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Using Accounting Information

Using Accounting Information. Business Control and Planning. Comparative Statement Analysis. Balance sheets and P&L statements Two periods Side by side Examine any significant changes Dollars or percentages Affect financial firm condition

cole-obrien
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Using Accounting Information

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  1. Using Accounting Information Business Control and Planning

  2. Comparative Statement Analysis • Balance sheets and P&L statements • Two periods • Side by side • Examine any significant changes • Dollars or percentages • Affect financial firm condition • Measure changes over time and against industry standards • Robert Morris Associates • Comparative balance sheet analysis • Figure 13-1 • Comparative profit and loss statement analysis • Figure 13-2

  3. Comparative Balance Sheet

  4. Comparative Profit and Loss Statement

  5. Net Working Capital Analysis (NWC) • NWC • Difference between current assets and current liabilities • Expressed on balance sheet NWC = Current Asset - Current Liabilities

  6. Net Working Capital Analysis (NWC) • Net Working Capital Analysis tells managers • -- Where firm’s money comes from • Business profits • Borrowings • Stock sales, and so on • --Where firm is spending money • Buy fixed assets • Pay dividends • Pay debts, and so on

  7. Net Working Capital Sources • Net Working Capital Sources • Fixed assets sale • Investments sales • Long-term loans taken • Stock sale • Depreciation • Profits

  8. Net Working CapitalUses • Net Working Capital Uses • Dividend payment • Fixed assets purchase • Investments payments • Long term repayment • Stock retirement

  9. Developing Source and Uses Statement Three-Step Process • Step One: Calculate NWC for each year from balance sheet and determine change in NWC between two periods • Step Two: Items that constitute sources and uses of NWC are determined • Step Three: Changes that occurred within current assets and liabilities are examined • Figure 13-3

  10. Developing Sources and Uses of Net Working Capital Statement

  11. Ratio Analysis • Ratio analysis • Examines relationship • Various components of balance sheet • P&L statement • Evaluate ratios • Comparing changes over time • Industry standards • Four categories • Liquidity Ratios • Solvency Ratios • Activity Ratios • Profitability Ratios

  12. LiquidityRatios • Current Ratio: relationship between current assets and current liabilities as listed on balance sheet Current Assets Current Ratio = Current Liabilities

  13. LiquidityRatios • Quick Ratio = • Acid Test Ratio: Ultimate test of liquidity CurrentAssets - Inventories Current Liabilities Cash Acid Test Ratio = Current Liabilities

  14. SolvencyRatios • Debt to Equity Ratio = • Times Interest Earned Ratio = Total Debt = Total Liabilities Owners’ Equity Income Before Taxes & Interest Expense Interest Expense

  15. ActivityRatios • Inventory Turnover Ratio = • Accounts Receivable Turnover Ratio = • Accounts Payable Turnover Ratio = Cost of Goods Sold Inventory Level Credit Sales Accounts Receivable Purchases on Credit Accounts Payable

  16. Profitability Ratios • Return on Investment (ROI) Ratio = • Return on Owners’ Equity = • Profit as Percentage of Sales Ratio = Profit Before Taxes Total Assets Profit Before Taxes Owners’ Equity Profit Before Taxes Total Sales

  17. Developing Pro Forma Cash Flow Budgets Determining cash inflows: • Begin by using same cash sales estimates from marketing plan. • Developed from ratios • Other information on balance sheet and income statement

  18. Estimating Cash Outflows

  19. Estimating Cash Inflows

  20. Pro Forma Cash Flow Budget

  21. Pro Forma Cash Flow Budget Managers Answer 5 Key Questions • Need to borrow money? • If so, how much money? • When need borrowed? • How repaid? • When paid?

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