Financial Management

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Chapter 15
Accounting Financial Analysis
2
Guideline Establishment

• GAAP (Generally Accepted Accounting Principles)
• FASB (Financial Accounting Standards Board)
• SEC ( Securities Exchange Commission)
• IRS (Internal Revenue Service)

3
Learning Objectives

• Explain how firms use accounting
• Explain how to interpret financial statements
• Explain how to evaluate a firms financial
  condition

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Accounting and Financial Analysis
Management decisions such as how much to produce
and how many employees to hire
Accounting Function Summary and Analysis of a
Firms Financial Condition
Marketing decisions such as pricing and the
amount of promotion necessary
Value of Firm
Earnings of Firm
Finance decisions such as the amount of debt
financing versus equity financing that is
appropriate
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Two Types of Accounting
Financial concerned with preparing information
for review by those outside the firm
Managerial concerned with preparing
information for review by those inside the firm
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Audit for Control
A formal evaluation of the records used to
prepare a firms financial statements
Employees who analyze and evaluate the company
Internal Auditors
Public accountants who work for an independent
accounting firm
External Auditors
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Two Major Financial Statements
Income Statement
Indicates the revenue, costs, and earnings of a
firm over a given time frame
Balance Sheet
Reports the book value of assets, liabilities,
and owners equity of a firm at a given point in
time Based on the accounting equation Assets
Liabilities Owners Equity (ALOE)
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Sample Income Statement
Net sales 20,000,000 Cost of goods sold
16,000,000 Gross profit (margin)
4,000,000 Selling expense 1,500,000 General
administrative 1,000,000 Total operating
expenses 2,500,000 Earnings before interest
and taxes 1,500,000 Interest
expense 500,000 Earnings before
tax 1,000,000 Income tax (at 30)
300,000 Net income 700,000

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Sample Balance Sheet

• Assets
• Current assets
• Cash 200,000
• Marketable securities 300,000
• Accounts receivable 500,000
• Inventory 1,000,000
• Total current assets
  2,000,000
• Fixed assets
• Plant and equipment 10,000,000
• Less accumulated depreciation 2,000,000
• Net fixed assets 8,000,000
• Total assets 10,000,000
• Liabilities Owners Equity
• Current liabilities
• Accounts payable 600,000
• Notes payable 400,000
• Total current liabilities 1,000,000
• Long-term debt 5,000,000

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Ratio Analysis
A quantitative measurement used to evaluate a
firms financial performance

• Liquidity
• Efficiency
• Profitability
• Leverage

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Liquidity Ratios

• Measures a firms ability to meet its short term
  obligations

• Current ratio ? measures the amount of current
  assets the company has to satisfy each of
  current liability

Current Assets Current Liabilities

• Acid-Test ratio or Quick ratio

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Efficiency Ratios

• Measures how well the firm is managing its assets

• Inventory Turnover ratio
• ? measures the speed of inventory moving through
  the firm and its conversion into sales
• Asset Turnover ratio
• ? measures the amount of sales generated by
  every invested in assets

Cost of Goods Sold Average Inventory
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Profitability Ratios

• Measures a firms ability to generate revenue in
  excess of expenses
• 1. Return on Assets
• ? measures the amount of net income generated
  by every invested in assets

Net Income Total Assets
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Profitability Ratios

• 2. Return on Sales (Net Profit Margin)
• ? measures how much profit was earned for
  each sales

Net Income Net Sales
3. Return on Equity ? measures how much
profit was earned for each invested by owners
Net Income Total Owners Equity
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Leverage or Debt Ratio

• An important indicator of a firms financial
  strength
• Debt-to-Equity
• Measures the degree to which a firm relies on
  borrowed funds vs. from owners

Total Liabilities Tot
al Owners Equity
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Tootsie Roll Industries, Inc.Annual Report 2007
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Tootsie Roll Industries, Inc. 2007 Balance
Sheet

• Assets (in thousands)
• Current assets
• Cash cash equivalents 57,606
• Marketable securities (Investments) 41,307
• Accounts receivable other receivables
  35,284
• Inventories 57,402
• Other current assets 8,127
• Total current assets
  199,726
• Fixed assets
• Land 19,398
• Buildings, machinery equipment 358,295
• Less accumulated depreciation 176,292
• Net fixed assets 201,401
• Other assets 411,598
• Total assets 812,725
• Liabilities Owners Equity
• Current liabilities
• Accounts payable 11,572

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Tootsie Roll Industries, Inc. 2007 Income Stmt
(in thousands) Net revenue 497,717
Costs of goods sold 329,044 Gross
profit (margin) 168,673 Selling, genl
admin expenses 97,821 Other operating income
exp ( 6,315) Total operating expense
91,506 Earnings before income taxes
77,167 Income taxes 25,542 Net
income 51,625
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Tootsie Roll Industries, Inc.Annual Report 2008
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Tootsie Roll Industries, Inc. 2008 Balance
Sheet

• Assets (in thousands)
• Current assets
• Cash cash equivalents 68,908
• Marketable securities (Investments) 17,963
• Accounts receivable other receivables
  34,196
• Inventories 55,584
• Other current assets 11,328
• Total current assets
  187,979
• Fixed assets
• Land 19,307
• Buildings, machinery equipment 388,878
• Less accumulated depreciation 190,557
• Net fixed assets 217,628
• Other assets 406,485
• Total assets 812,092
• Liabilities Owners Equity
• Current liabilities
• Accounts payable 13,885

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Tootsie Roll Industries, Inc. 2008 Income Stmt
(in thousands) Net sales 496,016 Co
st of goods sold 334,235 Gross profit
(margin) 161,781 Selling, genl admin
expenses 95,254 Other operating income exp
10,618 Total operating expense
105,872 Earnings before income taxes
55,909 Income taxes 17,132 Net
income 38,777