Chapter 1 - Financial Accounting for MBAs Flashcards
The main objective of financial reporting
to provide users w/ information that supports investment and management decisions
Main user groups of financial statements (3)
- Investors and equity analysts
- Lenders and credit analysts
- Company managers
Ongoing basic business activities (4 types)
- Planning
- Operating
- Investing
- Financing
Business forces (3 types)
- Market conditions
- Competitive pressures
- Regulations
Demand for Information - (7 classes)
- Managers and employees
- Investment analysts and information intermediaries
- Creditors and suppliers
- Stockholders and directors
- Customers and strategic partners
- Regulators and tax agencies
- Voters and their representitives
Supply of information (2 main; SEC)
- 10-K (audited annual report)
- 10-Q (unaudited quarterly report)
Datasets are scrubbed and formatted
Costs of disclosure (4)
- Preparation and dissemination
- Competitive disadvantages
- Litigation
- Political
Benefits of disclosure ((4)
- Capital markets
- Labor markets
- Input markets
- Output markets
International Accounting Standards
- International Financial Reporting Standards (IFRS)
- International Accounting Standards Board (IASB)
Both IASB & FASB use accrual accounting
Financial Statements (4)
- Balance sheet
- Income sheet
- Statement of stockholders’ equity
- Statement of cash flows
Breaking down the Balance Sheet
Reports a company’s financial position at a point in time. “Permanent Accounts”
Reports 3 components of that financial position
- Resources (asset)
- Investing
- Owner financing (equity)
- Non-owner financing (liability)
- Broken down into the accounting equation
Investing = Financing (sources)
Investing = Non-owner Financing + Owner Financing
ASSETS = LIABILITIES + EQUITY
Investing Activities
- Prepared at a point in time
- Represented by a company’s Assets
- Financed by a combination of nonowner financing (Liabilities) and owner financing (Equity)
Listed on the balance sheet in order of nearness to cash
- Current assets (short-term) - expected to generate cash in w/in 1 yr from the BS date
- Large investments in short-term assets
- e.g. Best Buy, Starbucks, Nordstrom’s.
- e.g. Alphabet, Cisco
- Large investments in short-term assets
- Long-term assets - Land, building, and equipment (PPE - property, plant, and equipment) will generate cash over a long period of time
- Larger investments in PPE, long-term inventory, & accounts receivable
- e.g. 3M, J&J, & Colgate-Palmolive
- Larger investments in PPE, long-term inventory, & accounts receivable
Financing Activities
To pay for Assets
-
Equity (Owner financing)
- Resources contributed by owners (two types; mostly cash, sometimes noncash assets)
- Profits retained by the company
-
Liabilities (Nonowner financing)
- Borrowed Money
Stable cash flows equate to the ability to operate with higer debt (e.g. Caterpillar, GM, Starbucks)
Higher levels of risk equate to requiring more cash (e.g. Alphabet & Intel)
Breaking down the Income Statement
Definition. Equation. 2 kinds of operating expenses
Reports on a company’s performance over a period of time and lists amounts for top line revenues (also called sales) and its expenses.
Revenues - expenses = net income (or profit or earnings)
(Note: net income represents the profit to the company’s shareholders for the period)
2 basic kinds of operating expenses
-
Cost of goods sold (COGS, also called cost of sales)
- Amt paid to purchase or manufacture a good
- Revenue less COGS = gross profit (which is profit available to cover all other costs)
-
Selling, general, and administrative expenses (SG&A)
- Includes salaries, marketing costs, occupancy costs, HR & IT costs, and all the other operating expenses
Relative profitability (what is…)
Net income as a percent of sales
Net income ÷ sales = relative profitability
Breaking down the Statement of Stockholders’ Equity
Definition. 3 Components.
Reports on year-over-year changes in the equity accounts that are reported on the balance sheet
3 Components of an Equity Statement
- Beginning balance
- Summary of activity in the account during the year
- Ending balance
Three categories of changes to an Equity Statement
List & Define
- Contributed capital
- Retained earnings
- Other equity
Contributed capital: Represents the assets the company received from issuing stock to stockholders
Retained earnings: Represents the cumulative total amount of income the company has earned and that has been retained in the business (i.e not distributed to stockholders as dividends)
- Net income increases retained earnings
- Dividends decrease retained earnings
Breaking down the Statement of Cash Flows
Reports the change (either increase or decrease) in a company’s cash balance over a period of time.
Reports cash inflows and outflows from operating, investing, and financing activites over a period of time
3 activites on the Statement of Cash Flows
- Operating activities: generated profit or loss from the core business
- Investing activities: purchase of property, PPE assets, and inflows/outflows of case for sales and purchases of marketable securities
- Financing activities: Borrowing and repayment of debt, sales and repurchases of stock and the payment of dividends
Return on Assets (What are…)
Defined as net income for that period divided by teh av erage total assets during that period
Components of Return on Assets (2)
-
Profitability relates profit to sales. This ratio is called the profit margin (PM). Reflects the net income (profit after sales) earned on each sales dollar.
- Net income ÷ sales
-
Productivity relats sales to assets. Asset turnover reflects sales generated by each dollar of assets.
- Sales ÷ Average assets
General observations on Return on Assets
- High margin and Low turnover
- e.g. Intel, Cisco, J&J, & Apple
- Low margin and High turnover
- e.g. Nordstrom, Target, Macy’s, & CVS
- High performance
- Intel, Apple, Colgate Palmolive, Starbucks, & Home Depot
Return on Equity (What is…)
Net income divided. by average stockholders’ equity
(Beginning of year + end of year) ÷ 2 = average equity
ROE reflects the return to stockholders (which is different from the Return on Assets (ROA))
EBITDA (What is…)
Earnings Befor Interest, Taxes, and amoritization Expense
5 forces of the Competitive Environment
A.K.A. Porter’s 5 Forces
- Industry competition
- Bargaining power of buyers
- Bargaining power of suppliers
- Threat of substitution
- Threat of entry
How to Calculate Asset Turnover (AT)
Net sales (Net revenue) ÷ Average assets = Asset Turnover
