1. Financial Services Industry TrainingIntroduction to Accounting & FinanceSaunders Learning Group, LLCSaunders Learning Group, LLC, Andover, KS

2. Training from Saunders Learning Group Saunders Learning Group provides a variety of training programs, workshops and seminars targeted to the financial services industry. Programs are available in a wide range of topics, and we are specialists in developing custom programs that are targeted to your needs. Contact the founder, Floyd Saunders at 316-680-6482 or at floyd@floydsaunders.com for more information. Saunders Learning Group, LLC, Andover, KS1 3. Topics 1. Basic Financial Terms 2. Accounts 3. Ratios Saunders Learning Group, LLC, Andover, KS Slide 2 4. Basic TermsSaunders Learning Group, LLCSaunders Learning Group, LLC, Andover, KS 5. What are Assets? Assets are the resources that a business owns Types of Assets Tangible Asset Physical Items Cash Receivables Inventory Property Company plant and equipment Intangible Asset No physical form Patents and Copyright Debt placement costs Goodwill Current Asset Assets used up during production and which will realize cashwithin a year such as cash, cash equivalents, short-term investments,accounts receivable, inventory Long-term Asset (Fixed Asset) Assets that cannot be easily converted to cashsuch as property, plant, and equipment .Saunders Learning Group, LLC, Andover, KS Slide 4 6. What is a Liability Liability The obligation a business owes Liability may be a legal debt or an accrual, which is anestimate of an obligation. Current liabilities Liabilities the business has to meetwithin a year. They usually include payables such aswages, accounts, taxes, and accounts payables,unearned revenue when adjusting entries, portions oflong-term bonds to be paid this year, short-termobligations Long-term liabilities these liabilities are expected notto be liquidated within a year. They usually includeissued long-term bonds, notes payables, long-termleases, pension obligations, and long-term productwarranties.Saunders Learning Group, LLC, Andover, KSSlide 5 7. Equity Value of the assets contributed by the owners orthe owners value in an asset Equity = Total Assets minus Total Liabilities This is also referred to as Net Worth, Capital andShareholders EquitySaunders Learning Group, LLC, Andover, KSSlide 6 8. Revenue The top line The amount of money that a company actuallyreceives during a specific period, includingdiscounts and deductions for returnedmerchandise. It is the "top line" or "gross income" figure fromwhich costs are subtracted to determine netincome.Saunders Learning Group, LLC, Andover, KSSlide 7 9. Expense The economic costs that a business incursthrough its operations to earn revenue. In order to maximize profits, businesses mustattempt to reduce expenses without alsocutting into revenues.Saunders Learning Group, LLC, Andover, KS Slide 8 10. Gross Profit A companys revenue minus its cost ofgoods sold. Gross profit is a companysresidual profit after selling a product orservice and deducting the cost associatedwith its production and sale. Also called "gross margin" and "grossincome". Calculated as Revenue - cost of goods soldSaunders Learning Group, LLC, Andover, KSSlide 9 11. Gross Profit Margin A financial metric used to assess a firmsfinancial health by revealing theproportion of money left over fromrevenues after accounting for the cost ofgoods sold. Gross profit margin serves as the sourcefor paying additional expenses and futuresavings. Calculated as Gross Profit/RevenueSaunders Learning Group, LLC, Andover, KSSlide 10 12. Bottom Line The Net Profit Net Profit is calculated by takingrevenues and adjusting for the cost ofdoing business, depreciation, interest,taxes and other expenses This is often referred to as "the bottomline" since net profit is listed at thebottom of the income statementSaunders Learning Group, LLC, Andover, KS Slide 11 13. Net Profit Margin A ratio of profitability calculated as netincome divided by revenues. A higher profit margin indicates a moreprofitable company . Saunders Learning Group, LLC, Andover, KS Slide 12 14. Dividend and Retained Profit Dividend This is the share of the profitreturned to shareholders Retained Profit The amount kept back forfuture investment which is retained by thecompany.Saunders Learning Group, LLC, Andover, KSSlide 13 15. Summary A Sales B Cost of Goods Sold C=A-B Gross Profit D Other Expense E=C-D Net Profit F Dividend G=E-F Retained Profit Saunders Learning Group, LLC, Andover, KSSlide 14 16. AccountsSaunders Learning Group, LLCSaunders Learning Group, LLC, Andover, KS 17. Why do we need Accounts ? To provide information for stakeholders. Shareholders Progress of the investment Customers Long term future of business Management Monitor performance Employees their position in business Provides the opportunity for the business to monitor its own activities Provides transparency to enable the firm to attract investmentSaunders Learning Group, LLC, Andover, KS Slide 16 18. Different type of Accounts Accounts Payable An accounting entry that represents an entitys obligation to pay off a short- term debt to its creditors. The accounts payable entry is found on a balance sheet under the heading current liabilities Accounts Receivable Money owed by customers (individuals or corporations) to another entity in exchange for goods or services that have been delivered or used, but not yet paid for. Receivables usually come in the form of operating lines of credit and are usually due within a relatively short time period, ranging from a few days to a year.Saunders Learning Group, LLC, Andover, KS Slide 17 19. What are Profit and Loss Account Shows the flow of sales and costs over a period Shows the level of profit or loss made Shows what has been done with the profit or lossSaunders Learning Group, LLC, Andover, KSSlide 18 20. Financial StatementsSaunders Learning Group, LLCSaunders Learning Group, LLC, Andover, KS 21. Financial StatementsFinancial Statement that Required Disclosure Satisfies Requirement Financial position at theBalance Sheet end of the period Earnings for the periodIncome Statement Cash flows during theStatement of Cash Flows period Investments by and Statement of Changes in distributions to ownersOwners Equity during the period In addition to the financial statements, the annual report will includeseveral accompanying footnotes or explanations of the accountingpolicies and detailed information about many of the amounts shown onthe financial statements.Saunders Learning Group, LLC, Andover, KS 22. Balance SheetBalance sheet describes assets, liabilities, and equity of thefirm at a specific time (like a snapshot)Assets: (Tangible/intangible): - Things that a firm owns. -Assets are entered on the top or on the left of the balance sheetSaunders Learning Group, LLC, Andover, KS 23. Balance SheetASSETS: (Top, or left of balance sheet)LIABILITIES (Below Assets or on the right1. Current Assets: of Balance Sheet) Firms short term assets.1. Current Liabilities:-Cash and Marketable Securities, Short term liabilities-Accounts Receivable,-Inventories Typically, current liabilities are:2. Fixed Assets: -Accounts payable- Assets that have long life, like plant -Notes payableand equipment -Accruals3. Net Fixed Assets:-You deduct the accumulated2. Long-term Liabilities:depreciation of the fixed assets fromBonds, bank loans, etc..the value of fixed assets to find NetFixed Assets 3. Total Liabilities:Net Fixed Assets=Fixed Assets -Current Liabilities + Long-term LiabilitiesAccumulated Depreciation Saunders Learning Group, LLC, Andover, KS 24. Balance SheetAssets represent the amount of resourcesowned by the entity.Liabilities are amounts owed to Main Street Store, Inc.other entities.Balance SheetAugust 31, 2004Assets Liabilities and Owners EquityCurrent AssetsCurrent LiabilitiesCash $34,000Short-term debt$20,000Equity is theAsccounts recievable80,000Accounts payable35,000Merchandise inventory170,000Other accrued liabilities 12,000 ownership right ofTotal current asets$ 284,000Total current liabilities$67,000 the owner(s) of thePlant and Equipment Long-term debt50,000 entity in the assetsEquipment 40,000Total Liabilities117,000Less: Accumulated that remain afterdepreciation(4,000) Owners equity203,000deducting theTotal liabilities andTotal Assets $ 320,000owners equity$ 320,000liabilities.Saunders Learning Group, LLC, Andover, KS 25. Balance Sheet Current assets are those assets that areCurrent liabilities likely to be converted into cash or used toare thosebenefit the entity within one year.liabilities that arelikely to be paidwith cash within Main Street Store, Inc.Balance Sheetone year of theAugust 31, 2004 balance sheetAssets Liabilities and Owners Equitydate.Current AssetsCurrent LiabilitiesCash $34,000Short-term debt$20,000Asccounts recievable80,000Accounts payable35,000Merchandise inventory170,000Other accrued liabilities 12,000Total current asets$ 284,000Total current liabilities$67,000Plant and Equipment Long-term debt50,000Equipment 40,000Total Liabilities117,000Less: Accumulateddepreciation(4,000) Owners equity203,000Total liabilities andTotal Assets $ 320,000owners equity$ 320,000Saunders Learning Group, LLC, Andover, KS 26. Balance Sheet AccountDefinitionCash Cash on hand and in the bankAccounts receivableAmounts due from customersMerchandise inventoryCost of merchandise acquired and not yet soldEquipmentCost of equipment purchased and used in businessAccumulated depreciation Portion of the cost of equipment that is estimated to have been used up in the process of operating the businessShort-term debtAmounts borrowed that will be repaid within one year of the balance sheet dateAccounts payable Amounts due to suppliersOther accrued liabililites Amounts owed to various creditorsLong-term debt Amounts borrowed from banks or other creditors that will not be repaid within one year from the balance sheet dateOwners equity Explained in more detail later in this chapter Saunders Learning Group, LLC, Andover, KS 27. Income StatementSummarizes the Shows total results of therevenues and firmsexpenses foroperations over the time perioda period of timePrepared for different timeShows differentperiods: measures ofMonthly,profit quarterly, andannually Saunders Learning Group, LLC, Andover, KS 28. Income Statement The income statement shows the profit for the period of time under consideration. Revenues resultMain Street Store, Inc.Income Statement from the entitys For the Year Ended August 31, 2004operating activities (e.g., selling Net sales$1,200,000merchandise). Cost of goods sold850,000Gross profit $350,000Selling, general, and admin. expenses 311,000 Costs andIncome from operations $ 39,000Interest expense9,000 expenses are Income before taxes$ 30,000incurred in Income taxes 12,000generatingNet income $ 18,000 revenues andNet income per share of common operating thestock outstanding$ 1.80 entity. Saunders Learning Group, LLC, Andover, KS 29. Income StatementCaptionsExplanationNet sales Amount of sales of merchandise to customers, less the amountof customer returns of merchandiseCost of goods soldRepresents the total cost of merchandise removed frominventory and delivered to customers as a result of salesGross profitDifference between net sales and cost of goods sold;Represents the sellers maximum amount of "cushion" fromwhich all other expenses of the business must be deductedbefore it is possible to have net incomeSelling, general, and Represent the operating expenses of the entityadministrative expensesIncome from operationsRepresents one of the most important measures of the firmsactivitiesInterest expenseRepresents the cost of using borrowed fundsIncome taxesShown after all of the other income statement items have beenreported because income taxes are a function of the firmsincome before taxesNet income per share of A significant item in evaluating the market value of a share ofcommon stock outstandingcommon stock; Often referred to as "earnings per share" or EPS Saunders Learning Group, LLC, Andover, KS 30. Statement of Cash FlowsFinancial Transactions of Firms:1. Sources of Funds: Cash inflows that increase cash balance2. Uses of Funds: Cash outflows that decrease cash balanceHow Well Managers Perform? - Analyze how management uses shareholders money: -Use Statement of Cash Flows Saunders Learning Group, LLC, Andover, KS 31. Statement of Cash Flows Main Street Store, Inc.Statement of Cash FlowsFor the Year Ended August 31, 2004Cash Flows from Operating Activities: The purpose of thisNet incomeAdd (deduct) items not affecting cash: $18,000financial statement Depreciation expense 4,000 Increase in accounts receivable(80,000)is to identify the Increase in merchandise inventory (170,000) Increase in current liabilitiesNet cash used by operating activities 67,000 (161,000) sources and uses ofCash Flows from Investing Activities:Cash paid for equipment$ (40,000)cash during theCash Flows from Financing Activities:Cash received from issue of long-term debt50,000 year.Cash received from sale of common stock190,000Payment of cash dividend on common stock(5,000)Net cash provided by financing activities$ 235,000Net increase in cash for the year$ 34,000 Saunders Learning Group, LLC, Andover, KS 32. Statement of Cash Flows CaptionsExplanationCash flows from operating Shown first; Net income is the starting point for thisactivitiesmeasure of cash generationDepreciation expenseAdded back to net income because it is subtracted toarrive at net income but does not require the use of cashIncrease in accountsDeducted because it reflects sales revenues, included inreceivablenet income, but not yet received in cashIncrease in merchandise Deducted because cash was spent to acquire theinventory increase in inventoryIncrease in current Added because cash has not yet been paid for theliabilities products and services that have been received during thecurrent fiscal periodCash flows from investing Shows the cash sources and uses related to long-livedactivitiesassetsCash flows from financing Shows the cash sources and uses related to transactionsactivitieswith creditors and stockholders Saunders Learning Group, LLC, Andover, KS 33. Statement of Cash Flows Statement of Cash Flows:-Summarizes changes in firms cash balanceEnding Cash Balance =Beginning Cash Balance +Cash Inflow (Sources) -Cash outflow (Uses)Saunders Learning Group, LLC, Andover, KS 34. Statement of Cash Flows Increase and Decrease in Cash Flows:- Uses of funds decrease cash flows: Increase in assets, Decrease inliabilities- Sources of funds increase cash flows:Decrease in assets, Increase in liabilities Therefore, for uses of funds, we should use a - sign in the Excel sheet. Saunders Learning Group, LLC, Andover, KS 35. Statement of Cash Flows Statement of Cash Flows separates firm activities into three parts:1. Operating Activities2. Investing Activities3. Financing ActivitiesSaunders Learning Group, LLC, Andover, KS 36. Cash Flows for Operations Typically theseare: Net income,changes in accounts receivabledepreciation,and other accountsnotes inventories current payablepayableliabilities Saunders Learning Group, LLC, Andover, KS 37. Cash Flows From Investing Typically these are change infixed assets like change inplant and equipment investment in these assets orsale of these assets Or cash flows from investingin other companies, financialmarkets, currency hedgesetc. Saunders Learning Group, LLC, Andover, KS 38. Cash Flows from Financing the business Typically these are: Dividends paid toshareholders, and Changes in Debt stockSaunders Learning Group, LLC, Andover, KS 39. Statement of Changes in Owners Equity Main Street Store, Inc.Statement of Changes in Owners EquityFor the Year Ended August 31, 2004 Paid-In Capital: Beginning balance $ - Common stock, par value $10; 50,000 shares authorized, 10,000 shares issued and outstanding 100,000 Additional paid-in capital 90,000 Balance, August 31, 2004$ 190,000 Retained Earnings: Beginning balance $ - Net income for the year18,000 Less: Cash dividends of $.50 per share (5,000) Balance, August 31, 2004$13,000 Total owners equity$ 203,000This financial statement shows the detail of owners equity and explains thechanges that occurred in the components of owners equity during the year. Saunders Learning Group, LLC, Andover, KS 40. Statement of Changes in Owners Equity Captions ExplanationPaid-in capital Represents the total amount invested in the entity by theownersCommon stockReflects the number of shares authorized by thecorporations charter, the number of shares issued tostockholders, and the number of shares that are still heldby the stockholdersAdditional paid-in capitalDifference between the total amount invested by theowners and the par value or stated value of the stockRetained earnings Represents the cumulative net income of the entity thathas been retained for use in the businessDividends Are distributions of earnings to the owners Saunders Learning Group, LLC, Andover, KS 41. Limitations of Financial Statements Financial statements report only quantitative economic data.They do not reflect qualitativeeconomic variables, such as thevalue of the management team or the employees morale.The balance sheet doesMany estimates arenot report market valuesused, such as warranty or replacement cost of costs, depreciation, and the assets. pension expense.Saunders Learning Group, LLC, Andover, KS 42. The Corporations Annual Report The annual report is distributed to shareholders (and others).It contains the financial statements, together with thereport of the external auditorsexamination of the financialstatements.It may also containManagements Discussion and Analysis (MD&A). Saunders Learning Group, LLC, Andover, KS 43. RatiosSaunders Learning Group, LLCSaunders Learning Group, LLC, Andover, KS 44. Ratios - Why do we need them ? A Financial Ratio a relative magnitude of two selected numerical valuestaken from an enterprises financial statements. They are used to evaluate the overall financial condition of a corporation. Types of ratios : Profitability ratios a measure of how much profit its activities generate Liquidity ratios ability of a business to meet its debts Investment ratios a measure of the performance of the businessSaunders Learning Group, LLC, Andover, KS Slide 43 45. Why Ratio Analysis?The value of a firm is based upon its profitability and growthProductFinancial market strategy market strategy OperatingInvestment Financing DividendManagementManagementstrategypolicies Saunders Learning Group, LLC, Andover, KS 46. Commonly Used Profitability ratios Profit Margin the proportion of money left over from revenues after accounting for the costof goods sold Net Profit Margin Calculated as net income divided by revenues. Retained Profit margin Percentage of retained profit to the revenue of the company Return on Capital Employed A measure of the efficiency of the firm in using its capital to generate profit.Saunders Learning Group, LLC, Andover, KSSlide 45 47. Types of Liquidity ratios Working Capital The difference between current assets and current liabilities Current Ratio The proportion of assets to liabilities Acid Test Ratio (Current Assets Stock)/Current Liabilities The Acid Test Ratio gives an indication whether a firm can meet its liabilitieswithout having to dispose of its stocksSaunders Learning Group, LLC, Andover, KS Slide 46 48. Investment ratios Gearing Ratio Measures the proportion of share capital to loan capital Earning per share The average profit earned per ordinary share Dividend Per share The average dividend received per ordinary shareDividend yield A comparison of the dividend received with the current market value of the shares PE ratio A valuation ratio of a companys current share price compared to its per-share earnings.Saunders Learning Group, LLC, Andover, KS Slide 47 49. Financial Ratio Analysis The key concept of Financial ratio analysis is establishing the relationship of one number to another number to determine if a company: Is profitability Will remain profitability How does it compared to other firms in the same industry Is creating a reasonable return for investors Takes advantage of its strengths Corrects any weaknesses Forecasts where it is headed Saunders Learning Group, LLC, Andover, KS 50. Financial RatiosRatios are tools that enable managementto: Measure and compare informationwithin a business over several periods Compare similar businesses in thesame industry Include: Profitability ratios Financial stability ratios Ratios of efficiencySaunders Learning Group, LLC, Andover, KS 51. Current RatioThe current ratio measures the companys abilityto pay current liabilities with current assets. = Total current assets Total current liabilitiesRule of thumb: A strong current ratio is 2.00. Saunders Learning Group, LLC, Andover, KS 52. Profitability Ratios Gross profitGross profit ratio100%Net sales Net profitNet profit ratio100% Net sales Net profitReturn on equity 100% Average owner s equity Net profitReturn on assets100% Average total assets Saunders Learning Group, LLC, Andover, KS 53. Gross Profit Ratio AnalysisPROFITABILITY RATIOS - Gross Profit Shows the return on net sales prior to adding revenue or deducting expensesReasons gross profit ratio increases: selling prices increase and purchase price remains unchanged opening inventory undervalued closing inventory overvalued purchase bought at lower priceReasons gross profit ratio decreases: discounts given on sales products closing inventory undervalued obsolete or damaged stock written off purchases bought at higher price but sales values not adjustedSaunders Learning Group, LLC, Andover, KS 54. Net Profit Ratio AnalysisPROFITABILITY RATIOS - Net profit ratio Shows the amount earned by normal activities after accounting for other revenue and expenses Measures operation efficiencyReasons net profit ratio increases: expenses decrease operating revenue increases fixed costs spread over higher sales revenueReasons net profit ratio decreases: expenses increase at higher rate than COGS other operating revenue sources declineTo arrest declining net profit margins: investigate business selling plans and techniques increase effective promotion and advertising encourage areas of operating revenue review alternative and cheaper interest rates review all expensesSaunders Learning Group, LLC, Andover, KS 55. ROE & ROAPROFITABILITY RATIOSReturn on equity ratioShows the return on every dollar invested in the businessReturn on assetsIndicates the earning capacity of the business Measures efficiency of business asset usage Saunders Learning Group, LLC, Andover, KS 56. Financial Stability Current assetsWorking capital ratioCurrent liabilitiesCurrent assets - inventories - prepayment sQuick asset ratio Current liabilities - bank overdraftTotal owner s equity Equity ratio 100%Total assetsSaunders Learning Group, LLC, Andover, KS 57. Working capital ratioFINANCIAL STABILITY - Working capital ratioTest of business solvency, to see if it can meetshort-term debts from its current assets Shows amount of dollars to cover every dollar ofliabilities The higher the ratio, the better the position of thebusinessSaunders Learning Group, LLC, Andover, KS 58. Quick Ratio FINANCIAL STABILITY - Quick asset ratio Quick asset ratio Only the liquid business items that easily convert to cash are used Inventories and prepayments are excluded from current assets and the bank overdraft from current liabilities Ratio well above 1:1 is acceptable Saunders Learning Group, LLC, Andover, KS 59. Equity Ratio FINANCIAL STABILITY - Equity ratioShows relationship of owners equity invested in business to thetotal assets of the business It is the degree to which the business relies on owner capital The higher the ratio, the lower the need for externally borrowed funds High equity ratio = long-term financial stability Saunders Learning Group, LLC, Andover, KS 60. Financial RatiosDebt RatioDebt-to-Equity RatioEarnings per Share (EPS)Price-Earnings (P-E) RatioSaunders Learning Group, LLC, Andover, KS 61. Debt RatioThe debt ratio measures the proportion ofcompanys assets financed by debt.Total liabilities Total assetsA low debt ratio is safer than a high debt ratio Saunders Learning Group, LLC, Andover, KS 62. Debt-to-Equity RatioThis ratio expresses the relationship between liabilitiesand equity.Total liabilities Total equity Saunders Learning Group, LLC, Andover, KS 63. Earnings per Share (EPS)EPS is shown on the face of the income statement.Earnings per share is the net income per commonshare of stock outstanding during a period.Net incomeEPS Average number of shares outstanding Saunders Learning Group, LLC, Andover, KS 64. Price-Earnings (P-E) RatioThe P-E ratio measures how much investors are willing to payfor a chance to share the companys potential earnings.A high P-E ratio indicates that investors predict that thecompanys net income will grow rapidly.The ratio is determined by the marketplace because themarket price of the stock is used to compute the ratio.Market price per shareP - E Ratio Earnings per shareSaunders Learning Group, LLC, Andover, KS 65. LIMITATIONS OF RATIOS Ratio analysis and interpretation can beinfluenced by factors such as: poor or inadequate accounting methods incomplete financial reports changes in accounting methods existence of unusual items during a financialyear e.g. losses by fire management changes changes to the economy, such as an industryrecession Saunders Learning Group, LLC, Andover, KS 66. Thank You !Saunders Learning Group, LLCSaunders Learning Group, LLC, Andover, KS 67. About the Author/Presenter Floyd Saunders has worked on Wall Street with both Bank of America and JPMorgan, where is was a vice president in global financial systems. He has worked across the industry in retail, commercial, and investment banking. He has taught courses in Money and Banking and extensively for the American Institute of Banking and various colleges. As a consultant, he developed and taught a wide range of banking and investing courses. He authored three programs for the American Bankers Association: Banking on Mutual Funds and Annuities, Introduction to Securities Markets and Investing in Securities. He is the author of Figuring Out Wall Street and his next book is Family Financial Freedom a book on personal money management. Saunders Learning Group, LLC, Andover, KS