Understanding A Firm s Financial Statements

Size: px
Start display at page:

Download "Understanding A Firm s Financial Statements"

Transcription

1 CHAPTER OUTLINE Spotlight: J&S Construction Company (http://www.jsconstruction.com) 1 The Lemonade Kids Financial statement (accounting statements) reports of a firm s financial performance and resources, including an income statement, a balance sheet, and a cash flow statement Setting Up the Business determining firm s assets and sources of financing Opening Day developing alternate methods of payment rather than cash Collecting Accounts Receivable Strategic Planning for the Following Saturday The Second Saturday of Business 2 The Income Statement Describe the purpose and content of an income statement. Definitions Income statement (profit and loss statement) a financial report showing the profits or losses from a firm s operations over a given period of time Cost of goods sold cost of producing or acquiring goods or service to be sold by a firm Gross profit sales less the cost of goods sold Operating expenses costs related to marketing and selling a firm s product or service, general and administrative expenses, and depreciation Operating profits earnings after operating expenses but before interest and taxes are paid Interest expense the cost of borrowed money Profits before taxes (taxable profits) earnings after operating expenses and interest expenses but before taxes Net profits earnings that may be distributed to the owners or reinvested in the company Depreciation expense cost of a firm s building and equipment, allocated over their useful life Profit margins Profits as a percentage of sales Answers question, How profitable is the business? Reports sales (revenue), cost of producing or acquiring the goods or services sold by the company, operating expenses, interest expense, tax payments Allows business owner to consider how decision affect the company s profits 3 The Balance Sheet Explain the purpose and content of a balance sheet. Formula Total assets = Debt + Ownership equity Assets Definitions Current assets assets that can be converted into cash relatively quickly 102

2 Accounts receivable amount of credit extended to customers that is currently outstanding Inventory firm s raw materials and products held in anticipation of eventual sale Working capital cycle the process of converting inventory to cash Fixed assets (property, plant and equipment [PPE]) Physical assets that will be used in the business for more than one year, such as equipment, buildings, and land. Depreciable assets assets whose value declines, or depreciates, over time Gross fixed assets Depreciable cost at their original cost before any depreciating expense has been taken. Accumulated depreciation total (cumulative) depreciation expense taken over the assets life Net fixed assets gross fixed assets less accumulated depreciation Other assets A firm s raw materials and products held in anticipation of eventual sale. These are all things owned by the business Debt and Equity Debt financing provided by creditors Current debt (short-term liabilities) borrowed money that must be repaid within 12 months Accounts payable (also called trade credit) Outstanding credit payable to suppliers. Accrued expenses Operating expenses that have been incurred but not paid. Short-term notes Agreements to repay cash amounts borrowed from banks or other lending sources within 12 months or less Long-term debt loans from banks or other sources with repayment terms of more than 12 months. Long-term notes Agreements to repay cash amounts borrowed from banks or other lending sources for periods longer than 12 months Ownership Equity Mortgage a long term loan from a creditor for which real estate is pledged as collateral Ownership equity owners investments in a company plus cumulative net profits retained in the firm Retained earnings profits less less dividends paid over the life of a business 4 Viewing the Income Statement and Balance Sheet Together How do financial statements how a firm s financial position? Balance sheet is a view of the firm s financial condition at a particular point in time Income statement shows results over a given period (a quarter or a year for example) 5 The Cash Flow Statement Use the income statement and balance sheets to compute a company s cash flows. Profits versus Cash Flows 103

3 Cash flow statement a financial report showing a firm s sources of cash as well as its uses of cash Accrual-basis accounting an accounting method of recording profits when earned and expenses when incurred, whether or not the profit has or the expense paid Cash-basis accounting an accounting method of recording profits when cash is received and recording expenses when they are paid Profits based on an accrual accounting system will differ from the firm s cash flows Sales reported in an income statement include both case sales and credit sales; total sales do not correspond to the actual case collected Some inventory purchases are financed by credit, so inventory purchases do not exactly equal cash spent for inventory Depreciation expense shown in the income statement is a noncash expense Measuring a Firm s Cash Flows Cash inflows and outflows explained by three activities Generating cash flows from day-to-day business operations Buying or selling fixed assets Financing the business Cash Flows From Day-To-Day Business Operations Converts the company s income statement from an accrual basis to a cash basis Two steps required Add back depreciation to net profits, since depreciation is not a cash expense Subtracting any uncollected sales and payments for inventory Investing in Fixed Assets equipment or buildings (example) Financing the Business 6 Evaluating a Firm s Financial Performance Analyze the financial statements using ratios to see how well a firm is doing Entrepreneur s decisions basically in four areas Firm s ability to pay its debt as it comes due Company s profitability from assets Amount of debt the business is using Rate of return earned by the owners on their equity investment Pendley & Associates Liquidity (Ability to Pay Its Debt) Definitions Liquidity the degree to which a firm has working capital available to meet maturing debt obligations Current ratio a measure of a company s relative liquidity, determined by dividing current assets by current liabilities Pendley & Associates Profitability on Its Assets 104

4 Return on assets a measure of a firm s profitability relative to the amount of its assets, determined by dividing operating profits by total assets (see Exhibit 10-9 Return on Assets: An Overview) Definitions Operating profit margin a measure of how well a firm is controlling its costs of goods sold and operating expenses relative to sales, determined by dividing operating profits by sales Total asset turnover a measure of how efficiently a firm is using its assets to generate sales, calculated by dividing sales by total assets Pendley & Associates Debt debt ratio is a measure of what percentage of a firm s assets is financed by debt, determined by dividing total debt by total assets Pendley & Associates Return on Equity Return on equity a measure of the rate of return owners receive on their equity investment, calculated by dividing net profits by ownership equity Financial leverage the impact (positive or negative) of financing with debt rather than with equity. A firm with a high (low) return on assets will have a high (low) return on equity As a firm s debt ration increases, return on equity will increase if the return on assets is greater than the interest rate paid on any debt, but return on equity will decrease if the return on assets is less than the interest rate ANSWERS TO END-OF-CHAPTER DISCUSSION QUESTIONS 1. Explain the purposes of the income statement and balance sheets? The income statement reports the results of periodic operations, detailing sales revenue, cost of goods sold, selling expenses, administrative expenses, interest expense, and other income and expenses. It culminates in a bottom line statement of net profit (or loss). The balance sheet is the statement that details and classifies the firm s various assets and liabilities and the ownership equity in the business. Total assets always equal the sum of liabilities and ownership equity. The final net profit (or loss) shown on the income statement adjusts the value of the ownership equity reported on the balance sheet. 2. What determines a company s profitability? A company s profit is a primary source of financing for future growth. The more profitable a company is, the more funds it will have for growth. Thus, we need to know the factors that drive profits so that we can make the needed profit projections. A company s net income, or net profit, depends on four variables: Amount of sales. Much that we project about a company s financial future is driven by the assumptions we make regarding future sales. Costs of goods sold. This reflects the cost of producing or acquiring the goods or services to be sold. 105

5 Operating expenses. Operating expenses include expenses such as those related to marketing and distributing the product. We want, as best we can, to classify these expenses as either expenses that do not vary as sales increase or decrease (fixed operating expenses) or expenses that change proportionally with sales (variable operating expenses). Interest expense. When we borrow money, we agree to pay interest on the loan principal. If we borrow $25,000 for a full year and commit to paying 12-percent interest, our interest expense will be $3,000 for the year (12% $25,000). Taxes. For the most part, the firm s taxes are a percentage of taxable income. The rate increases as the amount of income increases. 3. Distinguish among (a) gross profit, (b) operating profits, and (c) net profits. a. Gross profit is sales (revenue) less the cost of producing or acquiring the product or service. It is the difference between what the product costs the producer and what the producer sells it for. b. Operating profits are determined by deducting operating expenses and depreciation expense from gross profit. c. Net profits are the income that may be distributed to the owners or reinvested in the company. 4. The balance sheet reports information on a firm s (1) assets, (2) debt, and (3) equity. What is included in each of these reported categories? Assets include everything owned by the company. Assets are basically divided in current assets (assets that can be converted into cash relatively quickly), fixed assets (assets that take much longer to convert into cash), and other assets (such as patents, copyrights, and goodwill). Debt is financing provided by a creditor and is divided into current (short-term) debt that must be repaid within 12 months and long-term debt that includes loans from banks or other sources that are generally loaned for longer than 12 months (for example, for a mortgage). Equity is money that the owners invest in the business as well as the cumulative amount of profits that have been retained in the business. 5. How are ownership equity and debt different? Ownership equity is the money invested in a firm by the owners (including stockholders) for use in conducting the business. Debt is the money loaned to a business that establishes a debtor-creditor relationship. 6. Distinguish between common stock and retained earnings. Common stock is an investment in the firm while retained earnings are profits less withdrawals (dividends) over the life of a business. 106

6 7. What is the relationship between an income statement and a balance sheet? The income statement reports the results of periodic operations, detailing sales revenue, cost of goods sold, selling expenses, administrative expenses, interest expense, and other income and expenses. It culminates in a bottom line statement of net profit (or loss). The balance sheet is the statement that details and classifies the firm s various assets and liabilities and the ownership equity in the business. Total assets always equal the sum of liabilities and ownership equity. The final net profit (or loss) shown on the income statement adjusts the value of the ownership equity reported on the balance sheet. 8. Why aren t a firm s cash flows equal to its profits? The cash flow statement shows a firm s sources of cash as well as its uses of cash indicating where cash came from and went to in a business. Profits are the result of an increase in cash that is created by spending less than what is earned by the business through sales of products/services. 9. Describe the three major components of a cash flow statement. The three major components of a cash flow statement are the net profits less depreciation, and cost of products/services sold. 10. What questions do financial ratios help answer about a firm s financial performance? Financial ratios restate selected income statement and balance sheet data to provide information that helps the management of a venture compare how it is doing relative to previous periods of time in the company and how it is doing compared to other ventures within the same industry. 107

7 COMMENTS ON CHAPTER YOU MAKE THE CALL SITUATIONS Situation 1 1. What did Donahoo s balance sheet look like at the outset of the firm s life? Balance Sheet Date Assets Assets Debt + Equity Debt + Equity 1-Jan Plus $1,500 Cash $1,500 Debt $ 500 Plus $500 y Equit 1,000 Plus $1,000 Total $1,500 Total $1, What did the firm s balance sheet look like after each transaction? Date Assets Assets Debt + Equity Debt + Equity 2-Jan Cash $1,000 Accts payable $ 500 Less $500 Inventory 1,000 Debt 500 Plus $500 Plus $1,000 Total $2,000 Equity 1,000 Total $2,

8 Assets Assets Debt + Equity Debt + Equity 3-Jan Cash $1,000 Payables $ 500 Plus $250 Receivables 250 Debt 500 Less $200 Inventory 800 Equity 1,050 Plus $50 Plus $50 $2,050 $2,050 Date Assets Assets Debt + Equity Debt + Equity 15-Jan Cash $1,000 Payables $ 700 Receivables 250 Debt 500 Plus $200 Plus $200 Inventory 1,000 Equity 1,050 $2,250 $2,250 Assets Assets Debt + Equity Debt + Equity 31-Jan Cash sale: + $50 Reduce debt: - $250 Dividend: - $100 Total cash - $300 Payables $ 700 Cash $ 700 Debt 250 Equity 1,050 Plus $50 $2,000 Plus $450 Receivables

9 Less $400 Inventory 600 $2, Ignoring taxes, determine how much income Donahoo earned during January. Prepare an income statement for the month. Recognize an interest expense of 1 percent for the month (12 percent annually) on the $500,000 long-term debt, which has not been paid but is owed. January 3 January 31 Jan 1 Jan 31 Revenues $ 250 $ 500 $ 750 Cost of goods sold (200) (400) (600) Gross profits/operating profits Interest expense (1%/month) $ 50 $ 100 $ (5) Net Income $ 50 $ 100 $ What was Donahoo s cash flow for the month of January? Beginning cash (January 1) $ 1,50 0 Ending cash (January 31) 700 Net change in cash $ (800 ) Free cash flow Operating Perspective Operating income $ 150 Depreciation Expense --- EBITDA $

10 current assets Cash $ (800) Accounts 700 receivable Inventory 600 $ 500 current assets accounts 700 payable net working $ (200) capital Free cash flow (operating) $ 350 Free cash flows Financing perspective Dividends $ 100 Debt retirement 250 Interest expense $ 5 accounts (5) payable Interest paid --- Free cash flow $

11 Situation 2 1. Given the information provided by the financial statements, what would you tell Abrahams? (As part of your answer, calculate the firm's cash flows.) Explain to Ms. Abrahams that his equation for determining cash flows (profits + depreciation), although correct once in a while, can be very misleading. The cash flows can be better determined as follows: Firm s cash flows: Operating income $19,000 Depreciation 5,000 Earnings before interest, taxes, and depreciation $24,000 Cash taxes 8,000 After-tax cash flows from operations $16,000 net working capital: current assets $10,000 non-interest bearing short-term debt 3,000 net working capital $7,000 Investment in fixed assets ($5,000) Decrease in other assets 2,000 Firm s cash flows: $6,000 Financing cash flows: Interest $3,000 Dividends 3,000 Financing cash flows $6,000 Thus, the Turpen Company generated $6,000 in cash flows, which were used to pay dividends and interest to investors. Also, we should notice that of the $6,000 that was paid to investors, $2,000 came from a reduction in cash balances. If the cash had not been reduced, there would have been only $4,000 available to the investors. In short, there is no money available for Rose. 2. How would you describe the cash flow pattern for the Turpen Company? The primary sources of cash are (a) income plus depreciation (a noncash charge) and (b) increasing short-term borrowings in the form of accounts payable and accruals. The primary uses are (a) increased investments in accounts receivable, inventories, and fixed assets and (b) payment of dividends. 112

12 Situation 3 1. Compute the financial ratios discussed in the chapter for Wholesome Foods for 2010 and Current ratio Return on assets 19.6% 17.9% Operating profit margin 13.3% 13.1% Total asset turnover Debt ratio 55.1% 56.7% Return on equity 23.4% 20.9% Calculations: Current ratio 138,300/75, ,000/84,400 Return on assets 80,000/408,300 85,000/475,000 Operating profit margin 80,000/600,000 80,000/650,000 Total asset turnover 600,000/408, ,000/475,000 Debt ratio 225,000/408, ,400/475,000 Return on equity 42,900/183,300 43,000/205, Acquire a small firm s financial statements. Review the statements and describe the firm s financial position. Find our if the owner agrees with your conclusions Answers will vary. This would also require either bringing some financial statements to class and having the students review them or, assuming wifi is available in the classroom, having students pull up this information on their laptops and then evaluating the financial data. 3. Interpret your findings, both for the firm s financial ratios compared to those of the peer group and for the cash flow statement. Answers will vary depending on the chosen firm s financial ratios. 113

13 SUGGESTED SOLUTION TO CASE 10: DIETRICH & MERCER, INC. 1. How would you evaluate the company s liquidity? Liquidity is the degree to which a firm has working capital available to meet maturing debt obligations. To assess the company s ability to pay its current liabilities, several computations can be done to make this determination: Assess working capital which is use to evaluate a company ability to pay current liabilities, Compute the current ratio, which is a more reliable indicator of the ability to pay current liabilities than working capital. Compute the quick ratio, which considers current assets, unlike the other two computations. 2. Assess the company s historical performance in generating operating profits on its assets Return on Assets (Operating Profits / Total Assets) was 11.4% $2,766,000 / $24,267, Return on Assets was 10.4% ($2,868,000 / $27,434,000) In 2011 assets increased and profits decreased. Additional analysis could include computing the company s debt ratio to measure what percentage of the firm s assets if financed by debt (determined by dividing total debt by total assets). 3. Describe how the business is financed. The business is financed with both debt and equity. Via debt they have a $2.3m note to the bank, $4.4m of credit via accounts payable, and $8.1m long-term debt. Via equity they have $2.08 of common stock and additional paid-in-capital and $8.2m in retained earnings. 4. Do Dietrich and Mercer receive a good return on their equity investment in the business? Return of equity is a measure of the rate of return that owners receive on their equity investment calculate by dividing net profits by ownership equity Return on equity was 11.4% ($1,044,000 / $9,136,000) 2011 Return on equity was 10.3% ($1,063,000 / 10,291,000) Because they had a lower return on assets in 2011, it stands that they will have a lower return on equity in It simply is not possible to have a good return on equity if you are not earning a good return on your assets. Also, as the amount of the firm s debt increases, its return on equity will increase provided that the return on assets is higher than the interest rate paid on any debt. 114

Preparing a Successful Financial Plan

Preparing a Successful Financial Plan Topic 9 Preparing a Successful Financial Plan LEARNING OUTCOMES By the end of this topic, you should be able to: 1. Describe the overview of accounting methods; 2. Prepare the three major financial statements

More information

ACC 255 FINAL EXAM REVIEW PACKET (NEW MATERIAL)

ACC 255 FINAL EXAM REVIEW PACKET (NEW MATERIAL) Page 1 ACC 255 FINAL EXAM REVIEW PACKET (NEW MATERIAL) Complete these sample exam problems/objective questions and check your answers with the solutions at the end of the review file and identify where

More information

In this chapter, we build on the basic knowledge of how businesses

In this chapter, we build on the basic knowledge of how businesses 03-Seidman.qxd 5/15/04 11:52 AM Page 41 3 An Introduction to Business Financial Statements In this chapter, we build on the basic knowledge of how businesses are financed by looking at how firms organize

More information

STATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS

STATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS C H A P T E R 1 0 STATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS I N T R O D U C T I O N Historically, profit-oriented businesses have used the accrual basis of accounting in which the income statement,

More information

Understanding Financial Statements. For Your Business

Understanding Financial Statements. For Your Business Understanding Financial Statements For Your Business Disclaimer The information provided is for informational purposes only, does not constitute legal advice or create an attorney-client relationship,

More information

Guide to Financial Statements Study Guide

Guide to Financial Statements Study Guide Guide to Financial Statements Study Guide Overview (Topic 1) Three major financial statements: The Income Statement The Balance Sheet The Cash Flow Statement Objectives: Explain the underlying equation

More information

CASH FLOW STATEMENT (AND FINANCIAL STATEMENT)

CASH FLOW STATEMENT (AND FINANCIAL STATEMENT) CASH FLOW STATEMENT (AND FINANCIAL STATEMENT) - At the most fundamental level, firms do two different things: (i) They generate cash (ii) They spend it. Cash is generated by selling a product, an asset

More information

GVEP Workshop Finance 101

GVEP Workshop Finance 101 GVEP Workshop Finance 101 Nairobi, January 2013 Agenda Introducing business finance Understanding financial statements Understanding cash flow LUNCH Reading and interpreting financial statements Evaluating

More information

Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods TABLE OF CONTENTS

Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods TABLE OF CONTENTS Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods 1.0 FINANCIAL FORECASTING METHODS 1.01 Introduction

More information

Reporting and Analyzing Cash Flows QUESTIONS

Reporting and Analyzing Cash Flows QUESTIONS Chapter 12 Reporting and Analyzing Cash Flows QUESTIONS 1. The purpose of the cash flow statement is to report all major cash receipts (inflows) and cash payments (outflows) during a period. It helps users

More information

how to prepare a cash flow statement

how to prepare a cash flow statement business builder 4 how to prepare a cash flow statement zions business resource center zions business resource center 2 how to prepare a cash flow statement A cash flow statement is important to your business

More information

CH 23 STATEMENT OF CASH FLOWS SELF-STUDY QUESTIONS

CH 23 STATEMENT OF CASH FLOWS SELF-STUDY QUESTIONS C H 2 3, P a g e 1 CH 23 STATEMENT OF CASH FLOWS SELF-STUDY QUESTIONS (note from Dr. N: I have deleted questions for you to omit, but did not renumber the remaining questions) 1. The primary purpose of

More information

Accounts Payable are the total amounts your business owes its suppliers for goods and services purchased.

Accounts Payable are the total amounts your business owes its suppliers for goods and services purchased. Accounts Payable are the total amounts your business owes its suppliers for goods and services purchased. Accounts Receivable are the total amounts customers owe your business for goods or services sold

More information

UNDERSTANDING WHERE YOU STAND. A Simple Guide to Your Company s Financial Statements

UNDERSTANDING WHERE YOU STAND. A Simple Guide to Your Company s Financial Statements UNDERSTANDING WHERE YOU STAND A Simple Guide to Your Company s Financial Statements Contents INTRODUCTION One statement cannot diagnose your company s financial health. Put several statements together

More information

This week its Accounting and Beyond

This week its Accounting and Beyond This week its Accounting and Beyond Monday Morning Session Introduction/Accounting Cycle Afternoon Session Tuesday The Balance Sheet Wednesday The Income Statement The Cash Flow Statement Thursday Tools

More information

Chapter 002 Financial Statements, Taxes and Cash Flow

Chapter 002 Financial Statements, Taxes and Cash Flow Multiple Choice Questions 1. The financial statement summarizing the value of a firm's equity on a particular date is the: a. income statement. B. balance sheet. c. statement of cash flows. d. cash flow

More information

Analyzing the Statement of Cash Flows

Analyzing the Statement of Cash Flows Analyzing the Statement of Cash Flows Operating Activities NACM Upstate New York Credit Conference 2015 By Ron Sereika, CCE,CEW NACM 1 Objectives of this Educational Session u Show how the statement of

More information

Financial Statements

Financial Statements Financial Statements The financial information forms the basis of financial planning, analysis & decision making for an organization or an individual. Financial information is needed to predict, compare

More information

Chapter 14. 1 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Chapter 14. 1 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 14 1 Identify the purposes of the statement of cash flows Distinguish among operating, investing, and financing cash flows Prepare the statement of cash flows by the indirect method Identify noncash

More information

Learning Objectives: Quick answer key: Question # Multiple Choice True/False. 14.1 Describe the important of accounting and financial information.

Learning Objectives: Quick answer key: Question # Multiple Choice True/False. 14.1 Describe the important of accounting and financial information. 0 Learning Objectives: 14.1 Describe the important of accounting and financial information. 14.2 Differentiate between managerial and financial accounting. 14.3 Identify the six steps of the accounting

More information

Accounting Self Study Guide for Staff of Micro Finance Institutions

Accounting Self Study Guide for Staff of Micro Finance Institutions Accounting Self Study Guide for Staff of Micro Finance Institutions LESSON 2 The Balance Sheet OBJECTIVES The purpose of this lesson is to introduce the Balance Sheet and explain its components: Assets,

More information

Ipx!up!hfu!uif Dsfeju!zpv!Eftfswf

Ipx!up!hfu!uif Dsfeju!zpv!Eftfswf Ipx!up!hfu!uif Dsfeju!zpv!Eftfswf Credit is the lifeblood of South Louisiana business, especially for the smaller firm. It helps the small business owner get started, obtain equipment, build inventory,

More information

ICAP GROUP S.A. FINANCIAL RATIOS EXPLANATION

ICAP GROUP S.A. FINANCIAL RATIOS EXPLANATION ICAP GROUP S.A. FINANCIAL RATIOS EXPLANATION OCTOBER 2006 Table of Contents 1. INTRODUCTION... 3 2. FINANCIAL RATIOS FOR COMPANIES (INDUSTRY - COMMERCE - SERVICES) 4 2.1 Profitability Ratios...4 2.2 Viability

More information

Accounts payable Money which you owe to an individual or business for goods or services that have been received but not yet paid for.

Accounts payable Money which you owe to an individual or business for goods or services that have been received but not yet paid for. A Account A record of a business transaction. A contract arrangement, written or unwritten, to purchase and take delivery with payment to be made later as arranged. Accounts payable Money which you owe

More information

A Simple Model. Introduction to Financial Statements

A Simple Model. Introduction to Financial Statements Introduction to Financial Statements NOTES TO ACCOMPANY VIDEOS These notes are intended to supplement the videos on ASimpleModel.com. They are not to be used as stand alone study aids, and are not written

More information

MASTER BUDGET - EXAMPLE

MASTER BUDGET - EXAMPLE MASTER BUDGET - EXAMPLE Sales IN UNITS for the previous two months (of last quarter), as well as the sales forecast for next quarter are as follows: Sales Budget Units May sales (ACTUAL) 20 June sales

More information

Return on Equity has three ratio components. The three ratios that make up Return on Equity are:

Return on Equity has three ratio components. The three ratios that make up Return on Equity are: Evaluating Financial Performance Chapter 1 Return on Equity Why Use Ratios? It has been said that you must measure what you expect to manage and accomplish. Without measurement, you have no reference to

More information

Statement of Cash Flows

Statement of Cash Flows HOSP 2110 (Management Acct) Learning Centre Statement of Cash Flows The Statement of Cash Flows (or cash flow statement) is one of the main financial statements used by investors. It shows the cash generated

More information

TOPIC LEARNING OBJECTIVE

TOPIC LEARNING OBJECTIVE Topic Mapping 1 Transaction Analysis Understand the effect of various types of transactions on the accounting equation, accounting journal and accounting ledger. Concepts and Skills Accounting Equation

More information

Understanding Financial Information for Bankruptcy Lawyers Understanding Financial Statements

Understanding Financial Information for Bankruptcy Lawyers Understanding Financial Statements Understanding Financial Information for Bankruptcy Lawyers Understanding Financial Statements In the United States, businesses generally present financial information in the form of financial statements

More information

Income Measurement and Profitability Analysis

Income Measurement and Profitability Analysis PROFITABILITY ANALYSIS The following financial statements for Spencer Company will be used to demonstrate the calculation of the various ratios in profitability analysis. Spencer Company Comparative Balance

More information

FINANCIAL MANAGEMENT

FINANCIAL MANAGEMENT 100 Arbor Drive, Suite 108 Christiansburg, VA 24073 Voice: 540-381-9333 FAX: 540-381-8319 www.becpas.com Providing Professional Business Advisory & Consulting Services Douglas L. Johnston, II djohnston@becpas.com

More information

What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated?

What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? HOCK international - 2004 1 HOCK international - 2004 2 How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? HOCK

More information

Construction Economics & Finance. Module 6. Lecture-1

Construction Economics & Finance. Module 6. Lecture-1 Construction Economics & Finance Module 6 Lecture-1 Financial management: Financial management involves planning, allocation and control of financial resources of a company. Financial management is essential

More information

CHAPTER 4. FINANCIAL STATEMENTS

CHAPTER 4. FINANCIAL STATEMENTS CHAPTER 4. FINANCIAL STATEMENTS Accounting standards require statements that show the financial position, earnings, cash flows, and investment (distribution) by (to) owners. These measurements are reported,

More information

Financial Statements and Ratios: Notes

Financial Statements and Ratios: Notes Financial Statements and Ratios: Notes 1. Uses of the income statement for evaluation Investors use the income statement to help judge their return on investment and creditors (lenders) use it to help

More information

CASH FLOW STATEMENT & BALANCE SHEET GUIDE

CASH FLOW STATEMENT & BALANCE SHEET GUIDE CASH FLOW STATEMENT & BALANCE SHEET GUIDE The Agriculture Development Council requires the submission of a cash flow statement and balance sheet that provide annual financial projections for the business

More information

CHAPTER 2 ACCOUNTING STATEMENTS, TAXES, AND CASH FLOW

CHAPTER 2 ACCOUNTING STATEMENTS, TAXES, AND CASH FLOW CHAPTER 2 ACCOUNTING STATEMENTS, TAXES, AND CASH FLOW Answers to Concepts Review and Critical Thinking Questions 1. True. Every asset can be converted to cash at some price. However, when we are referring

More information

Preparing Agricultural Financial Statements

Preparing Agricultural Financial Statements Preparing Agricultural Financial Statements Thoroughly understanding your business financial performance is critical for success in today s increasingly competitive agricultural environment. Accurate records

More information

3,000 3,000 2,910 2,910 3,000 3,000 2,940 2,940

3,000 3,000 2,910 2,910 3,000 3,000 2,940 2,940 1. David Company uses the gross method to record its credit purchases, and it uses the periodic inventory system. On July 21, 20D, the company purchased goods that had an invoice price of $ with terms

More information

Financial Statements Tutorial

Financial Statements Tutorial Financial Statement Review: Financial Statements Tutorial There are four major financial statements used to communicate information to external users (creditors, investors, suppliers, etc.) - 1. Balance

More information

ACCOUNTING III Cash Flow Statement & Linking the 3 Financial Statements. Fall 2015 Comp Week 5

ACCOUNTING III Cash Flow Statement & Linking the 3 Financial Statements. Fall 2015 Comp Week 5 ACCOUNTING III Cash Flow Statement & Linking the 3 Financial Statements Fall 2015 Comp Week 5 CODE: CA$H Administrative Stuff Send an email to trentnelson@college.harvard.edu if you have not been added

More information

CHAPTER 23. Statement of Cash Flows 1, 2, 7, 8, 12 3, 4, 5, 6, 16, 17, 19 9, 20 4, 5, 9, 10, 11 10, 13, 15, 16. 7. Worksheet adjustments.

CHAPTER 23. Statement of Cash Flows 1, 2, 7, 8, 12 3, 4, 5, 6, 16, 17, 19 9, 20 4, 5, 9, 10, 11 10, 13, 15, 16. 7. Worksheet adjustments. CHAPTER 23 Statement of Cash Flows ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems Concepts for Analysis 1. Format, objectives purpose, and source of statement.

More information

Report Description. Business Counts. Top 10 States (by Business Counts) Page 1 of 16

Report Description. Business Counts. Top 10 States (by Business Counts) Page 1 of 16 5-Year County-Level Financial Profile Industry Report Architectural Services (SIC Code: 8712) in Prince George County, Maryland Sales Range: $500,000 - $999,999 Date: 11/07/08 Report Description This 5-Year

More information

9. Short-Term Liquidity Analysis. Operating Cash Conversion Cycle

9. Short-Term Liquidity Analysis. Operating Cash Conversion Cycle 9. Short-Term Liquidity Analysis. Operating Cash Conversion Cycle 9.1 Current Assets and 9.1.1 Cash A firm should maintain as little cash as possible, because cash is a nonproductive asset. It earns no

More information

6. Depreciation is a process of a. asset devaluation. b. cost accumulation. c. cost allocation. d. asset valuation.

6. Depreciation is a process of a. asset devaluation. b. cost accumulation. c. cost allocation. d. asset valuation. 1. A company purchased land for $72,000 cash. Real estate brokers' commission was $5,000 and $7,000 was spent for demolishing an old building on the land before construction of a new building could start.

More information

The Basic Framework of Budgeting

The Basic Framework of Budgeting Master Budgeting 1 The Basic Framework of Budgeting A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period. 1. The act of

More information

Chapter 6 Statement of Cash Flows

Chapter 6 Statement of Cash Flows Chapter 6 Statement of Cash Flows The Statement of Cash Flows describes the cash inflows and outflows for the firm based upon three categories of activities. Operating Activities: Generally include transactions

More information

Total shares at the end of ten years is 100*(1+5%) 10 =162.9.

Total shares at the end of ten years is 100*(1+5%) 10 =162.9. FCS5510 Sample Homework Problems Unit04 CHAPTER 8 STOCK PROBLEMS 1. An investor buys 100 shares if a $40 stock that pays a annual cash dividend of $2 a share (a 5% dividend yield) and signs up for the

More information

Cash is King. cash flow is less likely to be affected

Cash is King. cash flow is less likely to be affected Reading 27: Understanding Cash Flow Statements Relevance of Cash Flow The primary purpose of the statement of cash flows (SCF) is to provide: Info about a firm s cash receipts & cash payments during an

More information

Often stock is split to lower the price per share so it is more accessible to investors. The stock split is not taxable.

Often stock is split to lower the price per share so it is more accessible to investors. The stock split is not taxable. Reading: Chapter 8 Chapter 8. Stock: Introduction 1. Rights of stockholders 2. Cash dividends 3. Stock dividends 4. The stock split 5. Stock repurchases and liquidations 6. Preferred stock 7. Analysis

More information

Forecasting Financial Requirements

Forecasting Financial Requirements CHAPTER OUTLINE Spotlight: Planning for Growth (http://www.builtny.com) 1 The Purpose and Need for Financial Forecasting Describe the purpose and need for financial forecasting. Purpose of pro forma financial

More information

BACKGROUND KNOWLEDGE for Teachers and Students

BACKGROUND KNOWLEDGE for Teachers and Students Pathway: Business, Marketing, and Computer Education Lesson: BMM C6 4: Financial Statements and Reports Common Core State Standards for Mathematics: N.Q.2 Domain: Quantities Cluster: Reason quantitatively

More information

Review of Concepts Underlying the Statement of Cash Flows. Chapter 4 discussed the following concepts underlying the statement of cash flows:

Review of Concepts Underlying the Statement of Cash Flows. Chapter 4 discussed the following concepts underlying the statement of cash flows: Statement of Cash Flows: A Closer Look Web Learning Objectives 1. Review the rationale for the statement of cash flows, particularly regarding why net income differs from cash flows. 2. Cement an understanding

More information

C&I LOAN EVALUATION UNDERWRITING GUIDELINES. A Whitepaper

C&I LOAN EVALUATION UNDERWRITING GUIDELINES. A Whitepaper C&I LOAN EVALUATION & UNDERWRITING A Whitepaper C&I Lending Commercial and Industrial, or C&I Lending, has long been a cornerstone product for many successful banking institutions. Also known as working

More information

National Black Law Journal UCLA

National Black Law Journal UCLA National Black Law Journal UCLA Peer Reviewed Title: An Introduction to Financial Statements for the Practicing Lawyer Journal Issue: National Black Law Journal, 4(1) Author: Edmonds, Thom Publication

More information

The Basics of Accounting ACCT 201

The Basics of Accounting ACCT 201 The Basics of Accounting ACCT 201 Content Accounting definition Accounting equation Accounting elements Asset, Liabilities, & Equity Transactions Accounts Receivable vs Accounts Payable Retained Earnings

More information

Understanding Cash Flow Statements

Understanding Cash Flow Statements Understanding Cash Flow Statements 2014 Level I Financial Reporting and Analysis IFT Notes for the CFA exam Contents 1. Introduction... 3 2. Components and Format of the Cash Flow Statement... 3 3. The

More information

CASH FLOW STATEMENT. MODULE - 6A Analysis of Financial Statements. Cash Flow Statement. Notes

CASH FLOW STATEMENT. MODULE - 6A Analysis of Financial Statements. Cash Flow Statement. Notes MODULE - 6A Cash Flow Statement 30 CASH FLOW STATEMENT In the previous lesson, you have learnt various types of analysis of financial statements and its tools such as comparative statements, common size

More information

1. A set of procedures for controlling cash payments by preparing and approving vouchers before payments are made is known as a voucher system.

1. A set of procedures for controlling cash payments by preparing and approving vouchers before payments are made is known as a voucher system. Accounting II True/False Indicate whether the sentence or statement is true or false. 1. A set of procedures for controlling cash payments by preparing and approving vouchers before payments are made is

More information

Course 1: Evaluating Financial Performance

Course 1: Evaluating Financial Performance Excellence in Financial Management Course 1: Evaluating Financial Performance Prepared by: Matt H. Evans, CPA, CMA, CFM This course provides a basic understanding of how to use ratio analysis for evaluating

More information

14. Calculating Total Cash Flows.

14. Calculating Total Cash Flows. 14. Calculating Total Cash Flows. Greene Co. shows the following information on its 2008 income statement: Sales = $138,000 Costs = $71,500 Other expenses = $4,100 Depreciation expense = $10,100 Interest

More information

COMPONENTS OF THE STATEMENT OF CASH FLOWS

COMPONENTS OF THE STATEMENT OF CASH FLOWS ILLUSTRATION 24-1 OPERATING, INVESTING, AND FINANCING ACTIVITIES COMPONENTS OF THE STATEMENT OF CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES + Sales and Service Revenue Received Cost of Sales Paid Selling

More information

EXERCISES. The cash from operating activities detail is provided as follows for class discussion:

EXERCISES. The cash from operating activities detail is provided as follows for class discussion: EXERCISES Ex. 14 1 There were net additions, such as depreciation and amortization of intangible assets of $389 million, to the net loss reported on the income statement to convert the net loss from the

More information

Guide to Financial Ratios Analysis A Step by Step Guide to Balance Sheet and Profit and Loss Statement Analysis

Guide to Financial Ratios Analysis A Step by Step Guide to Balance Sheet and Profit and Loss Statement Analysis Guide to Financial Ratios Analysis A Step by Step Guide to Balance Sheet and Profit and Loss Statement Analysis By BizMove Management Training Institute Other free books by BizMove that may interest you:

More information

How to Prepare a Cash Flow Statement

How to Prepare a Cash Flow Statement How to Prepare a Cash Flow Statement Peoples Bank Business Resource Center Business Builder 4 peoplesbancorp.com 800.374.6123 Table of Contents What to Expect... 4 What You Should Know Before Getting

More information

Current liabilities - Obligations that are due within one year. Obligations due beyond that period of time are classified as long-term liabilities.

Current liabilities - Obligations that are due within one year. Obligations due beyond that period of time are classified as long-term liabilities. Accounting Fundamentals Lesson 8 8.0 Liabilities Current liabilities - Obligations that are due within one year. Obligations due beyond that period of time are classified as long-term liabilities. Current

More information

TheSmallBusiness. ReportCard. Is your business making the grade? This number-crunching study guide has the answer.

TheSmallBusiness. ReportCard. Is your business making the grade? This number-crunching study guide has the answer. ReportCard TheSmallBusiness Is your business making the grade? This number-crunching study guide has the answer. MasterCard Solutions For Small Business MasterCard Solutions for Small Business encompasses

More information

Statement of Cash Flow

Statement of Cash Flow Management Accounting 337 Statement of Cash Flow Cash is obviously an important asset to all, both individually and in business. A shortage or lack of cash may mean an inability to purchase needed inventory

More information

Chapter 21 The Statement of Cash Flows Revisited

Chapter 21 The Statement of Cash Flows Revisited Chapter 21 The Statement of Cash Flows Revisited AACSB assurance of learning standards in accounting and business education require documentation of outcomes assessment. Although schools, departments,

More information

TYPES OF FINANCIAL RATIOS

TYPES OF FINANCIAL RATIOS TYPES OF FINANCIAL RATIOS In the previous articles we discussed how to invest in the stock market and unit trusts. When investing in the stock market an investor should have a clear understanding about

More information

THE STATEMENT OF CASH FLOWS

THE STATEMENT OF CASH FLOWS THE STATEMENT OF CASH FLOWS Associate Professor PhD Cernusca Lucian University Aurel Vlaicu of Arad, luciancernusca_ro@yahoo.com Professor PhD Mates Dorel, West University of Timisoara Abstract: In today

More information

Financial Statement Analysis: An Introduction

Financial Statement Analysis: An Introduction Financial Statement Analysis: An Introduction 2014 Level I Financial Reporting and Analysis IFT Notes for the CFA exam Contents 1. Introduction... 3 2. Scope of Financial Statement Analysis... 3 3. Major

More information

Financial Statement and Cash Flow Analysis

Financial Statement and Cash Flow Analysis Chapter 2 Financial Statement and Cash Flow Analysis Answers to Concept Review Questions 1. What role do the FASB and SEC play with regard to GAAP? The FASB is a nongovernmental, professional standards

More information

9901_1. A. 74.19 days B. 151.21 days C. 138.46 days D. 121.07 days E. 84.76 days

9901_1. A. 74.19 days B. 151.21 days C. 138.46 days D. 121.07 days E. 84.76 days 1. A stakeholder is: 9901_1 Student: A. a creditor to whom a firm currently owes money. B. any person who has voting rights based on stock ownership of a corporation. C. any person or entity other than

More information

Balance Sheet. Assets. Current Assets Total ( )...4

Balance Sheet. Assets. Current Assets Total ( )...4 Balance Sheet Assets + Cash and Short-Term Investments... 1 + Cash...162 + Short-Term Investments...193 + Receivables Total... 2 + Receivables Trade...151 + Income Tax Refund...161 + Receivables Current

More information

2-8. Identify whether each of the following items increases or decreases cash flow:

2-8. Identify whether each of the following items increases or decreases cash flow: Problems 2-8. Identify whether each of the following items increases or decreases cash flow: Increase in accounts receivable Increase in notes payable Depreciation expense Increase in investments Decrease

More information

Financial Formulas. 5/2000 Chapter 3 Financial Formulas i

Financial Formulas. 5/2000 Chapter 3 Financial Formulas i Financial Formulas 3 Financial Formulas i In this chapter 1 Formulas Used in Financial Calculations 1 Statements of Changes in Financial Position (Total $) 1 Cash Flow ($ millions) 1 Statements of Changes

More information

Indian Accounting Standard (Ind AS) 7 Statement of Cash Flows

Indian Accounting Standard (Ind AS) 7 Statement of Cash Flows Contents Indian Accounting Standard (Ind AS) 7 Statement of Cash Flows Paragraphs OBJECTIVE SCOPE 1 3 BENEFITS OF CASH FLOW INFORMATION 4 5 DEFINITIONS 6 9 Cash and cash equivalents 7 9 PRESENTATION OF

More information

Sri Lanka Accounting Standard-LKAS 7. Statement of Cash Flows

Sri Lanka Accounting Standard-LKAS 7. Statement of Cash Flows Sri Lanka Accounting Standard-LKAS 7 Statement of Cash Flows CONTENTS SRI LANKA ACCOUNTING STANDARD-LKAS 7 STATEMENT OF CASH FLOWS paragraphs OBJECTIVE SCOPE 1 3 BENEFITS OF CASH FLOW INFORMATION 4 5 DEFINITIONS

More information

E2-2: Identifying Financing, Investing and Operating Transactions?

E2-2: Identifying Financing, Investing and Operating Transactions? E2-2: Identifying Financing, Investing and Operating Transactions? Listed below are eight transactions. In each case, identify whether the transaction is an example of financing, investing or operating

More information

RAPID REVIEW Chapter Content

RAPID REVIEW Chapter Content RAPID REVIEW BASIC ACCOUNTING EQUATION (Chapter 2) INVENTORY (Chapters 5 and 6) Basic Equation Assets Owner s Equity Expanded Owner s Owner s Assets Equation = Liabilities Capital Drawing Revenues Debit

More information

Preparing Financial Statements

Preparing Financial Statements Preparing Financial Statements Understanding financial statements is essential to the success of a small business. They can be used as a roadmap to steer you in the right direction and help you avoid costly

More information

FOREIGN CURRENCY TRANSLATION

FOREIGN CURRENCY TRANSLATION FOREIGN CURRENCY TRANSLATION L E A R N I N G O B J E C T I V E Develop the necessary understanding and skills to translate the financial statements of a foreign entity into U.S. dollars using the all-current

More information

Chapter 18. Financial Planning. Answers to Concept Review Questions

Chapter 18. Financial Planning. Answers to Concept Review Questions Chapter 18 Financial Planning Answers to Concept Review Questions 1. What is the financial planning process? What is a strategic plan? Describe the roles that financial managers play with regard to strategic

More information

STATEMENT OF CHANGES IN FINANCIAL POSITION

STATEMENT OF CHANGES IN FINANCIAL POSITION Home Page - Statement of Changes in Financial Position STATEMENT OF CHANGES IN FINANCIAL POSITION by Dr. J. Herbert Smith/ACOA Chair Technology Management and Entrepreneurship Faculty of Engineering University

More information

* * * Chapter 15 Accounting & Financial Statements. Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

* * * Chapter 15 Accounting & Financial Statements. Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 15 Accounting & Financial Statements Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall Bookkeeping vs. Accounting Bookkeeping Accounting The recording of business transactions.

More information

CHAPTER 14: THE ROLE OF ACCOUNTANTS AND ACCOUNTING INFORMATION

CHAPTER 14: THE ROLE OF ACCOUNTANTS AND ACCOUNTING INFORMATION CHAPTER 14: THE ROLE OF ACCOUNTANTS AND ACCOUNTING INFORMATION I. What Is Accounting and Who Uses Accounting Information? Accounting is a comprehensive system for collecting, analyzing, and communicating

More information

Oklahoma State University Spears School of Business. Financial Statements

Oklahoma State University Spears School of Business. Financial Statements Oklahoma State University Spears School of Business Financial Statements Slide 2 Sources of Information Annual reports (10K) & Quarterly reports (10Q) SEC EDGAR Major databases COMPUSTAT(access through

More information

The Statement of Cash Flows

The Statement of Cash Flows CHAPTER The Statement of Cash Flows OBJECTIVES After careful study of this chapter, you will be able to: 1. Define operating, investing, and financing activities. 2. Know the categories of inflows and

More information

Measuring Financial Performance: A Critical Key to Managing Risk

Measuring Financial Performance: A Critical Key to Managing Risk Measuring Financial Performance: A Critical Key to Managing Risk Dr. Laurence M. Crane Director of Education and Training National Crop Insurance Services, Inc. The essence of managing risk is making good

More information

Financial Ratio Cheatsheet MyAccountingCourse.com PDF

Financial Ratio Cheatsheet MyAccountingCourse.com PDF Financial Ratio Cheatsheet MyAccountingCourse.com PDF Table of contents Liquidity Ratios Solvency Ratios Efficiency Ratios Profitability Ratios Market Prospect Ratios Coverage Ratios CPA Exam Ratios to

More information

EMERSON AND SUBSIDIARIES CONSOLIDATED OPERATING RESULTS (AMOUNTS IN MILLIONS EXCEPT PER SHARE, UNAUDITED)

EMERSON AND SUBSIDIARIES CONSOLIDATED OPERATING RESULTS (AMOUNTS IN MILLIONS EXCEPT PER SHARE, UNAUDITED) CONSOLIDATED OPERATING RESULTS (AMOUNTS IN MILLIONS EXCEPT PER SHARE, UNAUDITED) TABLE 1 Quarter Ended March 31, Percent Change Net Sales $ 5,854 $ 5,919 1% Costs and expenses: Cost of sales 3,548 3,583

More information

Financial Terms & Calculations

Financial Terms & Calculations Financial Terms & Calculations So much about business and its management requires knowledge and information as to financial measurements. Unfortunately these key terms and ratios are often misunderstood

More information

Creating a Successful Financial Plan

Creating a Successful Financial Plan Creating a Successful Financial Plan Basic Financial Reports Balance Sheet - Estimates the firm s worth on a given date; built on the accounting equation: Assets = Liabilities + Owner s Equity Income Statement

More information

ABOUT FINANCIAL RATIO ANALYSIS

ABOUT FINANCIAL RATIO ANALYSIS ABOUT FINANCIAL RATIO ANALYSIS Over the years, a great many financial analysis techniques have developed. They illustrate the relationship between values drawn from the balance sheet and income statement

More information

Chapter 3. Learning Objectives Principles Used in This Chapter 1. An Overview of the Firm s Financial Statements

Chapter 3. Learning Objectives Principles Used in This Chapter 1. An Overview of the Firm s Financial Statements Chapter 3 Understanding Financial Statements, Taxes, and Cash Flows Agenda Learning Objectives Principles Used in This Chapter 1. An Overview of the Firm s Financial Statements 2. The Income Statement

More information

Assets, Liabilities, and Net Worth

Assets, Liabilities, and Net Worth Assets, Liabilities, and Net Worth C H A P T E R 3 OVERVIEW Assets, liabilities, and net worth are part of the language of finance. As such, it is important to understand both their composition and how

More information

Finance and Accounting For Non-Financial Managers

Finance and Accounting For Non-Financial Managers Finance and Accounting For Non-Financial Managers Accounting/Finance Recording, classifying, and summarizing financial transactions in terms of dollars and their interpretation 1 Key Accounting Terms Accounting

More information

Accounting Is a Language. Financial Accounting: The Balance Sheet BALANCE SHEET. Accounting Information. Assets. Balance Sheet: Layout

Accounting Is a Language. Financial Accounting: The Balance Sheet BALANCE SHEET. Accounting Information. Assets. Balance Sheet: Layout Accounting Is a Language Financial Accounting: The Balance Sheet Richard S. Barr Purpose: providing information Financial Statements Summarize accounting information Examples We need to know what the numbers

More information