Course 2 - 202 - Financial Analysis & Accounting - The Tools

Question 1

What is accounting?

Answer 1

It is the systematic measurement, analysis, and interpretation used to communicate the financial information of the business.

Question 2

The birth of modern day accounting is said to be tied to what publication?

Answer 2

The birth of modern-day accounting is said to be tied to the publication of a textbook written by Luca Pacioli in 1494.

Question 3

What is a financial analysis? Why is it important to us in retail?

Answer 3

Financial analysis is a process that serves to provide an assessment of the stability and profitability of an organization. Financial analysis is important to the business as it gives the executive team and company decision makers the information needed to sustain or grow the organization, aids in the strategic direction of the company, and ultimately will impact decisions on growth of the infrastructure.

Question 4

What are financial statements? What are they used for?

Answer 4

Financial statements are designed to offer an accurate picture of a company’s condition and operating results.

Question 5

What is a Balance Sheet? What is it used for?

Answer 5

The balance sheet gives you a quick picture of what the company owns in physical assets, as well as the money it holds, has invested, or is owed to the organization.

Question 6

A balance sheet is based on an equation defined by a fundamental accounting model:

Answer 6

Assets = Liabilities + Equity

Question 7

In accounting terms, what is an asset?

Answer 7

Assets are items of economic value owned by a company. An asset consists of the physical properties of the company, money it holds or has invested, and money that is owed the company. Assets might typically include cash or cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses, office equipment, real estate, fleet vehicles, and other property and resources that could be converted to cash in less than one year. Current assets are important to most companies as a source of funds for day-to-day operations.

Question 8

In accounting terms, what is a liability?

Answer 8

Liabilities are obligations that legally bind a company to settle a debt. In other words, financial obligations that a company owes to others. Examples of liabilities might include: accounts payable, taxes, wages, accrued expenses and deferred revenues. There are generally two types of liabilities that we must consider: Current liabilities, which are debts that a company expects to pay off within one year (such as bills and utilities, money owed to vendors and suppliers, payroll, short term loans, etc…); and long-term liabilities, which are debts payable over a longer period of time (for example, mortgages).

Question 9

In accounting terms, what is equity?

Answer 9

Equity, or Owners Equity is often referred to as a company’s capital or net worth. In accounting terms, ownership equity is the remaining interest in all assets after all liabilities are paid. Simply stated, it is the money that would be left over if a company sold all its assets and paid off all its liabilities.

Question 10

What is an Income/Profit & Loss Statement? What is the purpose of a P&L Statement?

Answer 10

Simply stated, an Income Statement shows how much money a company made and spent over the designated time period.

Question 11

What are the four primary elements of income?

Answer 11

The elements of income are generally broken down into four primary categories: revenues, expenses, gains, and losses.

Question 12

What is the Costs of Goods Sold?

Answer 12

This number represents the costs directly associated with manufacturing and/or acquisition of products. A retailer’s inventory is merchandise that has not yet been sold.

Question 13

What is Gross Profit? What is the formula for determining Gross Profit?

Answer 13

This is derived by subtracting the cost of goods sold from net sales.
Gross Profit = Total Sales – Cost of Goods

Question 14

What is the Gross Profit Margin Percentage? What is the formula for determining the Gross Profit Margin Percentage?

Answer 14

Ultimately, every business wants sales performance to show success beyond the Break-Even point; that is, beyond the point at which the sales equal the expenses.
Gross Margin % = (Retail Price – Cost) ÷ Retail Price

Question 15

What is depreciation?

Answer 15

Depreciation is the process by which a company gradually records the loss in value of a fixed asset (For example, equipment used in the business such as copiers, computers, printers, fax machines, etc.)

Question 16

What is Operating Income?

Answer 16

he profit realized from a business’s own operations, excluding operating expenses (such as cost of goods sold) and depreciation from gross income, also referred to as operating profit or recurring profit.

Question 17

What is the formula for determining Operating Income?

Answer 17

Operating Income = Gross Income – Operating Expenses – Depreciation

Question 18

What is a Cash Flow Statement? What is it used for?

Answer 18

The Cash Flow Statement explains where cash came from during the year, where the cash went, and what the company did with it.

Question 19

What is an Annual Report?

Answer 19

An Annual Report is a formal financial publication that public companies must file annually which describe the preceding year’s financial results, operations, and financial conditions.

Question 20

What information is typically contained in an Annual Report?

Answer 20

A general description of the industry in which the company is involved

Financial highlights and a brief description of the company’s business over the past year

Information related to the company’s various business segments

Letter to the Shareholders

Management’s Discussion and Analysis of the financial condition of the company

Financial Statements including:

Auditor’s Report on Financial Statements

Balance Sheet

Income/Profit & Loss Statement

Cash Flow Statement

Statement of Retained Earnings

Notes to Financial Statements

Summary Financial Data

Corporate Information, including a listing of the company’s directors and executive officers

Market price of the company’s stock and dividends paid

Question 21

Generally speaking, how is “Shrink” defined?

Answer 21

Generally speaking, however, “shrink” or “shrinkage” refers to the total loss of assets between the point of purchase from a manufacturer or other vendor, to the point of sale to the consumer.

Question 22

What is the formula for determining shrink percentage?

Answer 22

Shrink = Optimal Retail Value/Income – Actual Retail Value/Income

While shrink is measured in terms of total dollars lost, shrink is most often categorized in terms of a percentage to company sales. This concept is extremely important in understanding the interrelationship between loss prevention and other areas of the business. For example, the shrink percentage for most specialty and department store retailers will typically average around 2% of sales. In other words, for every $1 million in company sales volume, $20,000 is lost to shrink:

$20,000 Losses ÷ $1,000,000 Total Sales = 2% Shrink

Understanding this concept, we can then clearly see that by improving our company sales, we will as a result directly impact our shrink numbers. For instance, using our example above let’s say that we had $20,000 lost to shrink, but we improved our performance to $2 million in sales:

$20,000 Losses ÷ $2,000,000 Total Sales = 1% Shrink

Question 23

What do we mean when we say that acceptable shrink percentages are not universal?

Answer 23

It is also important to recognize that acceptable shrink percentages are not universal, and may vary from business to business—and even product to product. For example, the profit margin isn’t as high in the specialty electronics industry (computers, televisions, etc…), and a 2% shrink for this type of product might be considered extremely poor and reflect a serious problem.

Question 24

Briefly, what is an inventory?

Answer 24

Inventory represents one of the most important assets that a retail business can possess, as the turnover of our inventories denotes the primary source of revenue generation and subsequent earnings.

Question 25

Why is it important to manage our inventory?

Answer 25

Maintaining an ample inventory ensures that sales will not be lost or deadlines missed, but can carry a substantial investment in both products and storage space. Similarly, possessing high inventory rates for long periods of time is not usually good for business due to inventory storage issues, obsolescence, spoilage, and other associated costs.

Question 26

What are some practices that can help us to establish and maintain an effective inventory system?

Answer 26

A regular and strategic review of product offerings, to include the scope of the product line and the impact that peripheral products and product sales have on inventory.

Ensuring that strategies are in place to determine and monitor quantities allocated for each product at each location, reviewed on a regular and consistent basis to recognize and respond to needs, quality control, and customer demands.

Periodic review of inventory levels to ensure that inventory for a particular product is held at a level that best meets the needs of customers. This should also account for the level of service necessary to meet those customer needs.

Analysis and review of the potential impact of seasonal inventory fluctuations and their influence on inventory management strategies.

Development and implementation of effective forecasting mechanisms and their impact on inventory decisions.

Establishment of a system for effectively identifying and managing excess or obsolete product inventory that further attempts to identify why these goods reached such status. This system should also be reviewed for effectiveness and relevance on a regular basis.

Systematic review of product transportation vehicles, systems, and alternatives, and their impact on inventory management.

Development and implementation of a system where “reserve” inventory stock can be acquired and distributed on a timely basis in the event of an unforeseen rise in product demand.

Development and implementation of an effective “transfer” system between store locations to compensate for and meet the demands of product needs between stores when necessary and appropriate.

Flexibility, creativity, innovation, and cooperation. Make inventory decisions that reflect a recognition that such decisions are vastly interrelated with many other areas of the business operation.

Inventory management systems and strategies should be regularly reviewed from top to bottom as a critical and necessary function of the business planning process. Such examinations of systems and processes can provide valuable insights into many aspects at the foundation of business operations.

Question 27

What is a physical inventory?

Answer 27

A physical inventory is the process by which the company physically counts its entire inventory of saleable assets.

Question 28

What is our Book Inventory?

Answer 28

Book Inventory defines what stock should be on hand based on accounting/financial records.

Question 29

What is a Periodic Inventory System?

Answer 29

Under the Periodic Inventory method that value remains the same until it is recounted, at which time the balance is readjusted. As the title implies, inventory balances are thus only determined periodically.

Question 30

What is a Perpetual Inventory System?

Answer 30

The Perpetual Inventory System is commonly used by retailers today. Keep in mind that the Perpetual Inventory method is not a physical check of the inventory levels, but a recording of changes in inventory based on related transactions. To actually determine the physical inventory number, the company must take inventory at the end of the accounting period, just as is done using the periodic method.

Question 31

What are Cycle Counts?

Answer 31

Cycle counting is the process of counting specific inventory items throughout the year.

Question 32

What is the primary purpose for taking inventory?

Answer 32

The primary purpose for taking inventory is to validate what the financial books claim a company has in their possession with what they actually do have in their possession.

Question 33

What is Inventory Reconciliation?

Answer 33

Reconciliation is the key process used to determine whether our accounting records truly reflect what is actually found on-hand in our company facilities. As those of us in the loss prevention profession are very familiar, the difference in these figures is identified as inventory shortage, or shrink.

Question 34

What is a SKU?

Answer 34

The increasing speed, reduced costs, and practically limitless memory capacity computers possess led to the advent of what became known as the Stock Keeping Unit, or SKU. A term coined by IBM in the mid 1960s, a SKU number identifies the vendor, size, style, color, size, cost, and retail price of an item.

Question 35

What is a Cost-based inventory system?

Answer 35

The Cost method of inventory accounting requires inventory to be valued at its acquisition cost.

Question 36

What is a Retail-based inventory system?

Answer 36

The Retail method of inventory uses the relationship of retail price to determine the cost of merchandise in inventory.

Question 37

What are the advantages of using a Retail-based inventory system?

Answer 37

The Retail method recognizes the decrease in value of inventory due to markdowns, and thereby generates the most conservative value. As a result, it is generally considered the most economical method of determining the accumulated cost at fair market value and retail price of inventory.

Question 38

What are markdowns?

Answer 38

A price markdown is a deliberate reduction in the selling price of retail merchandise. It is used to raise the demand and increase the velocity (rate of sale) of a particular item, typically for clearance purposes, to sell off obsolete merchandise, or otherwise enhance the sales for a particular product.

Question 39

What is Markdown Optimization Management?

Answer 39

Markdown Optimization Management is the process by which we determine what items should be marked down, by how much they should be marked down, when they should be marked down, and in which market or stores those markdowns should occur.

Question 40

Why is it important to “capture” markdowns?

Answer 40

Markdowns that aren’t properly captured can directly impact store and company shrink numbers. Such markdowns may be managed and/or captured in a variety of different ways depending on the specific guidelines and practices of the particular retailer. However, monitoring of such company-specific practices should be an integral part of our standard loss prevention audit and management programs.

Question 41

QUIZ QUESTION: In order to maximize sales and inventory efficiencies, a company uses a process that determines what items should be marked down, by how much they should be marked down, when they should be marked down, and in which market or stores those markdowns should occur. This process is known as:

Answer 41

Markdown Optimization Management

Question 42

QUIZ QUESTION: A contractor repairs a damaged air conditioning unit on the roof of a store and sends the retailer a bill. The contractor’s accountant does not post the transaction as income until the payment is actually received from the retailer. This is an example of:

Answer 42

Cash-Basis Accounting

Question 43

QUIZ QUESTION: A company places an order with a vendor that sells athletic shoes, and the merchandise is delivered to the company’s warehouse. According to the terms of purchase, the company must pay the vendor for the shoes within 30 days of receipt. However, based on the company’s accounting model, the cost of the goods are recorded as an expense at the time they are received at the warehouse, even if the bill has not yet been paid. This type of accounting model is an example of:

Answer 43

Accrual-Based Accounting

Question 44

QUIZ QUESTION: Let’s say that we invested $8000 into a project, and realized a gain of $9700 based on that investment. Similarly, we invested $12,000 in a second project, and realized a gain of $14,000 on our investment. On a third project, we invested $14,000, and realized a gain of $16,700 on our investment. Which project showed a more efficient return on the investment of our money?

Answer 44

The $8000 investment