Transcript Document

Analyzing and Using
Financial Information
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Accounting is an information system.
Gathers raw data and converts them into
information.
◦ Raw Data: Monetary transactions
◦ Information: Financial reports and statements
Definition:
An information system that measures,
interprets, and communicates financial
information to internal and external
users.
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Financial Accounting
is concerned with preparing financial statements
and other information for outsiders such as
stockholders and creditors (people or organizations
that have lent a company money or have extended
them credit).
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Management Accounting
is concerned with preparing cost analyses,
profitability reports, budgets, and other information
for insiders such as management and other
company decision makers
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Financial Accounting
◦ Reports prepared for
outsiders and insiders
◦ Financial statements
◦ Audited
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Management Accounting
◦ Reports prepared for
insiders only
◦ Other analyses and
reports
◦ Not audited
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Bookkeeping
Tax Accounting
Cost Accounting
Financial Analysis
Audit
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Private Accountants
◦ Work inside a company and prepare reports
◦ Bookkeepers, cost accountants, tax accountants,
internal auditors..
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Public Accountants
◦ Independent of the company
◦ External auditors, consulting services..
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Ministry of Finance
 for taxation
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Trade Law (Türk Ticaret Kanunu)
 to protect the rights of creditors and shareholders
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Capital Markets Board (SPK)
 to protect the rights of the shareholders of public
companies
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Professional Accounting Bodies (TÜRMOB..)
 to regulate the accounting profession
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They are the reports prepared by the financial
accounting system.
They are uniform reports prepared for
outsiders.
 WHY are they uniform reports?
 BECAUSE everyone can understand them and you can
compare financial statements of different companies.
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Companies and stakeholders (creditors,
investors, suppliers, analysts etc. ) use these
reports to evaluate an company’s past
performance and present condition, and to
spot opportunities and potential problems.
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Balance Sheet
Income Statement
Cash Flow Statement
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Shows the financial position in a point in time.
Answers questions such as…
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What are the things that the company owns?
How did the company own them?
How much are the debts of the company?
Who are the creditor groups?
How much did the shareholders invest in the
company?
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As the name indicates, the balance sheet has to be
in
“balance”
What does the company own?
=
How did the company own them?
What does the company own?
ASSETS
=
How did the company own them?
LIABILITIES + OWNER’S EQUITY
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For everything that a company owns (ASSETS),
there must be a source; either borrowed from
outsiders (LIABILITIES) or from the owners
investment (OWNER’S EQUITY)
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Anything that has a monetary value that the
company owns.
More formal definition:
any economic resource expected to benefit a firm
or an individual who owns it.
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Cash
Inventories
Investments of the company
Receivables of the company
Buildings
Cars, trucks etc.
Machines
Rights such as copyright, trademarks,
patents
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Current Assets
◦ Assets that can be turned in cash in one year and
that are expected to be used up in one year.
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Examples
Cash, short term receivables, short term
investments, inventories, supplies etc.
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Fixed Assets
◦ Assets retained for long-term use
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Examples:
Land, buildings, machinery, and equipment:
also referred to as property, plant, and
equipment
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Debts of the company to the creditors of the
company.
Examples:
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Bank credits
Debts to suppliers
Taxes to be paid
Wages that the employees earned but not paid yet
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Short Term
◦ Liabilities to be paid in one year
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Long Term
◦ Liabilities to be paid in more than one year
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The rights of the owners of the company on the
assets of the company after all the debts are
paid.
Or, the amount of money that owners would
receive if they sold all of a firm’s assets and paid
all of its liabilities.
ASSETS – LIABILITIES = OWNERS’ EQUITY
XYZ Company Balance Sheet
31.12.2010
Liabilities and Owners’ Equity
Assets
Current Assets
Cash
Accounts Receivable
Inventories
Current Liabilities
$
500
Accounts Payable
600
200
Long Term Liabilities
Fixed Assets
Land
Total Assets
Bank Credits
$
300
35,000
Owners’ Equity
94,000
$ 95,300
Capital
Total Liabilities and
Owners’ Equity
60,000
$ 95,300
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Shows the result of the “performance”
of a company in a period of time.
What is the measure of performance of a
company?
PROFIT!
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Income statement shows how much profit the
company earned and how the profit is earned.
Profit = Revenues - Expenses
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What the company earns.
Formal definition:
the amounts that have been or are to be received
from customers for goods or services delivered to
them
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Examples:
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Sales Revenue
Interest Revenue
Rent Revenue
Dividend Revenue
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What the company consumes to generate
revenues.
Examples:
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Cost of goods sold
Selling Expenses
General and Administrative Expenses
Interest Expenses
XYZ Company Income Statement
01.01.2010 - 31.12.2010
Sales
$1,900
Cost of Goods Sold
(600)
Gross Profit
1,300
Selling Expenses
(200)
General and Admin. Expenses (300)
Operating Profit
800
Interest Expense
(100)
Profit Before Tax
700
Tax
(100)
Net Profit
$600
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Shows where the company receives its cash
and where the company pays it.
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We use financial statements to decide:
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Whether
Whether
Whether
Whether
to
to
to
to
give credit to the company
invest (buy the shares) in the company
do business with the company
acquire the company
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To decide…
We have to analyze the financial statements
and compare with other companies’ results.
Compare with the past performance of the
company.
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To understand if the company can
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pay its debts,
pay us dividends,
increase the share price
is worth acquiring
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We analyze financial statements to decide
FUTURE
about the
of the company,
using past and present information presented
in the financial statements.
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The main analysis tool used is RATIOS.
What is a ratio?
◦ It is a division of two numbers
◦ For example
 GNP per capita is a ratio
 Body/Mass index is a ratio
◦ They are used for comparison
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By ratio analysis we standardize items.
For example:
◦ GNP of Turkey is $375 billion and 75 million
people live in Turkey.
◦ GNP of Belgium is $300 billion and 15 million
people live in Belgium.
◦ Who is richer?
◦ Turkey: 375 billion / 75 million = $5,000
◦ Belgium: 300 billion / 15 million = $20,000
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Belgians are richer.
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We do the same for companies.
We take items from financial statements and
divide them into each other.
To see which company is better.
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Ratios are
◦ Quantitative measures to evaluate a
firm's financial performance
 They provide information for analyzing the
health and future prospects of a business
while allowing for the comparison of
different-sized companies.
Profitability
Ratios
Liquidity Ratios
Activity Ratios
Leverage or Debt Ratios
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Measures the quality of the performance of
the company.
At least one item of the ratio has to be an
income statement item.
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Return on Sales
Net Profit
Sales
Shows how much profit a company earns for
each $100 of sales.
XYZ Company: 600 / 1,900 = %31.6
For every $100 of sales made, the company
earns a profit of $31.6
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Return on Investment
Net Profit
Owners’ Equity
Shows how much profit a company earns for
each $100 of investment of shareholders.
XYZ Company: 600 / 60,000 = %1
For every $100 of owners’ investment,
the company earns a profit of $1
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Ratios that measure a firm's ability to meet its
short-term obligations when they are due.
At least one item of the ratio should come
from balance sheet.
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Current Ratio
Current Assets
Current Liabilities
Measures the ability of the firm to pay its
short term debt with current assets.
XYZ Company: 1,300 / 300 = 4.33
For every $1 of short term debt, the
company has $4.33 of current asset to
pay the debt.
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Ratios that measure the effectiveness of the
firm's use of its resources.
How effective does the company use its
assets?
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Inventory Turnover
Cost of Goods Sold
Inventory
How many times (in a year) does the company
convert an inventory into sales.
XYZ Company: 600 /200 = 3 times
Each year, the company busy and sells
inventory 3 times. Or, in every (365/3) 122
days the company buys an sells inventory.
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Accounts Receivable Turnover
Sales
Accounts Receivable
How many times (in a year) does the company
collects its receivables
XYZ Company: 1,900 / 600 = 3.17 times
Each year, the company collects receivables
3.17 times. Or, in every (365/3.17) 115 days
the company collects its receivables.
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Ratios that measure a firm's reliance on debt.
How is the debt situation of the company?
At least one item of the ratio should come
from the balance sheet.
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Debt to Equity
Total Liabilities
Owners’ Equity
For each $1 of owners’ equity, how much debt
the company has.
XYZ Company: 35,300 / 60,000 = 0.59
For each $1 of owners’ investment, the
company borrows $0.59 from creditors.
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Debt to Total Assets
Total Liabilities
Total Assets
For each $1 of assets, how much debt the
company has.
XYZ Company: 35,300 / 95,300 = 0.37
For each $1 of asset, the company borrows
$0.37 from creditors.