Managerial Accounting

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How Well Am I Doing?
How to ReadFinancial Statements
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What Are Financial Statements and Who Uses Them?

• The difference between failure and success is
  not always the lack of product knowledge or of
  failing to put in long hours. More often it is
  not understanding the financial situation.
• To have a functional understanding of finance,
  it is essential to thoroughly understand balance
  sheets, income statements and cash flow
  statements.

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How to Read FS?With a grain, or maybe a shaker
full, of salt!
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Limitations of Financial Statement Analysis

• Financial ratios are one of the many tools used
  in financial analysis.
• First-rate financial analysis uses ratios as a
  first quick and dirty tool to provide a
  ballpark view of the firm.

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Limitations of Financial Statement Analysis
Analysts should look beyond the ratios.
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What Ratios Measure

• Ratios measure proportions.
• Ratios also measure relationships.
• By doing this, it is easy to see valuable
  relationships between two seemingly unrelated
  items. Ratios also allow you to make comparisons
  between time periods.

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Statements in Comparative and Common-Size Form

• Dollar and percentage
• changes on statements

Analytical techniques used to examine
relationships among financial statement items

• Common-size
• statements

• Ratios

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Four Basic Rules for Ratios

•   To determine a percentage change, always make
  sure you know what your base is.  
• When comparing a part to a whole, such as net
  profits to sales, the whole is always the base.
• That is net profits
  sales
• Ratios lose significance and accuracy when they
  become excessively detailed. This is important
  because it means that you dont need a lot of
  detailed data or figures to use ratio analysis.
•  Remember that ratios will assist you in decision
  making not make decisions for you.

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Trend Percentages
Trend percentages state several years
financial data in terms of a base year, which
equals 100 percent.
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Trend Analysis
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Gross Margin Percentage
This measure indicates how much of each sales
dollar is left after deducting the cost of goods
sold to cover expenses and a profit.
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Common-Size Statements
Common-size statements use percentages to express
the relationship of individual components to a
total within a single period. This is also known
as vertical analysis.
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Categories of Ratios

• The first category of ratios is called liquidity
  ratios because they measure the amount of cash
  available to cover expenses both current and long
  term. These ratios are extremely important in
  keeping a business alive. Not paying your bills
  due to a shortage of cash is the fastest way to
  go out of business. Lending institutions often
  dont want to loan money when it is actually
  needed the most.

• The second category of ratios is called
  profitability ratios. These ratios measure and
  help control income. This is done through higher
  sales, larger margins, getting more from your
  expenses, and/or a combination of these methods.

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Categories of Ratios

• The third category of ratios is called efficiency
  ratios. Efficiency ratios measure and help
  control the operation of the business. They add
  another dimension to help you increase income by
  assessing such important transactions as the use
  of credit, control of inventory, and/or
  management of assets.

• The fourth category of ratios is called solvency
  ratios. Market ratios are used by investors to
  determine whether or not to purchase stock in a
  company. These ratios also assess the firms
  ability to meet its interest payments and
  long-term obligations as they become due.

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Working Capital
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Current Ratio
This ratio measures the ability of the company to
pay current debts as they become due.
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ROI or Return on Common Stockholders Equity
This measure indicates how well the company
employed the owners investments to earn income.
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Average Collection Period
This ratio measures, on average, how many days it
takes to collect an account receivable.
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Debt to Equity Ratio

• Interest Coverage Income before Interest
  Expense Taxes
• 
  Interest Expense
• This ratio is the most common measure of the
  ability of the firms operations to provide
  protection to long-term creditors. Creditors
  have first claim on earnings so the we must look
  at earnings BEFORE interest expense and tax
  expense are taken out of the equation.
• 3,1400,000 4.9 times
• 640,000

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Price-Earnings Ratio
This measure is often used by investors as a
general guideline in gauging stock values.
Generally, the higher the price-earnings ratio,
the more opportunity a company has for growth.
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