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financial statement & desicions

  2. Topics Accounting Concepts and Conventions Profit and Loss Cash Flow Statements Balance Sheet Financial Ratios Financial Reports
  3. Financial Reports Primary purpose: To provide information and data about company’s financial position and performance Information and data presented in financial reports: Management's commentary Statement of financial position (i.e. balance sheet) Statement of comprehensive income (i.e. income statement) Statement of changes in equity Statement of cash flows
  4. Classification of Business Activities
  5. Common Accounts • Components: – What elements are affected? – What accounts are affected? – Did accounts go up or down? • Accounting records: – Identify those activities requiring further action – Assess the profitability of the operations – Evaluate the current financial position of the company
  6. Accounting Equations • Assets = Liabilities + Owner’s Equity • Owner’s equity = Contributed capital + Retained earnings • Revenue – Expenses = Net income (loss)
  7. Debit/Credit Accounting System
  8. Debit/Credit Accounting System
  9. • Refer Handout Example 1
  10. Balance Sheet • The following formula summarizes what a balance sheet shows: ASSETS = LIABILITIES + SHAREHOLDERS‘ EQUITY • A company's assets have to equal, or "balance," the sum of its liabilities and shareholders' equity.
  11. Components of Balance Sheet • Assets: – What company owns or control – Tangible: property, plant, and equipment – Intangible: Brands, patents, etc. • Liabilities: – What the company owes • Equity – Owners’ residual interest in the company's assets after deducting its liabilities
  12. Current vs non-current • Assets: – Assets held primarily for the purpose of trading or expected to be sold, used up, or otherwise realized in cash within one year or one operating cycle of the business, which ever is greater, after the reporting period are classified as current assets. – Assets not expected to be sold or used up within one year or one operating cycle of the business are classified as non-current assets (long term, long-lived assets) • Liabilities: – Criteria of current liabilities • Expected to be settled in the entity’s normal operating cycle • Held primarily for the purpose of being traded • Due to be settled within one year after the balance sheet date • Does not have unconditional right to defer settlement of liabilities for at least one year after balance sheet date – All other liabilities are classified as non-current liabilities (long-term debt, financing)
  13. Analysis of Balance Sheet • Working capital = Current assets – Current liabilities • Current ratio = Current assets Current liabilities • Acid test ratio or = . Quick asset . Quick ratio Total current liabilities • . = Current assets - Inventories. Total current liabilities
  14. • Based on balance sheet above, calculate the followings: – Working capital – Current ratio – Acid test ratio Example 2
  15. Income Statement • Presents information on the financial results of a company’s business activities over a period of time • Also referred as “statement of operations”, “statement of earnings”, or “profit and loss statement”. • Components: – Revenue: Amount charged (and expected to be received) for the delivery of goods or services in the ordinary business activities. – Expenses: Reflect outflows, depletion of assets, and incurrences of liabilities in the course of business activities. – Net income: • Income – expenses • Revenue + other income + gains – expenses • Revenue + other income + gains – expenses – other expenses – losses – Gross profit or Gross margin: For multistep format reporting – Operating profit or EBIT: Deducting operating expenses from gross profit
  16. Analysis of Income Statement
  17. Example 3 • Determine interest coverage and net profit ratio
  18. Cash Flow Statement • Provides information about a company’s cash receipts, and cash payments during an accounting period. • Classifications of Cash Flows and Non-Cash Activities: – Operating activities: Cash outflows from payments of inventory, salaries, taxes, and other operating related expenses from paying accounts payable. – Investing activities: Purchasing and selling long-term assets and other investment. – Financing activities: Obtaining or repaying capital, such as equity and long term debt.
  19. Cash Flow Statement Analysis
  20. Cash Flow Statement Analysis
  21. Ratio Equation for calculation Industry average Liquidity Current Cash or quick cash Current assets/current liabilities Current assets – inventory/current liabilities 1.5 – 2.0 times 1.0 – 1.5 times Leverage Debt-to-total assets Times interest earned Fixed-charge coverage Total debt/total assets Profit before taxes plus interest charges/interest charges Income available for meeting fixed charges/fixed charges 30 – 35% 7.0 – 8.0 times 5.5 times Activity Inventory turnover Average collection period Fixed assets turnover Total assets turnover Sales or revenue/inventory Receivables/sales per day Sales/fixed assets Sales/total assets 7.0 times 45 – 60 days 2 – 3 times 1 – 2 times Summary of Selected Financial Ratios
  22. Ratio Equation for calculation Industry average Profitability Gross profit margin Net operating margin Profit margin on sales Return on net worth (return on equity) Return on total assets Net sales – cost of goods sold/sales (revenue) Net operating profit before taxes/sales (revenue) Net profit after taxes/sales (revenue) Net profit after taxes/net worth Net profit after taxes/total assets Varies Varies 5 – 8 % 15% 10% Summary of Selected Financial Ratios (cont’d)
  23. Thank You Mohd Shaiful Zaidi Bin Mat Desa