts the revenue and expenses for a designated period of time.

44 Depicts the ways cash has changed during a designated period of time.
Income Statement Balance Sheet Statement of Cash Flows Depicts the ways cash has changed during a designated period of time.

45 Statement of Financial Position or The Balance Sheet
The Balance Sheet reports: Has Today = Owes today + Worth today A Snapshot in time

46 Sample Balance Sheet Assets Liabilities Owners’ Equity Must Equal
Cash $ 40 Accounts receivable 100 Land 200 Total assets $340 Liabilities Accounts payable $ 50 Notes payable $200 Owners’ Equity Capital stock $100 Retained earnings $140 Total liabilities and owners’ equity $340 Must Equal 23

47 Current and Long-Term Assets
Assets on the balance sheet are divided into current or short-term (those that are cash or cash-equivalents or are expected to become cash or will be used up within twelve months) and long-term (those that will not). Short-Term or Current Assets are listed in order of declining liquidity and normally include: - cash and cash equivalents, - marketable securities, - accounts receivable, - inventory, and - prepaid expenses (long-term prepaid expenses are called Deferred Charges)

48 Cash and Cash Equivalents
The ultimate liquid assets Includes all forms of immediately available funds, including bank deposits Always denominated in Canadian funds even if foreign currencies being held

49 Marketable Securities
Marketable securities include equity and debt instruments that can be bought and sold in public and private markets. The values of marketable securities are reported by governments and not-for-profit organizations at fair market value. If there is any dispute about fair market value, then cost is used to provide a value.

50 Accounts Receivable When an organization produces a product, service or obligation for another entity and it is transferred to the entity, the organization acquires the right to collect the money from that entity – this establishes a receivable account An accounts receivable entry is made when this occurs but before the entity pays for it Knowing what the outstanding accounts receivable are for the organization is an important indicator of its anticipated income, the degree to which is it efficiently collecting for its services and the degree to which it is carrying debt that it should collect

51 Inventory Inventory is both the finished products held by the organization for sale to an outside buyer and the products used to make the finished product Three kinds of inventory: Raw material inventory Work-in-progress inventory Finished goods inventory This becomes an accounts receivable when it is sold and cash when the customer pays for it.

52 Pre-paid expenses Financial obligations that the organization has already paid for but not yet received Examples are: insurance, rent, deposits made with suppliers, salary advances They are current assets not because they can be turned into cash, but because the organization will have to use cash to pay for them in the near future and they are generally available for consumption within the twelve month period

53 Long-Term Assets Long-Term Assets are generally divided into three categories: Fixed Assets, which include: property (land) usually recorded at cost, plant (buildings) recorded at cost and reported at net book value, and equipment recorded at cost and reported at net book value Investments, and Intangibles

54 Fixed Assets Productive assets not intended for sale.
They will be used over and over again to produce value to the end product of the organizations Commonly include land, buildings, machinery, equipment, furniture, vehicles, etc. Normally reported on Balance Sheet in Net Fixed Asset format: listed at original cost minus an allowance for depreciation

55 Net Fixed Asset Determination
Recorded at cost when acquired. Reported net of accumulated depreciation on the balance sheet. Suppose an organization buys a van for $30,000 and expects to use it for five years and sell it for $5,000. Assuming that the van will be used up evenly over the five years, how would its value appear on the balance sheet at the end of two years?

56 A Net Book Value Example
Subtract two years of depreciation [($30,000 - $5,000 salvage)/5 yr. life] x 2 = $10,000 Record the Van at Cost = $30,000 Net Book Value = $30,000 cost - $10,000 Accumulated Depreciation = $20,000

57 Fixed Assets on the Balance Sheet
All three values - cost, accumulated depreciation, and net book value are shown. Museum A Museum B Net Fixed Assets or Net Book Value $1,000,000 $ 1,000,000 Property, Plant & Equipment at cost $40,000,000 $ 2,000,000 Accumulated Depreciation (39,000,000) (1,000,000) Are these two museums really similar or different?

58 Recognizing Asset Transactions
Financial events are recorded at the time of Recognition Asset transactions are recognized when: - they are owned by the organization, - they have a monetary value, - that monetary value can be objectively determined.

59 Recognizing Asset Transactions
Which of the following should be recognized as assets? the amount due on a bill sent to a client? an overhead projector? a fundraising mailing list developed in an organization?

60 Can Intangible Assets Appear on a Balance Sheet?
Intangibles, intangible assets, knowledge assets and intellectual capital are more or less synonyms. All are widely used – intangibles specifically in the accounting literature, knowledge assets by economists and intellectual capital predominantly in the management literature. Intangibles create future value. All intangibles are future-oriented. Rule of quantification – slippery slope of quantification Legal intangibles such as patents and copyrights are generally only put into the asset base if purchased from outside the organization. Goodwill in financial matters is the value of an entity over and above the value of its assets..

61 Can Intangible Assets Appear on a Balance Sheet?
Good will and knowledge assets………which represents the amount by which the price of an acquired company exceeds the fair value of the related net assets acquired. This excess is presumed to be the value of the company’s name and reputation and its customer base, intellectual capital, and workforce. No intangibles – including those that have been purchased, developed, constructed or inherited in right of Crown – are recognized as assets in government financial statements.

62 Liabilities Liabilities are economic obligations of the organization such as money that it owes to lenders, suppliers, employees, etc. Like assets, liabilities are categorized as short term and long term depending on when they are due for payment. Can be categorized and groups for presentation on the balance sheets by: To whom the debt is owned and Whether the debt is payable within the year

63 Short-term or current liabilities
Generally consist of: specific "payables" which are typically due within a specified period, usually the current fiscal year, e.g. wages or salary payable Generally have the following groupings: Accounts payable to suppliers Accrued expenses owed to employees and other for services Current debt owed to lenders Taxes owed

64 Accrued Expenses – Wage Payable
Monetary obligations similar to accounts payable Some flexibility on how these categories are used Generally accrued expenses involve financial obligation within the organization Therefore, this often records salary earned but not yet paid, interest due but not yet paid on bank debt, pension buy-outs, outstanding training costs Q&A Home Q&A by Topic Suggest a Question Where should I enter unpaid wages? Under the accrual basis of accounting, unpaid wages that have been earned by employees should be entered as 1) Wages Expense and 2) Wages Payable or Accrued Wages Payable. Wages Expense is an income statement account. Wages Payable is a current liability account that is reported on the balance sheet. The recording of wages that have been earned but not yet paid or processed through the routine payroll entries is referred to as accruing wages. This is done through an accrual-type adjusting entry.

65 Accounts Payable Obligations to pay, generally to other organization for material sand equipment bought on credit, that must soon be paid When it receives materials, the organization can either pay for them immediately with case or wait and let what is owed become an account payable

66 Notes Payable/Current Portion of Debt
Short-term obligations that are payable in a year or less Brings in long-term obligations, but only the amount to be spent within the year to discharge it Different from accounts payable in that there is some form of promissory note involved.

67 Long-Term Liabilities
Long-Term Liabilities included in Liabilities section is the current portion of the long-term liability that would have to be paid in the next 12 months: - Long-Term Debt, Capital Leases Long-Term Unsecured Loans Mortgages Bonds Payable - Pension Liabilities, and - Contingent Liabilities. In accounting, a contingent liability and the related contingent loss are recorded with a journal entry only if the contingency is both probable and the amount can be estimated. If a contingent liability is only possible (not probable), or if the amount cannot be estimated, a journal entry is not required. However, a disclosure is required. When a contingent liability is remote (such as a nuisance suit), then neither a journal nor a disclosure is required.

68 Liability Recognition
Liabilities are recognized when: they are legally owed, have to be paid, and the amount to be paid can be objectively measured. Which of the following should be recognized as a liability? a bill received from a vendor? wages that are due to a worker? a $5 million lawsuit filed against an organization?

69 Equity/Net Asset Categories
The amount of total assets minus total liabilities equals equity. Because equity is equal to the net difference between assets and liabilities, it is also called net assets. The net worth of an organization represents the sum of the organization's earnings from inception plus any paid-in capital Retained earnings/ accumulated surplus/deficit: money that is held after all liabilities have been discharged and not used for assets Net debt is the accumulated debt of a government that it carries forward from one year to the next. The statement of net assets presents the same information as a balance sheet: It assesses the balance of a government’s assets—the resources it can use to provide service and operate the government—against its liabilities—its obligations to turn over resources to other organizations or individuals. The difference between a government’s assets and its liabilities is called net assets. The name of the statement reflects its emphasis on what a government would have left over after satisfying its liabilities. Net assets are an indicator of a government’s financial position—its financial standing at a given point in time (typically, the end of the fiscal year). Financial position can be tracked over time to assess whether a government’s financial health is improving or deteriorating.

70 The Income Statement or Statement of Operations Also called Activity Statement, Statement of Revenues and Expenses

71 What is a Statement of Operations?
Reports on all changes in financial position in the organization in a given period Statement of cash movement for a specific period of time, usually a quarter, month or year – a specified period of time. Unlike a Balance Sheet which is a snapshot of a specific day Can be the most important in reading into the activities of the organization, its ability to meet obligations and ability to stay within budget Key tool in financial control and budgetary management: used to inform of current financial situation, identify surplus/deficits, measure performance

72 Basic Income Statement Formula
Revenues – Expenses = Net Income (Net Loss)

73 The Income Statement: Revenues and Support
represent inflows that the organization has received or is entitled to receive. result in an inflow of Assets to the organization and an increase in Net Assets.

74

75 Recognizing Revenue and Support
Revenue is recognized if: - the goods or services have been provided, - the amount to be collected can be objectively measured, - there is a reasonable likelihood of collection. Support is recognized if: - all of the conditions of the gift have been met, - the value of the pledge can be objectively measured, and

76 Recognizing Expenses Expense Recognition depends on the type of expense: - Product costs are those directly connected to providing goods and services. They are recognized based on the matching principle, which holds that expenses should be recorded in the same period as the revenue they were used to generate. - Period Costs, like rent, are those related to the passage of time. They are recognized in the time period they are incurred.

77 Deferred Revenue Deferred or unearned revenues arise when an organization is paid in advance for goods or services. Deferred usually long term, Unearned usually short term. - Why is deferred revenue a liability to an organization? A museum sells a five-year membership for $250. How much of the $250 should be recorded as deferred revenue? How much of the $250 would the museum recognize as revenue during the first year of the membership?

78 Statement of Operations: Key to Understanding Performance
Has to provide basis of comparison: Compare to previous years Compare to budget As statement of flow, reflects what actually happened over the year

79 York Catholic District School Board
YEAR END FINANCIAL REPORT Financial Operating Results

80 Cash Flow Statements

81 Statement of Cash Flows
Links Balance Sheet and Income Statement elements to change in cash position. Integral part of holy trinity of financial statements Undoes some accrual accounting adjustments underlying the income statement. Presents cash flows logically organized by source or type of activity generating the cash flows. The statement of cash flows should report how a reporting entity generated and used cash and cash equivalents in the accounting period, and what the change in cash and cash equivalents was in the period. The statement of cash flows should also report the cash and cash equivalents at both the beginning and end of the accounting period. 403MSBASOCF.ppt

82 The Cash Flow Statement
The Cash Flow Statement shows: Cash on hand at the start of the period Cash received in the period Cash spent in the period Cash on hand at the end of the period

83 The Cash Flow Statement
Why does an organization need both an operating statement and a cash flow statement? Cash flow statements provide vital budget to plan information in purely cash terms Cash flow information gives you information on your budgetary flexibilities and also on the actual cash performance versus the predicted one for cash/budget management purposes Why is it important to know the sources and uses of cash flow? This will depend on the nature of the organization – less so with single source (budget funds) of cash Isn't knowing if cash increased or decreased enough? No, source and availability are important

84 The Example Organization Statement of Cash Flows
December 31, 2011 Cash Flows From Operating Activities: Receipts 48 Payments (43) 5 Cash Flows From Investing Activities: Receipts 0 Payments (4) (4) Cash Flows Used By Financing Activities: Receipts 10 Payments (6) 4 Net Cash Flow 5 37

85 Notes to the Financial Statements
Four general types of notes: Summary of significant accounting policies: assumptions and estimates. Additional information about the summary totals. Disclosure of important information that is not recognized in the financial statements. Discuss concentrations of risk, commitments and contingencies, related party transactions, and other significant items

86 Future Oriented Financial Statements
Statements that project likely financial results based on known policies and projections Projected financial position, operations and cash flows Unlike financial statements, this is prospective, based on a planned course of action Common in private sector – emerging in public sector Requirement for all federal departments

87 Section 5: Ratios and Financial Analysis

88 Financial Analysis Two Objectives Measure financial condition
Measure financial performance

89 Financial Analysis Horizontal Analysis: Looks at trends in performance and strength over time Vertical Analysis: Looks at within year events rather than over time Ratio Analysis: Allows for consistent comparison of a single unit over time as well as comparison between units For example of horizontal analysis, overtime expense as a percent of total salary expenses For For exampl of verticale, salary expense as a percent of total expenses

90 Five Criteria Being Looked At
Liquidity Solvency Profitability Financial Efficiency Repayment Capacity

91 Current Ratio Working capital Current Assets/Current Liabilities
Liquidity: Ability of an entity to pay current liabilities as they come due Current Ratio Current Assets/Current Liabilities Less than one is bad Working capital Current assets minus current liabilities Negative number is bad

92 Solvency: Ability of an entity to repay all of its financial obligations
Debt to Asset Ratio Total liabilities/total assets Greater than one bad Equity to Asset Ratio Total equity/total assets Debt to Equity Ratio Leverage ratio Less than one better

93 Rate of return on assets Rate of return on equity
Profitability Rate of return on assets Rate of return on equity Operating profit margin ratio Limited government application, but viable in both government enterprises and not-for-profits

94 Operating expense ratio Depreciation ratio Interest expense ratio
Financial Efficiency: the intensity with which an entity uses its assets to generate results and the effectiveness of production Asset turnover ratio Operating expense ratio Depreciation ratio Interest expense ratio Net income from operations ratio

95 Term debt and capital lease coverage ratio
Repayment Capacity: Measures the borrower’s ability to repay term debts and capital leases rather than financial position or performance Term debt and capital lease coverage ratio Capital replacement and term repayment margin

96 Cautions Measures are only as good as the data used
Methods must be consistent between years and between operations Example – Asset valuation methods Measures ask the right questions but do not provide the answers

97 Key Macro Ratios the Federal Government Now Tracks in its Financial Statements
Federal debt as a % of GDP Revenues as a % of GDP Interest ratio: public debt charges as a % of revenues Source:

98 Are we having fun yet?


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