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Integrated Accounting Issues Winter 2006 Rodney K. Rogers, Ph.D., CPA School of Business Administration Portland State University
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Traditional Stakeholders of Firm Operations/Investing Vendor Customer Goods $ $ CreditorsInvestors $ $ $ $ Financial Intermediaries Information Intermediaries
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Expanded Stakeholders Firm Shareholders Creditors Employees Management Competitors Government Customers Vendors External Auditors Internal Auditors
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Market EnvironmentOrganization Strategy Organization Activities Accounting System Financial Statements Accounting Environment Accounting Strategy From Business Activities to Financial Statements Organization Structure
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Analysis of a Company Market Environment – “Context” –Macroeconomic, governmental, legal considerations, Organization Strategy Analysis – “Expectations” –Key profit drivers, business risks and profit potential Organization Structure – “Capabilities” –Current structure of organization Accounting Analysis –Evaluate the “quality” of the accounting numbers Financial Analysis –Evaluate performance using financial and non-financial information – (past and current results) Prospective Analysis –Forecasts and valuation
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SWOT Analysis Internal –Strengths –Weaknesses External –Opportunities –Threats
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Market Environment Interest Rates US and foreign GNP Growth Unemployment Levels Trends in Consumer savings/borrowing Others
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Business Strategy Analysis Specific Industry Structure (Porter’s “five forces”) –Rivalry among existing firms Industry Growth, Concentration, Switching Costs, Fixed/Variable Costs, Excess Capacity –Threat of new entrants Scale Economies, First mover, Relationships –Threat of substitute products Price/Performance trade-off –Bargaining power of buyers and suppliers Switching cots, number and volume of buyers/suppliers Competitive Strategy –Cost Leadership –Differentiation
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Competitive Strategy Cost Leadership –Same product or service at lower cost Economies of scale, efficient production, design Differentiation –Unique product or service at a premium price Product design, variety, customer service, brand, R&D, innovation How to maintain competitive status?
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Business Strategy Analysis Quality of Management Regulatory Developments Social Issues Technology
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Output: Basic Financial Statements Balance Sheet Income Statement Statement of Cash Flows Retained Earnings Statement Statement of Comprehensive Income
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Analyzing a Firm Operations/Investing Vendor Customer Goods $ $ CreditorsInvestors $ $ $ $ Financial Intermediaries Information Intermediaries
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Accounting Analysis Quality of Disclosures Quality of Numbers
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Sales –Price vs. volume Charges –Real vs. nominal growth Cost of Goods Sold –Cost-flow assumptions –LIFO liquidation –Loss/Reserves on write-down of inventory
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Quality of Numbers Operating Expenses –Discretionary expenses R&D Repair and Maintenance Advertising and Marketing –Depreciation Methods Estimates –Pension Accounting
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Quality of Numbers Nonoperating Revenue and Expenses –Gains/Losses from Sales of Assets –Interest Income –Equity Income –Loss recognition on write-down of assets –Accounting changes –Extraordinary items –Reserves on restructuring charges
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Financial Analysis: Levers for Value Creation Return on Equity = Net Income Shareholder’s Equity
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Return on = Profit Margin x Asset Turnover x Financial Equity Leverage net income = net income x sales x assets owner’s equity sales assets owner’s equity Change revenues êhigher prices êgreater volume Change costs êproduct/process design êsupply relationships Reduce need for investment (capital intensity) Advantageous financing (external) Interrelationships of Ratios Managing Rev/ExpAssetsLiabilities/Equity
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Managing Sales and Expenses Gross Profit Operating Profit Issues to Consider –Price vs. Volume Changes –Real vs. Nominal Growth –Inventory Issues
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Many terms Net Income EBIDA EBIT or Operating Income (pre-tax) EBITDA FCF NOPAT or prefinancing operating earnings
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Profitability Ratios Gross Profit Margin =Gross Profit Net Sales Operating Profit Margin = Operating Profit Net Sales Net Profit Margin = Net Earnings Net Sales
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Profitability Ratios Return on Investment (ROI) = Net Earnings Total Assets SGA % = Selling, General and Admin. Expenses Net Sales Cash Flow Margin =Cash flow from operations Net Sales Return on Assets (ROA) = NOPAT Total Assets
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Managing Assets Days in Receivables = Accounts Receivable Avg.Daily Sales A.R. Turnover = Net Sales Accounts Receivables Inventory Turnover = Cost of Goods Sold Inventory Fixed Asset Turnover = Net Sales Net Prop.Plant&Equip. Total Asset Turnover = Net Sales Total Assets
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Managing Liabilities and Equity Current Ratio= Current Assets Current Liabilities Quick Ratio =Current Assets-Inventory Current Liabilities
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Managing Liabilities and Equity Debt Ratio =Total Liabilities Total Assets L.T. Debt to Total Capital = LT Debt LT Debt + S.E. Debt to Equity = Total Liabilities Shareholders’ Equity Times Interest Earned =Operating Profit Interest Expense
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Return on = Profit Margin x Asset Turnover x Financial Equity Leverage net income = net income x sales x assets owner’s equity sales assets owner’s equity Change revenues êhigher prices êgreater volume Change costs êproduct/process design êsupply relationships Reduce need for investment (capital intensity) Advantageous financing (external) Interrelationships of Ratios Managing Rev/ExpAssetsLiabilities/Equity (common earnings leverage) (capital structure leverage)
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Market Ratios Earnings Per Share = Net Earnings Avg. Shares Outstanding Price to Earnings Ratio = Market Price of Common Stock Earnings Per Share Dividend Payout Ratio = Dividends Per Share Earnings Per Share Dividend Yield= Dividends Per Share Market Price of Common Stock
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Financial Performance Measures by Area and Viewpoint
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