Section 6: Financial Statement Analysis Flashcards
Accounting Vs Financing
Accounting: recording and classifying business and financial transactions and reporting them on an orgs financial statement
Financing: Managing orgs assets, liabilities, and cash flow (ALC) to maximize stakeholder (anyone with any interest) wealth
5 Accounting Systems an RM May Encounter
GG MST
GAAP
Government or fund accounting
Managerial Accounting
STAT
Tax Accounting
GAAP: Definition // Purpose
- set of rules that considers details, complexities, and legalities of business accounting
- Purpose is to make the process of financial reporting transparent. Uses standardized assumptions, terminology, definitions, and methods
STAT: Definition // Purpose
(Statutory Accounting Under Generally Accepted Accounting Principles)
- Set of accounting regs prescribed by the National Association of Insurance Commissioners (NAIC) for the preparation of the insurance company’s financial statements
- Goal is to assist regulators in monitoring an insurance company’s solvency
Tax Accounting (Under IRS Rules and Guidelines): Who it affects
- All orgs required to follow IRS rules and Guidelines. Even non-profits affected.
Governmental or Fund Accounting (Who uses it and how its different)
- Does not use a dual entry system using the customary debits and credits found in GAAP or STAT.
- Simplified system similar to the “cash basis” accounting very small orgs and households use
Managerial Accounting: What it is and why it’s proprietary
- Internal accounting system that provides accurate and timely financial info to make short-term and day-to-day financial decisions
- Proprietary because may reflect future goals of the organizations
7 Property Valuation Methods
BH FEAR M (Bloomfield Hills Fears Me)
- Book Value: Historical cost, less accumulated depreciation
- Historical Cost: OG purchase price of property
- Functional Replacement Cost: the cost to repair or replace damaged or destroyed property with materials that are functionally the equivalent of the property. Ex: Old bank vault and tellers’ cages and stained glass windows, now operates as a hotel. FRV, ID materials are no longer available or cost prohibitive
- Economic Value: future stream of income assigned to the property
- Actual Cash Value: The replacement cost less an allowance for depreciation or obsolescence
- Replacement Cost: Amount to replace a damaged or destroyed piece of property with new property of like kind and quality with no regard for depreciations
- Market Value: Amount a willing buyer will give to a willing seller
3 Types of Financial Statements
IBS
- Income Statement: summary of the orgs financial performance for a period of time
- Balance sheet: Summrary of assets, liabilities, and owners equity as of a specific point of time
- Statement of cash flow: Summary of the effects of cash on the operating, investing and financial activities of an org for a specific period of time.
6 Components of an Income Statement
CogsREDIT
Cost of goods sold (COGS)
- Direct cost of producing the goods or products sold. Materials and labor
- Understanding the calculation of the COGS is essential for evaluation of business interruption exposures and potential claims.
Revenue or sales
- Operating Revenue: Sales of goods and services
- Non-Operating income: Gains or losses from sources not related to the typical activities of the business or org (investments, property or asset sales, currency exchanges. etc.)
Expenses
- Operating expenses: Business incurs to keep it running such as wages, office supplies
- Non-operating expenses: not directly related to core business operations (ex: interest payments on debt, restructuring costs, inventory write-offs, etc)
Depreciation, depletion, amortization
Interest expense
- Reducing income from interest
Taxes
- Reducing income by taxes
Define: Depreciation, depletion, amortization
- Depreciation: Reduction of value of an asset over time. Lowers income and tax liability, thereby generating positive cash flow
- Depletion: Reduction in inventory and a charge against income to allocate the cost of extracting natural resources
- Amoritization: Accounting technique used to periodically lower the book value of a loan over a set period of time
7 Components of a Balance Sheet: 4 Assets // 2 Liabilities // Owners Equity (ALE)
(FLIMSCC)
Fixed Assets (Asset #1)
- Long-term tangible property or equipment an organization owns and uses in its operations to generate income
Long-Term Liabilities (Liability #1)
- more than 12 months
Inventory (Asset #2)
- Raw Materials
- Work in progress
- Finished Goods
Marketable Securities (Asset #3)
- highly liquid securities such as stocks or bonds easily converted to cash
Stockholder’s Equity (Owners Equity #1)
- How much the owners of a company have invested in the business by investing money or retaining earnings over time.
Current Liabilities (Liability #2)
- Short term financial obligations that are due within one year (utilities, vendor contracts, etc)
Current Assets (Asset #4)
- All assets of an org that are expected to be sold or used as a result of standard business ops over 1 year
4 Broad Categories of Stockholder Equity
CRAP
-common shares of stock
- retained earnings
- additional paid-in capital
- preferred shares of stock
Statement of Cash Flow: 4 Components
OPERATE // INVEST // FINANCE // ADJUST
- Operating Activities: sales of goods, services, interest revenue, dividend revenue, etc
- Investing Activites: collections and sales of loans, sales of equity investments, return of investments from those instruments
- Financing Activities: Cash inflows and outflows
- Adjustments for Non-cash Transactions: Stuff for non-cash
Financial Ratios: Best Ratio? How used in different Industries?
- No Perfect or Ideal ratio
- Ratios dependent upon type of financial system used to generates the numerator and denominator
