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Analyzing Financial Statements and Ratios. Chapter 2. Financial Statements. Defined: The primary source of information used to assess the financial health and performance of an organization Generally Accepted Accounting Principles (GAAP)
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Financial Statements • Defined: • The primary source of information used to assess the financial health and performance of an organization • Generally Accepted Accounting Principles (GAAP) • Publicly traded companies must release financial statements to public on regular basis. • Private firms are not required to disclose financial statements. • Example of a company who cooked their books leading to destruction? GAAP: Which are standard set of guidelines and procedures for financial reporting. Note: To better understand the financial operations of an organization, you need a background in basic accounting.
Balance Sheet • Defined: • A picture or snapshot of the financial condition of an organization at a specific point in time • Three primary sections • Assets -what a company owns including cash, inventory, and accounts receivable • Liabilities -financial obligations or debts owed to others • Owners’ equity-estimated measure of the ownership value in the company
UNDER -ARMOUR The rise to the top of the market in a short time.
Notes on Balance Sheets • Assets = Liabilities + Owners’ Equity • Under Armour example: $487.6 million = $156.5 million + 331.1 million • Assets and liabilities are listed in order of liquidity. • Liquidity – How quickly an asset can be converted into cash • Current – converted into cash within one year or due within one year • Long-term – converted into cash after one year or due after one year
THINK TANK! • Kevin Plank, the Under Armour founder and CEO, was a football player who saw a need for better t-shirts. • Is there an area of sports, exercise science, and recreation that you believe could be improved? • Do you think you have what it takes to form your own company and sell your new product? • WHAT WOULD IT BE? Read the sidebar 2B, p.41 The Birth and Growth of Under Armour
Income Statement (P&L) • Defined: • Shows an organization’s income (or loss) over a specified period of time, often on an annual or a quarterly basis. List the organizations revenues. • Two types of accounting: Cash or accrual basis • Parts: • Revenues and expenses • Non-operating income • Net income
Income Statement Framework Revenues Expenses Operating Income (EBITDA) Depreciation Amortization EBIT Interest EBT Taxes Net Income Revenues and Expenses Non-operating Net Income
Income Statement • An organization’s book may be kept on a cash basis or accrual basis. • Cash basis accounting recognizes transaction when money is either received or paid out. • Limitation is on the income statement. Sales made during a particular time period cannot be recognized on it if payment has not been received. • . • Accrual basis accounting accounts for income when it is earned and expenses when they are incurred. • Limitation is the lag time between when a transaction is made and when payment is exchanged is acknowledged through another financial state. • A fiscal year is a 12-month period over which a company budgets its money.
EVERY PENNY COUNTS STATEMENT OF CASH FLOWS
Statement of Cash Flows • Defined: • Financial statement that tracks cash flowing in and out of an organization over a given period of time. • Not influenced by non-cash expenses or income • Three sections: • Operationsrefers to the organization’s cash flows from normal business operations, such as cash flowing in from the sale of products or services, or cash flowing out by paying employees’ salaries. • Investingare activities include the buying and selling of assets, such as the purchase of property. • Financingrefers to the company’s debt and equity financing, such as the sale of stock or repaying a loan.
Statement of Cash Flows • Positive Cash Flow • Success means generating more cash than it spends. • Negative Cash Flow • Few companies can survive long periods of spending more than they generate. The Statement of cash flow provides data to show if the company had cover its’ debts, expenses, and obligations. It also provide a simple way to examine cash generated and spent.
FINANCIAL RATIOS • What are financial ratios? • A financial ratio or accounting ratio is a relative magnitude of selected numerical values taken from an enterprise's .
Financial Ratios Liquidity: • Current • Quick Asset Management • Total asset turnover • Inventory turnover Leverage • Debt • Interest coverage • Profitability • Net profit margin • Return on Equity • Market Value • Market value • Price-to-earnings Ratios are divided into five sections based on their type: Liquidity Asset management Financial leverage Profitability Market value Examples of each on p.45, 2.6
Quick Ratios/Acid Test A measure of a company’s ability to meet its current liabilities with its current assets, not including inventory.
Liquidity: Formula: Current ration= CURRENT ASSETS/CURRENT LIABILITIES Using data from exhibit 2.1 , it shows that Under Armour’s has the ability to cover its short-term liabilities nearly 3 times over. Using data from exhibit 2.2, also show the Green Bay Packers can also cover it’s short term liability but not at the rate as Under Armour.
Questions? Assignments: Answer questions and terms on MyTsu Assigned by Dr. H. Hamilton
Money Ball The basis for the book is the question of how the Oakland A's, one of baseball's poorest teams as measured by payroll, managed to win so many games in the first few years of the new millennium. Lewis's potentially boring answer revolves around inefficiencies in the market for players, but he weaves this story around the A's General Manager, Billy Beane. Now, if you have some axe to grind with Beane, you might as well not read the book, 'cause Lewis tends to be rather fawning in many places. Still, Beane's own background and mediocre career form the perfect framework upon which to build this story about evaluating baseball talent. Beane was a hugely athletic, "can't miss" prospect, who turned down a joint football/baseball scholarship from Stanford to sign with the New York Mets out of high school. His pro career turned out to be utterly undistinguished, and this disconnect is what drove him to seek new methods of scouting and evaluating baseball talent.
