Multinational Finance Introduction to Accounting

1
Multinational Finance Introduction to Accounting
Taxes

• Marcus Maltese, MBA

2
Outline
This presentation provides an overview of the
basic accounting and tax concepts and an overview
the financial statements .

• Conceptual definitions
• Understanding the basic elements and format of
  the Financial Statements
• Financial Ratios
• Tax Liabilities
• Income tax
• Other taxes

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Conceptual definition

• What is Accounting?
• Accounting is the language of business

4
Conceptual definition

• Why is it the language of business?
• Because it provides the means of recording and
  communicating business activities and the results
  of those activities

5
Conceptual definition

• What are taxes?
• Taxes are the costs one pays to live in
  organized society

6
Understanding the basic elements and format of
the Financial Statements

• The basic financial statements are
• 1. The Balance Sheet
• 2. The Income Statement
• 3. The Statement of Cash Flows

7
Understanding the basic elements and format of
the Financial Statements

• The Balance Sheet reports on a companys
  resources, obligations, and the difference of
  what is owned and what is owed
• Resources Assets
• Obligations Liability
• Ownership Equity

8
Understanding the basic elements and format of
the Financial Statements

• What are Assets?
• Assets are economic resources that are owned or
  controlled by a company

9
Understanding the basic elements and format of
the Financial Statements

• Liabilities are obligations to pay cash, transfer
  other assets, or provide services to someone else

10
Understanding the basic elements and format of
the Financial Statements

• Equity is the remaining claims against the assets
  after liabilities have been deducted

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Understanding the basic elements and format of
the Financial Statements

• Common Financial Statements format
• 1- Simplified Balance Sheet
• 2- Comparative Balance Sheet
• 3- Classified Balance Sheet
• 4- Common size Balance Sheet
• 5- Comparative Income Statement
• 6- Common Size Income Statement
• 7- Statement of Cash Flows
• 8- Pro-forma Financial Statements

12
Understanding the basic elements and format of
the Financial Statements

• Simplified Balance Sheet
• As the term suggests, a simplified Balance sheet
  lists the 3 main sections of the balance sheet in
  very general and simplified manner
• Operational problem

13
Lincoln CompanyComparative Balance
SheetDecember 31, 2006 and 2005
Balance Sheet
Increase (Decrease)

2006 2005 Amount Percent

• Assets
• Current assets 550,000 533,000 17,000
  3.2
• Long-term investments 95,000 177,500 (82,500) (46.
  5)
• Fixed assets (net) 444,500 470,000 (25,500) (5.4)
  
• Intangible assets 50,000 50,000
• Total assets 1,139,500 1,230,500
  (91,000) (7.4)
• Liabilities
• Current liabilities 210,000 243,000
  (33,000) (13.6)
• Long-term liabilities 100,000 200,000 (100,000) (5
  0.0) Total liabilities 310,000
  443,000 (133,000) (30.0)
• Stockholders Equity
• Preferred 6 stock, 100 par 150,000
  150,000
• Common stock, 10 par 500,000 500,000
• Retained earnings 179,500 137,500 42,000 30.5
• Total stockholders equity 829,500
  787,500 42,000 5.3
• Total liab. SE 1,139,500 1230,500 (91,000) (
  7.4)

14
Lincoln CompanyComparative Balance
SheetDecember 31, 2006 and 2005
Increase (Decrease)
2006 2005 Amount Percent
Assets Current assets 550,000
533,000 17,000 3.2 Long-term
investments 95,000 177,500 (82,500) (46.5) Fixed
assets (net) 444,500 470,000 (25,500) (5.4) Intan
gible assets 50,000 50,000 Total assets
1,139,500 1,230,500 (91,000) (7.4)
Liabilities Current liabilities 210,000
243,000 (33,000) (13.6) Long-term
liabilities 100,000 200,000 (100,000) (50.0)
Total liabilities 310,000
443,000 (133,000) (30.0) Stockholders
Equity Preferred 6 stock, 100 par 150,000
150,000 Common stock, 10
par 500,000 500,000 Retained
earnings 179,500 137,500 42,000 30.5 Total
stockholders equity 829,500
787,500 42,000 5.3 Total liab. SE
1,139,500 1230,500 (91,000) (7.4)
Horizontal Analysis
15
Lincoln CompanyComparative Balance
SheetDecember 31, 2006 and 2005
Increase (Decrease)
2006 2005 Amount Percent
Assets Current assets 550,000
533,000 17,000 3.2 Long-term
investments 95,000 177,500 (82,500) (46.5) Fixed
assets (net) 444,500 470,000 (25,500) (5.4) Intan
gible assets 50,000 50,000 Total assets
1,139,500 1,230,500 (91,000) (7.4)
Liabilities Current liabilities 210,000
243,000 (33,000) (13.6) Long-term
liabilities 100,000 200,000 (100,000) (50.0)
Total liabilities 310,000
443,000 (133,000) (30.0) Stockholders
Equity Preferred stock, 100 par 150,000
150,000 Common stock, 10
par 500,000 500,000 Retained
earnings 179,500 137,500 42,000 30.5 Total
stockholders equity 829,500
787,500 42,000 5.3 Total liab. SE
1,139,500 1230,500 (91,000) (7.4)
Horizontal Analysis
Difference (82,500) Base year
(2005) 177,500
(46.5)
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Lincoln CompanyComparative Balance
SheetDecember 31, 2006 and 2005
Okay, go to the next slide and calculate the
percentage change for fixed assets.
Increase (Decrease)
2006 2005 Amount Percent
Assets Current assets 550,000
533,000 17,000 3.2 Long-term
investments 95,000 177,500 (82,500) (46.5) Fixed
assets (net) 444,500 470,000 (25,500) (5.4) Intan
gible assets 50,000 50,000 Total assets
1,139,500 1,230,500 (91,000) (7.4)
Liabilities Current liabilities 210,000
243,000 (33,000) (13.6) Long-term
liabilities 100,000 200,000 (100,000) (50.0)
Total liabilities 310,000
443,000 (133,000) (30.0) Stockholders
Equity Preferred 6 stock, 100 par 150,000
150,000 Common stock, 10
par 500,000 500,000 Retained
earnings 179,500 137,500 42,000 30.5 Total
stockholders equity 829,500
787,500 42,000 5.3 Total liab. SE
1,139,500 1230,500 (91,000) (7.4)
Horizontal Analysis
Difference ? Base year (2005) ?
?
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Lincoln CompanyComparative Balance
SheetDecember 31, 2006 and 2005
Increase (Decrease)
2006 2005 Amount Percent
Assets Current assets 550,000
533,000 17,000 3.2 Long-term
investments 95,000 177,500 (82,500) (46.5) Fixed
assets (net) 444,500 470,000 (25,500) (5.4) Intan
gible assets 50,000 50,000 Total assets
1,139,500 1,230,500 (91,000) (7.4)
Liabilities Current liabilities 210,000
243,000 (33,000) (13.6) Long-term
liabilities 100,000 200,000 (100,000) (50.0)
Total liabilities 310,000
443,000 (133,000) (30.0) Stockholders
Equity Preferred 6 stock, 100 par 150,000
150,000 Common stock, 10
par 500,000 500,000 Retained
earnings 179,500 137,500 42,000 30.5 Total
stockholders equity 829,500
787,500 42,000 5.3 Total liab. SE
1,139,500 1230,500 (91,000) (7.4)
18
.
Lincoln CompanyComparative Balance
SheetDecember 31, 2006 and 2005
Increase (Decrease)
2006 2005 Amount Percent
Assets Current assets 550,000
533,000 17,000 3.2 Long-term
investments 95,000 177,500 (82,500) (46.5) Fixed
assets (net) 444,500 470,000 (25,500) (5.4) Intan
gible assets 50,000 50,000 Total assets
1,139,500 1,230,500 (91,000) (7.4)
Liabilities Current liabilities 210,000
243,000 (33,000) (13.6) Long-term
liabilities 100,000 200,000 (100,000) (50.0)
Total liabilities 310,000
443,000 (133,000) (30.0) Stockholders
Equity Preferred 6 stock, 100 par 150,000
150,000 Common stock, 10
par 500,000 500,000 Retained
earnings 179,500 137,500 42,000 30.5 Total
stockholders equity 829,500
787,500 42,000 5.3 Total liab. SE
1,139,500 1230,500 (91,000) (7.4)
(5.4)
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Understanding the basic elements and format of
the Financial Statements

• Income Statement
• The Income Statement reports revenues and
  expenses for a period of time. Usually one year.

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Lincoln CompanyComparative Income
StatementDecember 31, 2006 and 2005
Income Statement
Increase (Decrease)
2006 2005 Amount Percent
Sales 1,530,500 1,234,000 296,500 24.0 Sales
returns 32,500 34,000 (1,500) (4.4) Net
sales 1,498,000 1,200,000 298,000 24.8 Cost
of goods sold 1,043,000 820,000 223,000 27.2
Gross profit 455,000 380,000 75,000
19.7 Selling expenses 191,000 147,000
44,000 29.9 Administrative expenses 104,000 97,4
00 6,600 6.8 Total operating expenses
295,000 244,400 50,600 20.7 Operating
income 160,000 135,600 24,400
18.0 Other income 8,500 11,000 (2,500) (22.7)
168,500 146,600 21,900 14.9 Other
expense 6,000 12,000 (6,000) (50.0) Income
before income tax 162,500 134,600 27,900
20.7 Income tax 71,500 58,100 13,400 23.1 Net
income 91,000 76,500 14,500 19.0
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Lincoln CompanyComparative Income
Statement December 31, 2006 and 2005
Increase (Decrease)
2006 2005 Amount Percent
Sales 1,530,500 1,234,000 296,500 24.0 Sales
returns 32,500 34,000 (1,500) (4.4) Net
sales 1,498,000 1,200,000 298,000 24.8 Cost
of goods sold 1,043,000 820,000 223,000 27.2
Gross profit 455,000 380,000 75,000
19.7 Selling expenses 191,000 147,000
44,000 29.9 Administrative expenses 104,000 97,4
00 6,600 6.8 Total operating expenses
295,000 244,400 50,600 20.7 Operating
income 160,000 135,600 24,400
18.0 Other income 8,500 11,000 (2,500) (22.7)
168,500 146,600 21,900 14.9 Other
expense 6,000 12,000 (6,000) (50.0) Income
before income tax 162,500 134,600 27,900
20.7 Income tax 71,500 58,100 13,400 23.1 Net
income 91,000 76,500 14,500 19.0
Horizontal Analysis
Increase amount 296,500 Base year (2005)
1,234,000
24.0
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Lincoln CompanyComparative Income
Statement December 31, 2006 and 2005
Increase (Decrease)
2006 2005 Amount Percent
Sales 1,530,500 1,234,000 296,500 24.0 Sales
returns 32,500 34,000 (1,500) (4.4) Net
sales 1,498,000 1,200,000 298,000 24.8 Cost
of goods sold 1,043,000 820,000 223,000 27.2
Gross profit 455,000 380,000 75,000
19.7 Selling expenses 191,000 147,000
44,000 29.9 Administrative expenses 104,000 97,4
00 6,600 6.8 Total operating expenses
295,000 244,400 50,600 20.7 Operating
income 160,000 135,600 24,400
18.0 Other income 8,500 11,000 (2,500) (22.7)
168,500 146,600 21,900 14.9 Other
expense 6,000 12,000 (6,000) (50.0) Income
before income tax 162,500 134,600 27,900
20.7 Income tax 71,500 58,100 13,400 23.1 Net
income 91,000 76,500 14,500 19.0
Horizontal Analysis
Increase amount 298,000 Base year (2005)
1,200,000
24.8
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Vertical Analysis
A percentage analysis can be used to show the
relationship of each component to a total within
a single statement.
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Vertical Analysis
The total, or 100 item, on the balance sheet is
total assets.
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Lincoln CompanyComparative Balance Sheet
Balance Sheet
December 31, 2006 December 31, 2005
Amount Percent Amount Percent

• Assets
• Current assets 550,000 48.3 533,000 43.3
• Long-term investments 95,000 8.3 177,500 14.4
• Property, plant, equip. (net) 444,500 39.0 470,0
  00 38.2
• Intangible assets 50,000 4.4 50,000 4.1 Total
  assets 1,139,500 100.0 1,230,500 100.0
• Liabilities
• Current liabilities 210,000 18.4
  243,000 19.7
• Long-term liabilities 100,000 8.8 200,000 16.3
• Total liabilities 310,000 27.2
  443,000 36.0
• Stockholders Equity
• Preferred stock, 6, 100 par 150,000 13.2
  150,000 12.2 Common stock, 10
  par 500,000 43.9 500,000 40.6
• Retained earnings 179,500 15.7 137,500 11.2
• Total stockholders equity 829,500 72.8
  787,500 64.0
• Total liab. SE 1,139,500 100.0 1,230,500 10
  0.0

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Lincoln CompanyComparative Balance Sheet
December 31, 2006 December 31, 2005
Amount Percent Amount Percent
Assets Current assets
550,000 48.3 533,000 43.3 Long-term
investments 95,000 8.3 177,500 14.4 Property,
plant, equip. (net) 444,500 39.0 470,000 38.2 In
tangible assets 50,000 4.4 50,000 4.1 Total
assets 1,139,500 100.0 1,230,500 100.0
Liabilities Current liabilities
210,000 18.4 243,000 19.7 Long-term
liabilities 100,000 8.8 200,000 16.3 Total
liabilities 310,000 27.2 443,000 36.0
Stockholders Equity Preferred 6 stock, 100
par 150,000 13.2 150,000 12.2 Common
stock, 10 par 500,000 43.9 500,000 40.6 Retained
earnings 179,500 15.7 137,500 11.2 Total
stockholders equity 829,500 72.8
787,500 64.0 Total liab. SE 1,139,500 100.0
1,230,500 100.0
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Lincoln CompanyComparative Balance Sheet
December 31, 2006 December 31, 2005
Amount Percent Amount Percent
Assets Current assets
550,000 48.3 533,000 43.3 Long-term
investments 95,000 8.3 177,500 14.4 Property,
plant, equip. (net) 444,500 39.0 470,000 38.2 In
tangible assets 50,000 4.4 50,000 4.1 Total
assets 1,139,500 100.0 1,230,500 100.0
Liabilities Current liabilities
210,000 18.4 243,000 19.7 Long-term
liabilities 100,000 8.8 200,000 16.3 Total
liabilities 310,000 27.2 443,000 36.0
Stockholders Equity Preferred 6 stock, 100
par 150,000 13.2 150,000 12.2 Common
stock, 10 par 500,000 43.9 500,000 40.6 Retained
earnings 179,500 15.7 137,500 11.2 Total
stockholders equity 829,500 72.8
787,500 64.0 Total liab. SE 1,139,500 100.0
1,230,500 100.0
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Lincoln CompanyComparative Income StatementFor
the Years Ended December 31, 2006 and 2005
Income Statement
2006
2005
Amount Percent Amount Percent
Sales 1,530,500 102.2 1,234,000 102.8 Sales
returns 32,500 2.2 34,000 2.8 Net
sales 1,498,000 100.0 1,200,000 100.0 Cost
of goods sold 1,043,000 69.6 820,000 68.3 Gross
profit 455,000 30.4 380,000 31.7 Selling
expenses 191,000 12.8 147,000 12.3 Administ
rative expenses 104,000 6.9 97,400 8.1 Total
operating expenses 295,000 19.7
244,400 20.4 Income from operations
160,000 10.7 135,600 11.3 Other
income 8,500 0.6 11,000 0.9 168,500 11.3
146,600 12.2 Other expense 6,000 0.4 12,000 1.0 I
ncome before income tax 162,500 10.9
134,600 11.2 Income tax expense 71,500 4.8 58,100
4.8 Net income 91,000 6.1 76,500 6.4
Net sales is 100.0
29
Lincoln CompanyComparative Income StatementFor
the Years Ended December 31, 2006 and 2005
2006
2005
Amount Percent Amount Percent
Sales 1,530,500 102.2 1,234,000 102.8 Sales
returns 32,500 2.2 34,000 2.8 Net
sales 1,498,000 100.0 1,200,000 100.0 Cost
of goods sold 1,043,000 69.6 820,000 68.3 Gross
profit 455,000 30.4 380,000 31.7 Selling
expenses 191,000 12.8 147,000 12.3 Administ
rative expenses 104,000 6.9 97,400 8.1 Total
operating expenses 295,000 19.7
244,400 20.4 Income from operations
160,000 10.7 135,600 11.3 Other
income 8,500 0.6 11,000 0.9 168,500 11.3
146,600 12.2 Other expense 6,000 0.4 12,000 1.0 I
ncome before income tax 162,500 10.9
134,600 11.2 Income tax expense 71,500 4.8 58,100
4.8 Net income 91,000 6.1 76,500 6.4
Vertical Analysis
Selling expenses 191,000 Net sales
1,498,000
12.8
30
Lincoln CompanyComparative Income StatementFor
the Years Ended December 31, 2006 and 2005
2006
2005
Amount Percent Amount Percent
Sales 1,530,500 102.2 1,234,000 102.8 Sales
returns 32,500 2.2 34,000 2.8 Net
sales 1,498,000 100.0 1,200,000 100.0 Cost
of goods sold 1,043,000 69.6 820,000 68.3 Gross
profit 455,000 30.4 380,000 31.7 Selling
expenses 191,000 12.8 147,000 12.3 Administ
rative expenses 104,000 6.9 97,400 8.1 Total
operating expenses 295,000 19.7
244,400 20.4 Income from operations
160,000 10.7 135,600 11.3 Other
income 8,500 0.6 11,000 0.9 168,500 11.3
146,600 12.2 Other expense 6,000 0.4 12,000 1.0 I
ncome before income tax 162,500 10.9
134,600 11.2 Income tax expense 71,500 4.8 58,100
4.8 Net income 91,000 6.1 76,500 6.4
31
Lincoln CompanyComparative Income StatementFor
the Years Ended December 31, 2006 and 2005
2006
2005
Amount Percent Amount Percent
Sales 1,530,500 102.2 1,234,000 102.8 Sales
returns 32,500 2.2 34,000 2.8 Net
sales 1,498,000 100.0 1,200,000 100.0 Cost
of goods sold 1,043,000 69.6 820,000 68.3 Gross
profit 455,000 30.4 380,000 31.7 Selling
expenses 191,000 12.8 147,000 12.3 Administ
rative expenses 104,000 6.9 97,400 8.1 Total
operating expenses 295,000 19.7
244,400 20.4 Income from operations
160,000 10.7 135,600 11.3 Other
income 8,500 0.6 11,000 0.9 168,500 11.3
146,600 12.2 Other expense 6,000 0.4 12,000 1.0 I
ncome before income tax 162,500 10.9
134,600 11.2 Income tax expense 71,500 4.8 58,100
4.8 Net income 91,000 6.1 76,500 6.4
32
Lincoln CompanyComparative Income StatementFor
the Years Ended December 31, 2006 and 2005
2006
2005
Amount Percent Amount Percent
Sales 1,530,500 102.2 1,234,000 102.8 Sales
returns 32,500 2.2 34,000 2.8 Net
sales 1,498,000 100.0 1,200,000 100.0 Cost
of goods sold 1,043,000 69.6 820,000 68.3 Gross
profit 455,000 30.4 380,000 31.7 Selling
expenses 191,000 12.8 147,000 12.3 Administ
rative expenses 104,000 6.9 97,400 8.1 Total
operating expenses 295,000 19.7
244,400 20.4 Income from operations
160,000 10.7 135,600 11.3 Other
income 8,500 0.6 11,000 0.9 168,500 11.3
146,600 12.2 Other expense 6,000 0.4 12,000 1.0 I
ncome before income tax 162,500 10.9
134,600 11.2 Income tax expense 71,500 4.8 58,100
4.8 Net income 91,000 6.1 76,500 6.4
33
Common Size Statements
Vertical analysis with both dollar and percentage
amounts is also useful in comparing one company
with another or with industry averages. Such
comparisons are easier to make with the use of
common-size statements in which all items are
expressed in percentages.
34
.
Common-Size Income Statement
35
Understanding the basic elements and format of
the Financial Statements

• Statement of Cash Flows
• It shows significant cash inflows and outflows
  for a given period
• The cash flows are classified as operating,
  investing, or financing activities

36
Understanding the basic elements and format of
the Financial Statements

• Cash Flows Operating activities
• Shows the inflows and outflows of cash resulting
  from the day to day activity of the business

37
Understanding the basic elements and format of
the Financial Statements

• Statement of Cash Flows investing activity
• Shows the inflows and outflows of cash
  resulting from the buying and selling long term
  assets

38
Understanding the basic elements and format of
the Financial Statements

• Statement of Cash Flows Financing activity
• Shows the inflows and outflows of cash
  obtained from or paid to owners and/or creditors

39
The statement of cash flows reports cash flows by
three types of activities
Reporting Cash Flows
1. Cash flows from operating activities
transactions that affect net income. 2. Cash
flows from investing activities transactions
that affect noncurrent assets. 3. Cash flows from
financing activities transactions that affect
equity and debt of the entity.
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Cash Flows from Operating Activities
Typical cash inflows
Typical cash outflows
What are some of the typical cash inflows from
operating activities?
What are some of the typical cash outflows from
operating activities?
Sales of goods and services
Merchandise purchases
Payments of wages and other expenses
Interest revenue
Dividend revenue
Tax payments
41
Cash Flows from Investing Activities
Typical cash inflows
Typical cash outflows
What are some of the typical cash inflows from
investing activities?
What are some of the typical cash outflows from
investing activities?
Sales of fixed assets
Purchase of fixed assets
Sale of long-term investments
Purchase of long-term investments
42
Cash Flows from Financing Activities
Typical cash inflows
Typical cash outflows
What are some of the typical cash inflows from
financing activities?
What are some of the typical cash outflows from
financing activities?
Paying cash dividends
Issuing bonds and long-term notes payable
Repaying debt
Issuing preferred and common stock
Acquiring treasury stock
43
No cash flow per share is reported in the
financial statements because the user might
incorrectly interpret this as the amount
available for dividends.
44
Corporate Annual Reports
In addition to financial statements, the annual
report includes a management discussion analysis
(MDA) and an independent auditors report.
The MDA includes an analysis of the results of
operations and discusses managements opinion
about future performance. It compares the prior
years income statement with the current years.
It also contains an analysis of the firms
financial condition.
45
Corporate Annual Reports
Before issuing annual statements, all publicly
held corporations are required to have an
independent audit of their financial statements.
The CPAs who conduct the audit render an opinion
as to the fairness of the statements.
46
Understanding the basic elements and format of
the Financial Statements

• Pro-forma Financial Statements
• Pro-forma statements are not part of the basic
  required financial statements, instead they are
  tool that management use for projections. They
  are often called budgeted financial statements

47
Ratios Other Analysis

• Ratios
• Ratios are tools utilized to analyze financial
  statements
• Ratios are used to identify companys strengths
  and weaknesses
• Investment

48
Solvency Analysis

• Solvency is the ability of a business to meet its
  financial obligations (debts) as they are due.
• Solvency analysis focuses on the ability of a
  business to pay or otherwise satisfy its current
  and noncurrent liabilities.
• This ability is normally assessed by examining
  balance sheet relationships.

49
Current Position Analysis
Working Capital and Current Ratio
2006 2005
Current assets 550,000 533,000 Current
liabilities 210,000 243,000 Working
capital 340,000 290,000 Current ratio 2.6
2.2
Use To indicate the ability to meet currently
maturing obligations.
50
Current Position Analysis
Quick Ratio
2006 2005
Quick assets Cash 90,500 64,700 Marketable
securities 75,000 60,000 Accounts receivable
(net) 115,000 120,000 Total 280,500 244,700
Current liabilities 210,000 243,000 Quick
ratio 1.3 1.0
Use To indicate instant debt-paying ability.
51
Accounts Receivable Analysis
Accounts Receivable Turnover
2006 2005
Net sales on account 1,498,000 1,200,000 Account
s receivable (net) Beginning of year
120,000 140,000 End of year
115,500 120,000 Total 235,000
260,000 Average (Total 2) 117,500
130,000
52
Accounts Receivable Analysis
Accounts Receivable Turnover
2006 2005
Net sales on account 1,498,000 1,200,000 Account
s receivable (net) Beginning of year
120,000 140,000 End of year
115,500 120,000 Total 235,000
260,000 Average 117,500 130,000 Accounts
receivable turnover 12.7 9.2
Use To assess the efficiency in collecting
receivables and in the management of credit.
53
Accounts Receivable Analysis
Number of Days Sales in Receivables
2006 2005
Accounts receivable (net), end of year
115,000 120,000 Net sales on
account 1,498,000 1,200,000 Average daily sales
on account (sales 365) 4,104
3,288
54
Accounts Receivable Analysis
Number of Days Sales in Receivables
2006 2005
Accounts receivable (net), end of year
115,000 120,000 Net sales on
account 1,498,000 1,200,000 Average daily sales
on account (sales 365) 4,104
3,288
Number of days sales in receivables
28.0
36.5
Use To assess the efficiency in collecting
receivables and in the management of credit.
55
Inventory Analysis
Inventory Turnover
2006 2005
Cost of goods sold 1,043,000
820,000 Inventories Beginning of year
283,000 311,000 End of year
264,000 283,000 Total 547,000
594,000 Average (Total 2) 273,500 297,000
56
Inventory Analysis
Inventory Turnover
2006 2005
Cost of goods sold 1,043,000
820,000 Inventories Beginning of year
283,000 311,000 End of year
264,000 283,000 Total 547,000
594,000 Average (Total 2) 273,500
297,000 Inventory turnover 3.8 2.8
Use To assess the efficiency in the management
of inventory.
57
Inventory Analysis
Number of Days Sales in Inventory
2006 2005
Inventories, end of year 264,000 283,000 Cost
of goods sold 1,043,000 820,000 Average daily
cost of goods sold (COGS 365) 2,858
2,247
58
Inventory Analysis
Number of Days Sales in Inventory
2006 2005
Inventories, end of year 264,000 283,000 Cost
of goods sold 1,043,000 820,000 Average daily
cost of goods sold (COGS 365) 2,858
2,247 Number of days sales in
inventory 92.4 125.9
Use To assess the efficiency in the management
of inventory.
59
Long-Term Creditors
Ratio of Fixed Assets to Long-Term Liabilities
2006 2005
Fixed assets (net) 444,500 470,000 Long-term
liabilities 100,000 200,000 Ratio of fixed
assets to long-term liabilities 4.4 2.4
Use To indicate the margin of safety to
long-term creditors.
60
Long-Term Creditors
Ratio of Liabilities to Stockholders Equity
2006 2005
Total liabilities 310,000 443,000 Total
stockholders equity 829,500 787,500 Ratio of
liabilities to stockholders equity 0.37 0.56

Use To indicate the margin of safety to
creditors.
61
Long-Term Creditors
Number of Times Interest Charges Earned
2006 2005
Income before income tax 900,000
800,000 Add interest expense 300,000
250,000 Amount available for interest 1,200,000
1,050,000
62
Long-Term Creditors
Number of Times Interest Charges Earned
2006 2005
Income before income tax 900,000
800,000 Add interest expense 300,000
250,000 Amount available for interest 1,200,000
1,050,000 Number of times earned 4.0 4.2

Use To assess the risk to debtholders in terms
of number of times interest charges were earned.
63
Profitability Analysis
Profitability is the ability of an entity to earn
profits. This ability to earn profits depends on
the effectiveness and efficiency of operations as
well as resources available. Profitability
analysis focuses primarily on the relationship
between operating results reported in the income
statement and resources reported in the balance
sheet.
64
The Common Stockholder
Ratio of Net Sales to Assets
2006 2005
Net sales 1,498,000 1,200,000 Total
assets Beginning of year 1,053,000 1,010,000
End of year 1,044,500 1,053,000 Total 2,097,5
00 2,063,000 Average (Total
2) 1,048,750 1,031,500
Excludes long-term investments
65
The Common Stockholder
Ratio of Net Sales to Assets
2006 2005
Net sales 1,498,000 1,200,000 Total
assets Beginning of year 1,053,000 1,010,000
End of year 1,044,500 1,053,000 Total 2,097,5
00 2,063,000 Average (Total
2) 1,048,750 1,031,500
Ratio of net sales to assets
1.4 1.2
Use To assess the effectiveness of the use of
assets.
66
The Common Stockholder
Rate Earned on Total Assets
2006 2005
Net income 91,000 76,500 Plus interest
expense 6,000 12,000 Total 97,000
88,500 Total assets Beginning of
year 1,230,500 1,187,500 End of year
1,139,500 1,230,500 Total 2,370,000 2,418,000
Average (Total 2) 1,185,000 1,209,000
Rate earned on total assets 8.2
7.3
Use To assess the profitability of the assets.
67
The Common Stockholder
Rate Earned on Stockholders Equity
2006 2005
Net income 91,000 76,500 Stockholders
equity Beginning of year 787,500
750,000 End of year 829,500 787,500 Total 1,6
17,000 1,537,500 Average (Total 2)
808,500 768,750
Rate earned on stockholders equity
11.3
10.0
Use To assess the profitability of the
investment by stockholders.
68
Leverage
10
5
0
2006
2005
Rate earned on total assets
Rate earned on stockholders equity
69
The Common Stockholder
Rate Earned on Common Stockholders Equity
2006 2005
Net income 91,000 76,500 Less
preferred dividends 9,000 9,000 Remaindercommon
stock 82,000 67,500 Common
stockholders equity Beginning of year
637,500 600,000 End of year
679,500 637,500 Total 1,317,000 1,237,500 Aver
age (Total 2) 658,500 618,750
70
The Common Stockholder
Rate Earned on Common Stockholders Equity
2006 2005
Net income 91,000 76,500 Less
preferred dividends 9,000 9,000 Remaindercommon
stock 82,000 67,500 Common
stockholders equity Beginning of year
637,500 600,000 End of year
679,500 637,500 Total 1,317,000 1,237,500 Aver
age (Total 2) 658,500 618,750
Rate earned on common stockholders equity
12.5 10.9
Use To assess the profitability of the
investment by common stockholders.
71
The Common Stockholder
Earnings Per Share on Common Stock
2006 2005
Net income 91,000 76,500 Less preferred
dividends 9,000 9,000 Remaindercommon stock
82,000 67,500 Shares of common
stock 50,000 50,000
Earnings per share on common stock 1.64
1.35
Use To assess the profitability of the
investment by common stockholders.
72
The Common Stockholder
Price-Earnings Ratio
2006 2005
Market price per share of common 41.00 27.00 Ear
nings per share on common 1.64 1.35
Price-earnings ratio on common stock 25
20
Use To indicate future earnings prospects, based
on the relationship between market value of
common stock and earnings.
73
Dividends and Earnings Per Share
2.00
1.50
Per share
1.00
0.50
2006
2005
0.00
Dividends
Earnings
74
The Common Stockholder
Dividend Yield on Common Stock
2006 2005
Dividends per share of common 0.80
0.60 Market price per share of common 41.00
27.00
Dividend yield on common stock
1.95 2.22
Use To indicate the rate of return to common
stockholders in terms of dividends.
75
Taxation (Fiscal Policy)

• What is fiscal policy
• It is the manipulation of taxes and government
  spending to alter employment, control inflation,
  and stimulate economic growth.

76
Taxation

• Type of taxes
• a. Personal Income tax
• b. Sales tax
• c. Property tax
• d. Excise tax
• e. Corporate tax

77
Withholding Taxes, Other Deductions

• Employers are required to withhold federal income
  tax from each employee based on the withholding
  table and information provided by the employees
  W-4 form.
• Federal income tax and FICA tax must be withheld
  from the pay of each employee.
• Deductions for other purposes may be withheld by
  mutual agreement.

78
Employee Net Pay Calculation
John T. McGrath is single, has declared one
withholding allowance, and had gross pay of
1,462 for the week ended December 27.
79
RESPONSIBILITY FOR TAX PAYMENTS
80
Personal income tax

• The 4 basic elements to personal income tax are
• 1- Gross Income
• 2- Adjustments
• 3- Deductions
• 4- Credits

81
Personal Income Tax

• Gross Income
• The internal Revenue Code defines gross income
  broadly as except as otherwise provided all
  income from whatever source derived

82
Personal Income Tax

• Adjustments
• Adjustments are one the methods for providing
  tax relief
• Some common adjustments are ½ of self
  employment tax, moving expenses, interest on
  student loans

83
Personal Income Tax

• Deductions
• The revenue code provides for standard deduction
  from adjusted gross income, however, if certain
  deductible expenses referred to as itemize
  deductions are higher than the standard
  deduction, the taxpayer may use the itemize
  deduction instead of the standard deduction

84
Personal Income Tax

• Credits
• Credits are means of providing tax relief to
  certain class of taxpayers
• Credits are direct reductions from tax
  liability

85
Personal Income TaxSingle Person Tax Bracket

• .

86
FEDERAL INCOME
87
.
FEDERAL OUTLAYS
88
Sales Tax

• Sales taxes are comprised of different
  components.
• State 6
• County 1
• Localities .5
• Districts .25
• The state collects the taxes remit it

89
Property Tax

• Property tax is exclusively a state and local
  government tax. (County, School, City, )
• It is based on the value of the property.
• Inland Empire it is about .9 . It usually levied
  at the County level then remitted to the other
  parties.

90
Excise Tax

• Excise tax is a usage tax, levied both _at_ the
  Federal and State level. ( gasoline, tobacco,
  phone, transportation, luxury, alcohol, etc..)
• This tax is often referred to as the behavioral
  tax.

91
Corporate income tax

• Corporate income tax format is much simpler than
  the personal income tax format. The 3 basic
  elements are
• 1 - Income
• 2 - deductions
• 3 - tax and payments

92
Recap
This presentation provides an overview of the
basic accounting and tax concepts and an overview
of financial statements .

• We discussed the following
• Conceptual definition
• Understanding the basic elements and format of
  the Financial Statements
• Financial Ratios
• Tax Liabilities
• Income tax
• Other taxes

93
Accounting Taxes

• Any Questions?
• Marcus Maltese, MBA