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Copyright © 2007 South-Western. All rights reserved. Chapter 15 Accounting and Financial Analysis
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Copyright © 2007 South-Western. All rights reserved.
Chapter 15
Accounting and Financial Analysis
Copyright © 2007 South-Western. All rights reserved.
Accounting and Financial Analysis
Learning Objectives
Accounting andFinancial Analysis
Evaluate Use
Interpret Reporting
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Accounting and Financial Analysis
The Key Decisions in Running a Business
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Accounting and Financial Analysis
How Firms Use Accounting
UseReportingInterpretEvaluate
Accounting
Public Accountants
CPAs
Bookkeeping
Financial Accounting
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Accounting and Financial Analysis
Reporting Accounting
UseReportingInterpretEvaluate
Investors
Online Reporting
Creditors
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Accounting and Financial Analysis
Decision Support & Control
UseReportingInterpretEvaluate
Managerial Accounting
Auditing
Internal Auditors
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Accounting and Financial Analysis
Responsible Reporting
UseReportingInterpretEvaluate
Responsible Financial Reporting
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Accounting and Financial Analysis
Roles for Proper Reporting
UseReportingInterpretEvaluate
Auditors
Board of Directors
Sarbanes-Oxley Act
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Accounting and Financial Analysis
Income Statement
UseReportingInterpretEvaluate
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Accounting and Financial Analysis
Percentage of Sales
UseReportingInterpretEvaluate
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Accounting and Financial Analysis
Accounting Equation
UseReportingInterpretEvaluate
Balance Sheet
Assets = Liabilities + Owner’s Equity
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Accounting and Financial Analysis
Balance Sheet
UseReportingInterpretEvaluate
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Accounting and Financial Analysis
Breakdowns
UseReportingInterpretEvaluate
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Accounting and Financial Analysis
Ratio Analysis
UseReportingInterpretEvaluate
Liquidity
Efficiency
Financial Leverage
Profitability
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Accounting and Financial Analysis
Liquidity – Current Ratio
UseReportingInterpretEvaluate
Current AssetsCurrent Liabilities
Taylor, Inc example:$2,000,000$1,000,000
Current Ratio = 2.00
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Accounting and Financial Analysis
Liquidity – Quick Ratio
UseReportingInterpretEvaluate
Cash + MS + ARCurrent Liabilities
Taylor, Inc example:$1,000,000$1,000,000
Quick Ratio = 1.00
MS = Marketable SecuritiesAR = Accounts Receivable
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Accounting and Financial Analysis
Efficiency – Inventory Turnover
UseReportingInterpretEvaluate
Cost of Goods SoldInventory
Taylor, Inc example:$16,000,000$1,000,000
Inventory Turnover = 16.00
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Accounting and Financial Analysis
Efficiency – Asset Turnover
UseReportingInterpretEvaluate
Net SalesTotal Assets
Taylor, Inc example:$20,000,000$10,000,000
Asset Turnover = 2.00
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Accounting and Financial Analysis
Leverage – Debt to Equity
UseReportingInterpretEvaluate
Long Term DebtOwner’s Equity
Taylor, Inc example:$5,000,000$4,000,000
Debt to Equity Ratio = 1.25
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Accounting and Financial Analysis
Leverage – Interest Earned
UseReportingInterpretEvaluate
EBITAnnual Interest Expense
Taylor, Inc example:$1,500,000$500,000
Times Interest Earned = 3.00
EBIT = Earnings Before Interest and Taxes
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Accounting and Financial Analysis
Profitability – Net Profit
UseReportingInterpretEvaluate
Net IncomeNet Sales
Taylor, Inc example:$700,000
$20,000,000
Net Profit Margin = 3.50%
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Accounting and Financial Analysis
Profitability – Return on Assets
UseReportingInterpretEvaluate
Net IncomeTotal Assets
Taylor, Inc example:$700,000
$10,000,000
Return on Assets = 7.00%
Copyright © 2007 South-Western. All rights reserved.
Accounting and Financial Analysis
Profitability – Return on Equity
UseReportingInterpretEvaluate
Net IncomeOwner’s Equity
Taylor, Inc example:$700,000
$4,000,000
Return on Equity = 17.50%
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Accounting and Financial Analysis
Ratio Interpretation
UseReportingInterpretEvaluate
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Accounting and Financial Analysis
Ratio Interpretation - Taylor
UseReportingInterpretEvaluate
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Accounting and Financial Analysis
Ratio Limitations
UseReportingInterpretEvaluate
Difficult
Accounting Practices
Seasonal Swings
