Lesson 17: Accounting and Financial Information

True or False: In order for financial reports to be useful, they must be accurate, consistent and comparable over time.

true

True or False: The best analysis of a company's financial position comes from all three statements - using only one can cause you to miss opportunities and overlook risks.

true

Profitability/Performance Ratio: Return on sales is calculated by _____. A higher ratio indicates better ___ ____ ____. Often called "____ ____ ___," it can be calculated using the ___ statement and should be healthy and increasing (large margins).

Profitability/Performance Ratio: Return on sales is calculated by (NET REVENUE AFTER TAXES) / (REVENUE). A higher ratio indicates better NET PROFIT MARGINS. Often called "NET PROFIT MARGIN," it can be calculated using the INCOME statement and should be healthy and increasing (large margins).

Managerial accounting provides information for _______. It can help answer questions like... What are our ___ ____ products? How much have we ____ on marketing this year? Do we need to _____ money to open more stores? How much _____ do we have on hand? Managers and employees use managerial accounting info to make decisions about ___, ___, and ____ activities. Reporting of this kind of accounting is ______ - can provide reports about the revenue and costs associated with particular products, stores, or departments in any format useful to company managers.

Managerial accounting provides information for MANAGERS INSIDE AN ORGANIZATION. It can help answer questions like... What are our MOST PROFITABLE products? How much have we SPENT on marketing this year? Do we need to BORROW money to open more stores? How much INVENTORY do we have on hand? Managers and employees use managerial accounting info to make decisions about MARKETING, OPERATING, and INVESTING activities. Reporting of this kind of accounting is FLEXIBLE - can provide reports about the revenue and costs associated with particular products, stores, or departments in any format useful to company managers.

What's the difference between revenue and income on the income statement?

Revenue - the monetary value of what a firm receives for goods sold, services rendered, and other payments such as rent Income - the bottom line which is the net income (or loss) the firm incurs from revenue - sales returns, costs, expenses, and taxes over a period of time

T or F: Extended losses can harm a company, even if they began with considerable assets. T or F: Excellent profits can make a balance sheet weaker, even if the company has negative net worth currently. T or F: Cash flow statements can show investors where money is going, if balances drop or increase.

True False (stronger) True

Why is the third financial statement, the statement of cash flows, necessary?

- Balance sheet tells us how much cash a company has at a point in time, but we need to know why that cash balance has changed over time -Income statement tells us how much the company earned from primary operations (selling products to customers), but we need to know about the company's investing and financing activities

What are the two common methods of financial statement analysis?

1 - Compare the company's current performance to past performance. 2 - Compare the company's current performance to the performance of its competitors. - Measure of company's effectiveness and standing within its industry KEY is using measurements that are consistent over time and comparable for different-sized companies

3 financial statements provide the foundation of most financial analysis: ___, _____, and ____. They gauge a company's financial health by looking at how much a company has in the _______, how much the company earns in the ______, and where the money is coming from and going in the _________. ____ ____ is how much a company has left after all debts are paid off. This, earnings, and cash flow are good indicators of financial health. A _____ ____ is a snapshot of a company's net worth. An _____ _____ is a monthly earning report that displays profits/losses and how much the company has earned over a period of time. A _______ __ ____ ____ indicates where money is coming from (banks, loans, customers, products) and where it is going (loans, costs).

3 financial statements provide the foundation of most financial analysis: BALANCE SHEET, INCOME STATEMENT, and STATEMENT OF CASH FLOWS. They gauge a company's financial health by looking at how much a company has in the BALANCE SHEET, how much the company earns in the INCOME STATEMENT, and where the money is coming from and going in the STATEMENT OF CASH FLOWS. NET WORTH is how much a company has left after all debts are paid off. This, earnings, and cash flow are good indicators of financial health. A BALANCE SHEET is a snapshot of a company's net worth. An INCOME STATEMENT is a monthly earning report that displays profits/losses and how much the company has earned over a period of time. A STATEMENT OF CASH FLOWS indicates where money is coming from (banks, loans, customers, products) and where it is going (loans, costs).

A company's _____ _____ records all of a company's various transactions; transactions can include... o Selling ______ to a customer o Purchasing ____ ______ from a supplier o Paying an employee's _____ o Receiving a ____ from the bank o Purchasing a delivery vehicle

A company's ACCOUNTING SYSTEM records all of a company's various transactions; transactions can include... o Selling PRODUCT to a customer o Purchasing RAW MATERIALS from a supplier o Paying an employee's SALARY o Receiving a LOAN from the bank o Purchasing a delivery vehicle

_______ _____ - when a company purchases something and hasn't paid for it yet; this is a short-term liability. ____ _____ - when a company borrows money from a bank in the form of a promissory note or bond; this is a long-term liability.

ACCOUNTS PAYABLE - when a company purchases something and hasn't paid for it yet; this is a short-term liability. NOTES PAYABLE - when a company borrows money from a bank in the form of a promissory note or bond; this is a long-term liability.

Accountants in the US generally follow a set of _____ ____ _____ _____ for presenting financial information, defined by the _____ ___ __ ____. Internationally, principles are the ______ ___ ____ ______ created by the ___ _____ ____ ____. International companies must fill out _______.

Accountants in the US generally follow a set of GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) for presenting financial information, defined by the FINANCIAL ACCOUNTING STANDARDS BORAD (FASB). Internationally, principles are the INTERNATIONAL FINANCIAL REPORT STANDARDS (IFRS) created by the INTERNATIONAL ACCOUNTING STANDARDS BOARD. International companies must fill out BOTH.

Accounting is the process of systematically _______, ______, and _______ financial information, which is used to make reports to analyze ____ _____ and make decisions for future _____ _____. Accurate and relevant financial information provides a basis for ______ business and investment decisions. There are two types of accounting businesses perform: ____ and __. Both use the same data, just _____ it differently.

Accounting is the process of systematically COLLECTING, ANALYZING, and REPORTING financial information, which is used to make reports to analyze BUSINESS DECISIONS and make decisions for future FINANCIAL VENTURES. Accurate and relevant financial information provides a basis for EVALUATING business and investment decisions. There are two types of accounting businesses perform: MANAGERIAL and FINANCIAL. Both use the same data, just REPORT it differently.

An ____ ____ has to do with how often inventory is turning over. If a company holds onto inventory for too long, they have to pay more for ____ ___ and ___ ____. It shouldn't be too quick or too slow. Formula?

An ACTIVITY RATIO has to do with how often inventory is turning over. If a company holds onto inventory for too long, they have to pay more for WAREHOUSE SPACE and THEFT PREVENTION. It shouldn't be too quick or too slow. Sales Revenue / Inventory

Analysts use _____ ____, which show the relationship between two elements of a company's financial statements. They allow for fair and accurate comparison between current financial results and _____ or ____. A _____ _____ looks at how effectively the company uses its resources to generate profits. An example of this is _____. A ____ ____ looks at the company's ability to convert assets to cash and pay its short-term debts. An example of this is ______. A ____ ___ looks at the level of debt compared to assets or equity. An example of this is ______.

Analysts use FINANCIAL RATIOS, which show the relationship between two elements of a company's financial statements. They allow for fair and accurate comparison between current financial results and PREVIOUS PERIODS or INDUSTRY COMPETITORS. A PROFITABILITY/PERFORMANCE RATIO looks at how effectively the company uses its resources to generate profits. An example of this is RETURN ON SALES RATIO. A LIQUIDITY RATIO looks at the company's ability to convert assets to cash and pay its short-term debts. An example of this is CURRENT RATIO. A LEVERAGE RATIO looks at the level of debt compared to assets or equity. An example of this is DEBT TO EQUITY RATIO.

______, which stands for ___________ (also known as VARIABLE EXPENSES), are generally costs directly related to the production or purchase of product. These can include labor for production-line workers or service business employees. _____ _____, on the other hand, are ongoing business expenses that aren't directly tied to sales volume. These can include office salaries, rent payments, utilities, and marketing.

COGS, which stands for COST OF GOODS SOLD (also known as VARIABLE EXPENSES), are generally costs directly related to the production or purchase of product. These can include labor for production-line workers or service business employees. OPERATING EXPENSES, on the other hand, are ongoing business expenses that aren't directly tied to sales volume. These can include office salaries, rent payments, utilities, and marketing.

Cash flows from ___ + ______ + ____ = net change in cash.

Cash flows from OPERATIONS + INVESTING + FINANCING = net change in cash.

______ is how the value of a product decreases over time because it becomes obsolete, no longer needed, or damaged. Because of this, companies pay for equipment over a period of years instead of _____ as the equipment is used and depreciates in value.

DEPRECIATION is how the value of a product decreases over time because it becomes obsolete, no longer needed, or damaged. Because of this, companies pay for equipment over a period of years instead of UPFRONT as the equipment is used and depreciates in value.

Efficient analysis of a balance sheet involves _____ different types of assets and then organizing them from most _____ to least _______. Types of assets could be: __________. Next, sort these assets into two groups: _____ ____, which can quickly be converted into cash, and ____ _____ _____, which can't easily be converted into cash or will be held longer than a year. Give examples of each: _______. Then, sort liabilities into two groups: ____ ____ and ___ ___ ______. Give examples of each: _____. Lastly, calculate owners' equity based on these categories.

Efficient analysis of a balance sheet involves CATEGORIZING different types of assets and then organizing them from most LIQUID to least LIQUID. Types of assets could be: - cash in the bank - short term investments - facilities/vehicles - merchandise - intangible assets - accounts receivable Next, sort these assets into two groups: CURRENT ASSETS, which can quickly be converted into cash, and LONG TERM ASSETS, which can't easily be converted into cash or will be held longer than a year. Give examples of each: - CURRENT: cash, short term investments, inventory, accounts receivable - LONG TERM: equipment, intangible assets Then, sort liabilities into two groups: CURRENT LIABILITIES and LONG TERM LIABILITIES. Give examples of each: - CURRENT: accounts payable, accrued expenses, short term debt - LONG TERM: loans payable Lastly, calculate owners' equity based on these categories.

Financial accounting provides information primarily for ________. It can help answer questions like... How fast is this company _____? How much is this company ____? Can this company pay its ____? How is this company performing compared to others in their ____? Bankers, investors and creditors can evaluate whether to lend, invest, or otherwise partner with companies based on ___ ___ ___. Government agencies also use this info to assess ___. Reporting is formatted in a uniform set of financial statements about the entire organization, including a ____, ___ and ___. These reports must be prepared according to the standards of the ___ ___ ____ ___.

Financial accounting provides information primarily for PEOPLE OUTSIDE AN ORGANIZATION. It can help answer questions like... How fast is this company GROWING? How much is this company WORTH? Can this company pay its BILLS? How is this company performing compared to others in their INDUSTRY? Bankers, investors and creditors can evaluate whether to lend, invest, or otherwise partner with companies based on FINANCIAL ACCOUNTING INFO. Government agencies also use this info to assess TAXES. Reporting is formatted in a uniform set of financial statements about the entire organization, including a BALANCE SHEET, INCOME SHEET, and STATEMENT OF CASH FLOWS These reports must be prepared according to the standards of the FINANCIAL ACCOUNTING STANDARDS BOARD (FASB).

____ _____ are things like trademarks and copyrights. ____ _____ is money owed to a company by customers who have been invoiced for goods and services. ___ _____ is money owed by a company to suppliers for purchases that were made with credit. ______ ________ are expenses that can be paid off later, like salary and tax payments.

INTANGIBLE ASSETS are things like trademarks and copyrights. ACCOUNTS RECEIVABLE is money owed to a company by customers who have been invoiced for goods and services. ACCOUNTS PAYABLE is money owed by a company to suppliers for purchases that were made with credit. ACCRUED EXPENSES are expenses that can be paid off later, like salary and tax payments.

_________ is the ease at which an asset can be converted into cash. Assets that are more ________ can be easily sold. Having assets that are more liquid puts the owner in a (stronger/weaker) financial position. An assets is also potentially more valuable if it can produce ________ for the owner.

LIQUIDITY is the ease at which an asset can be converted into cash. Assets that are more LIQUID can be easily sold. Having assets that are more liquid puts the owner in a STRONGER financial position. An assets is also potentially more valuable if it can produce INCOME for the owner.

Leverage Ratio: Debt to Equity Ratio is calculated by ______. Higher ratios indicate higher levels of ________. A value of 1 means that the company has more ___ than ____. The more debt a company has, the more _______ the company is. A rising trend in this ratio is (good/bad).

Leverage Ratio: Debt to Equity Ratio is calculated by (TOTAL LIABILITIES) / (TOTAL OWNER'S EQUITY). Higher ratios indicate higher levels of DEBT. A value of 1 means that the company has more DEBT than EQUITY. The more debt a company has, the more LEVERAGED the company is. A rising trend in this ratio is BAD.

Liquidity Ratio: Current ratio is calculated by ________. Higher ratios indicate that the company has adequate short-term ____ to pay short-term _______. It can be calculated using the ____ ____. Higher ratio indicate higher short-term ____ _____.

Liquidity Ratio: Current ratio is calculated by (CURRENT ASSETS) / (CURRENT LIABILITIES). Higher ratios indicate that the company has adequate short-term ASSETS to pay short-term LIABILITIES. It can be calculated using the BALANCE SHEET. Higher ratio indicate higher short-term FINANCIAL SECURITY.

The ____ ____ is a summary of a company's revenues and expenses during a specified period of time. It shows how much the company earns from selling ____ and _____. The "____ ___" of the statement indicates the company's profit or loss. For a personal statement, the ___/___ pay will be at the top. Next will be a list of _______ ____, followed by the total, with the ____ ____ (income - total expenses) at the bottom. For a company statement, what is the format?

The INCOME STATEMENT is a summary of a company's revenues and expenses during a specified period of time. It shows how much the company earns from selling GOODS and SERVICES. The "BOTTOM LINE" of the statement indicates the company's profit or loss. For a personal statement, the INCOME/TAKE-HOME pay will be at the top. Next will be a list of MONTHLY/ANNUAL EXPENSES, followed by the total, with the CASH SURPLUS (income - total expenses) at the bottom. For a company statement, what is the format? (Revenue) - (Cost of Goods Sold, COGS) = (Gross Profit) (Gross Profit) - (Operating Expenses) = (Net Income from Operations) (Net Income from Operations) - (Taxes & Interest) = (Net Profit/Loss)

The _____ ___ ____ ____ can tell us how the company's operating, investing, and financing activities have affected their cash balance during an accounting period. ______ ________ include the purchase/sale of land, equipment, and other assets/investments. ____ _____ include receipt or payment of loans, sale or repurchase of company stock, and payment of cash dividends to company shareholders. What is the formula for this statement?

The STATEMENT OF CASH FLOWS can tell us how the company's operating, investing, and financing activities have affected their cash balance during an accounting period. INVESTING ACTIVITIES include the purchase/sale of land, equipment, and other assets/investments. FINANCIAL ACTIVITIES include receipt or payment of loans, sale or repurchase of company stock, and payment of cash dividends to company shareholders. What is the formula for this statement? (Cash flows from operating activities) +/- (Cash flows from investing activities) +/- (Cash flows from financing activities) = Net increase or decrease in cash

The balance sheet, sometimes referred to as the ________ __ ________ _____, is a summary of how much a company is worth at a particular moment in time. It can be monthly, _____, ______, etc. It is divided into three sections: _____ - how much you own _____ - how much you owe _______ (_____ _____) - what's left over; what portion of company assets belong to owners after all debts are paid How do you calculate the third?

The balance sheet, sometimes referred to as the STATEMENT OF FINANCIAL POSITION, is a summary of how much a company is worth at a particular moment in time. It can be monthly, QUATERLY, ANNUALLY, etc. It is divided into three sections: ASSETS - how much you own LIABILITIES - how much you owe OWNER'S/STOCKHOLDER'S EQUITY (NET WORTH) - what's left over; what portion of company assets belong to owners after all debts are paid How do you calculate the third? ASSETS - LIABILITIES = OWNERS' EQUITY