Review-of-Accounting課件(PPT 77頁)

1、Review of Accounting2第1頁，共77頁。Chapter 2 - Outline What is Accounting?The Income Statement (I/S)The Price/Earnings RatioThe Balance Sheet (B/S)Comparison of Market Value to Book ValueLimitations of Financial StatementsThe Statement of Cash Flows (CFs)Comparison of Accounting and Cash FlowsIncome Tax

2、ConsiderationsSummary and ConclusionsPPT 2-22第2頁，共77頁。What is Accounting? Accounting provides financial information about a businessOf interest to stakeholders in business: shareholders managers creditors governmentsInformation is used to make decisions about a businessFinancial statements summarize

3、 accounting informationMost important financial statements:Income StatementBalance SheetStatement of Cash FlowsPPT 2-33第3頁，共77頁。Basic Financial StatementsIncome StatementBalance SheetStatement of Cash Flows4第4頁，共77頁。Income StatementDevice to measure the profitability of a firm over a period of timeI

4、t covers a defined period of timeIt is presented in a stair-step or progressive fashion to examine profit or loss after each type of expense item is deducted5第5頁，共77頁。Income Statement An Income Statement shows profitability for a period (ex.; 1 year). Can be prepared in steps: (1) Sales - Cost of Go

5、ods Sold (COGS) = Gross Profit (GP)(2) GP - Operating Expenses = Earnings Before Interest and Taxes (EBIT) or Operating Income (OI) (3) EBIT - Interest = Earnings Before Taxes (EBT) (4) EBT - Taxes = Earnings Aftertaxes (EAT) or Net Income (NI)6第6頁，共77頁。Income Statement (contd)7第7頁，共77頁。Return to Ca

6、pitalThree primary sources of capital: BondholdersPreferred stockholdersCommon stockholdersEarnings per shareInterpreted in terms of number of outstanding sharesMay be paid out in dividends or retained by company for subsequent reinvestmentStatement of retained earnings Indicates disposition of earn

7、ings8第8頁，共77頁。Statement of Retained Earnings9第9頁，共77頁。Price-Earnings (P/E) RatioMultiplier applied to earnings per share to determine current value of common stockSome factors that influence P/E:Earnings and sales growth of the firmRisk (volatility in performance) Debt-equity structure of the firmDi

8、vidend payment policyQuality of management10第10頁，共77頁。Price-Earnings (P/E) Ratio (contd)Allows comparison of the relative market value of many companies based on $1 of earnings per shareIndicates expectations about the future of a companyPrice-earnings ratios can be confusing11第11頁，共77頁。Price-earnin

9、gs Ratios for Selected US Companies12第12頁，共77頁。Limitations of income statement 1. Income Vs Real worth2. Income Vs Cash flow3. Income may vary with different accounting method employed by the accountant13第13頁，共77頁。The Balance Sheet A Balance Sheet (B/S) shows what a firm owns and how it is financed

10、at a point in time (ex.; December 31)Remember the ALOE!Assets = Liabilities + Owners EquityPPT 2-914第14頁，共77頁。Classifications on the Balance SheetAssets:what a business ownsCurrent AssetsEx: Accounts receivable, InventoryWill be sold or used up within 1 yearCapital AssetsEx: Building Liabilities: wh

11、at a business owesCurrent LiabilitiesEx: Accounts payableDue within 1 yearLong-term LiabilitiesDue some time after 1 yearEquity: what the owner(s) have invested in the businessShareholders EquityCapital stockRetained earningsPPT 2-1015第15頁，共77頁。Statement of Financial Position (Balance Sheet)16第16頁，共

12、77頁。Concept of Net Worth Net worth/book value = Stockholders equity preferred stock componentMarket value is of primary concern to the:Financial managerSecurity analystStockholders17第17頁，共77頁。Limitations of the Balance SheetMost of the values are based on historical/original cost priceTroublesome wh

13、en it comes to plant and equipment inventoryFASB ruling on disclosure of inflation adjustments no longer in force It is purely a voluntary act on the part of the company18第18頁，共77頁。Limitations of balance sheet1. Book value Vs Market value2. Contingent Liability , Off balance-sheet activities. 19第19頁

14、，共77頁。Limitations of the Balance Sheet (contd)Differences between per share values may be due to:Asset valuationIndustry outlookGrowth prospectsQuality of managementRisk-return expectations20第20頁，共77頁。Comparison of Market Valueto Book Value per Share21第21頁，共77頁。Limitations of Financial StatementsBas

15、ed on past transactions rather than future forecastsMay not recognize important economic changes as they occurincrease in property valuesnew competitionVariety of accounting policies and methods are usedamortizationinventory valuationPPT 2-1422第22頁，共77頁。The Statement of Cash FlowsThe Statement of Ca

16、sh Flows (CFs) measures the flow of cash into and out of a firmCF from operating activities PLUSCF from financing activities PLUSCF from investing activities EQUALSNet increase (decrease) in cash PPT 2-1523第23頁，共77頁。Operations: cash paid and received from buying and selling of goods and servicesInve

17、stments: cash paid and received from investment activities (bonds, stocks, property, equipment)Financing: cash paid and received from financing activities (dividends, borrowing or issuing stocks, repayment of borrowings)Sources (uses) of Cash 24第24頁，共77頁。Statement of Cash Flows (contd)Advantage of a

18、ccrual methodAllows matching of revenues and expenses in the period in which they occur to appropriately measure profitsDisadvantage of accrual methodAdequate attention not directed to actual cash flow position of firm25第25頁，共77頁。Concepts Behind the Statement of Cash Flows26第26頁，共77頁。Determining Cas

19、h Flows from Operating ActivitiesTranslation of income from operations from an accrual to a cash basisDirect methodEvery item on the income statement is adjusted from accrual to cash accountingIndirect method Net income represents the starting pointRequired adjustments are made to convert net income

20、 to cash flows from operations27第27頁，共77頁。Indirect Method28第28頁，共77頁。Comparative Balance Sheets29第29頁，共77頁。Cash Flows from Operating Activities30第30頁，共77頁。Determining Cash Flows from Investing ActivitiesInvesting activities:Long-term investment activities in mainly plant and equipmentIncreasing inve

21、stments represent a use of fundsDecreasing investments represent a source of funds 31第31頁，共77頁。Determining Cash Flows from Financing ActivitiesFinancial activities apply to the sale/retirement of:BondsCommon stockPreferred stockOther corporate securitiesPayment of cash dividendsSale of firms securit

22、ies is a source of fundsPayment of dividends and repurchase of securities is a use of funds32第32頁，共77頁。Overall Statement Combining the Three Sections33第33頁，共77頁。Analysis of the Overall StatementHow are increases in long-term assets being financed?Preferably, adequate long-term financing and profits

23、should existShort-term funds may be used to carry long-term needs could be a potential high-risk situationExample: trade credit and bank loans34第34頁，共77頁。Depreciation and Funds FlowDepreciation Attempt to allocate the initial cost of an asset over its useful lifeCharging of depreciation does not dir

24、ectly influence the movement of funds35第35頁，共77頁。Comparison of Accounting and Cash Flows36第36頁，共77頁。Free Cash FlowFree Cash Flow = Cash flow from operating activities Capital expenditures DividendsCapital expendituresMaintain productive capacity of firmDividendsMaintain necessary payout on common st

25、ock and to cover any preferred stock obligationsFree cash flow is used for special financing activitiesExample: leveraged buyouts37第37頁，共77頁。Income Tax ConsiderationsCorporate tax ratesProgressive: the top rate is 40% including state and foreign taxes if applicable. The lower bracket is 1520%Cost of

26、 a tax-deductible expense38第38頁，共77頁。Depreciation as a Tax ShieldNot a new source of fundProvides tax shield benefits measurable as depreciation times the tax rateCorporation ACorporation BEarnings before depreciation and taxes$400,000$400,000Depreciation 100,000 0 _ _ Earnings before taxed 300,000

27、400,000Taxes (40%) 120,000 160,000 _ _ Earnings after taxes 180,000 240,000+Depreciation charged without cash outlay 100,000 0 _ _ Cash flow $280,000 $240,000Difference$40,00039第39頁，共77頁。Financial Analysis3第40頁，共77頁。Chapter 3 - Outline Financial Analysis 4 Categories of Financial RatiosImportance of

28、 RatiosDistortion in Financial Reporting41第41頁，共77頁。Financial Analysis and RatiosWhat is financial analysis?Evaluating a firms financial performanceAnalyzing ratios or numerical calculationsComparing a company to its industry and to its past performanceA long-run trend analysis over a 5-10 year peri

29、od is usually performed by an analyst.Ratio analysis may not answer questions, but leads to further inquiry42第42頁，共77頁。Tools of Financial AnalysisComparative financial statementsTrend analysisCommon-size statementsFinancial ratiosPPT 3-443第43頁，共77頁。4 Categories of Ratios Profitability RatiosAsset Ut

30、ilization RatiosLiquidity RatiosDebt Utilization RatiosPPT 3-544第44頁，共77頁。Classification system for ratios(a)A. Profitability Ratios 1.Profit margin2.Return on assets (ROA) (investment)3.Return on equity (ROE) (common shareholders)B. Asset Utilization Ratios4a. Receivable turnover4b. Average collect

31、ion period (days sales outstanding)5a. Inventory turnover5b. Inventory holding period6a. Accounts payable turnover6b. Accounts payable periodPPT 3-645第45頁，共77頁。Four categories of financial ratios (b)B. Asset Utilization Ratios (contd)7.Capital asset turnover8.Total asset turnover C. Liquidity Ratios

32、9. Current Ratio 10. Quick RatioD. Debt Utilization Ratios11. Debt to total assets12. Times interest earned13. Fixed charge coveragePPT 3-746第46頁，共77頁。Profitability RatiosShow how profitable a company is.The ratios express:Profit Margin or Return on Sales (%)Return on Assets or Return on Investment

33、(%)Return on Equity (%)47第47頁，共77頁。Asset Utilization RatiosShow how effectively a company uses its assets.The ratios express:Receivables Turnover (times)Average Collection Period (days)Inventory Turnover (times)Capital Asset Turnover (times)Total Asset Turnover (times)48第48頁，共77頁。Liquidity Ratios LT

34、Show how liquid a company is or how much $ it has to meet S/T needs.The ratios express:Current Ratio (times)Quick Ratio or Acid-Test Ratio (times)49第49頁，共77頁。Debt Utilization RatiosShow how well a company is managing or using debt.The ratios express:Debt-to-Total Assets (%)Times Interest Earned (tim

35、es)Fixed Charge Coverage (times)(Fixed Charges = lease payments, interest expense)50第50頁，共77頁。Importance of RatiosWhich ratios are most important?It depends on your perspective.Suppliers and banks (lenders) are most interested in liquidity ratios.Shareholders are most interested in profitability rat

36、iosBondholders concentrate on debt utilization ratiosThe effective utilization of assets is managements responsibility51第51頁，共77頁。SAXTON COMPANYIncome StatementFor the Year 2009Sales (all on credit) . . . . . . . . . . . . . . . . . .$ 4,000,000Cost of goods sold . . . . . . . . . . . . . . . . . .

37、.3,000,000Gross profit . . . . . . . . . . . . . . . . . . . . .1,000,000Selling and administrative expense* . . . . . . . . . . . 450,000Operating profit . . . . . . . . . . . . . . . . . . .550,000Interest expense . . . . . . . . . . . . . . . . . . .50,000Extraordinary loss . . . . . . . . . . .

38、. . . . . . .100,000Net income before taxes . . . . . . . . . . . . . . . .400,000Taxes (50%) . . . . . . . . . . . . . . . . . . . . .200,000Net income . . . . . . . . . . . . . . . . . . . . . .$ 200,000* Includes $50,000 in lease payments.PPT 3-2Financial statements for ratio analysis52第52頁，共77頁。

39、Balance SheetAs of December 31, 2009AssetsCash$ 30,000Marketable securities50,000Accounts receivable350,000Inventory370,000 Total current assets800,000Net plant and equipment800,000Total assets$1,600,000Liabilities and Shareholders EquityAccounts payable$ 50,000Notes payable250,000Total current liab

40、ilities300,000Long-term liabilities300,000 Total liabilities600,000Common stock400,000Retained earnings600,000Total liabilities and shareholders equity$1,600,000PPT 3-2Financial statements for ratio analysis53第53頁，共77頁。Profitability Ratios54第54頁，共77頁。DuPont System of AnalysisA satisfactory return on

41、 assets might be derived through:A high profit marginA rapid turnover of assets (generating more sales per dollar of its assets)Or bothReturn on assets (investment) = Profit margin Asset turnover 55第55頁，共77頁。DuPont System of Analysis (contd)A satisfactory return on equity might be derived through:A

42、high return on total assets A generous utilization of debtOr a combination of bothReturn on equity = Return on assets (investment) (1 Debt/Assets)56第56頁，共77頁。DuPont Analysis57第57頁，共77頁。Return of Wal-Mart versus Macys using the Du Pont method of analysis, 200758第58頁，共77頁。Asset Utilization RatiosThese

43、 ratios relate the balance sheet to the income statement59第59頁，共77頁。Asset Utilization Ratios (contd) 60第60頁，共77頁。Liquidity Ratios 61第61頁，共77頁。Debt Utilization RatiosMeasures the prudence of the debt management policies of the firm62第62頁，共77頁。Debt Utilization Ratios (contd)Fixed charge coverage measu

44、res the firms ability to meet the fixed obligations Interest payments alone are not consideredIncome before interest and taxes.$550,000Lease payments $50,000Income before fixed charges and taxes$600,000 63第63頁，共77頁。Ratio Analysis64第64頁，共77頁。Trend analysisA. Profit Margin Percent75311996 1998 2000 20

45、02 2004 2006 2009IndustrySaxtonPPT 3-1065第65頁，共77頁。B. Total asset turnover3.5X3.0X2.5X2.0X1.5X1.0X .5X1996 1998 2000 2002 2004 2006 2009IndustrySaxtonPPT 3-10Trend Analysis66第66頁，共77頁。Trend Analysis in the Computer Industry67第67頁，共77頁。Common-size financial statements (vertical analysis) 1. Express t

46、he items on the balance sheet as a percentage of total assets.2. Presents the items on the income statement as a percentage of total sales.68第68頁，共77頁。SAXTON COMPANYIncome StatementFor the Year 2009Sales (all on credit) . . . . . . . . . . . . . . . . .100%($ 4,000,000)Cost of goods sold . . . . . .

47、 . . . . . . . . . . . . .75%Gross profit . . . . . . . . . . . . . . . . . . . . .25%Selling and administrative expense* . . . . . . . . . . . 11.25%Operating profit . . . . . . . . . . . . . . . . . . .13.75%Interest expense . . . . . . . . . . . . . . . . . . .1.25%Extraordinary loss . . . . . .

48、. . . . . . . . . . . .2.5%Net income before taxes . . . . . . . . . . . . . . . .10%Taxes (50%) . . . . . . . . . . . . . . . . . . . . .5%Net income . . . . . . . . . . . . . . . . . . . . . .5%* Includes $50,000 in lease payments.Common size income statements 69第69頁，共77頁。Balance SheetAs of Decemb

49、er 31, 2009AssetsCash1.875%Marketable securities3.125%Accounts receivable21.875%Inventory23.20% Total current assets50%Net plant and equipment50%Total assets100%($1,600,000)Liabilities and Shareholders EquityAccounts payable3.125%Notes payable15.625%Total current liabilities18.75%Long-term liabiliti

50、es18.75% Total liabilities37.5%Common stock25%Retained earnings37.5%Total liabilities and shareholders equity100%Common size balance sheet 70第70頁，共77頁。Impact of inflation and disinflation on financial analysisA. Impact on profits 1. FIFO inventory valuation during inflation periods “understates” cos

51、t of goods sold and causes “inventory profits.” 2.The use of replacement cost accounting reduces income and interest coverage during inflationary periods. 3. A leveling off of prices referred to as disinflation, may cause a reduction in profits.71第71頁，共77頁。Inflations Impact on Profits FIFO (First-In, First-