aem 220 prelim 2 outline

aem 220 prelim 2 outline - Chapter 17 Accounting(2/28 3/2...

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Chapter 17 – Accounting (2/28, 3/2) The Accounting Cycle Objectives of Financial Statement Analysis Find out how liquid is an enterprise Find out how profitable is an enterprise Find out how efficient is an enterprise Solvency Ratios Quick Ratio = Cash + Marketable Securities + Receivables / Current Liabilities Current Ratio Debt-to-Equity Ratio Profitability (Performance) Ratios Return on Sales Return on Equity Earnings per Share Activity Ratios Inventory Turnover = COGS / Avg. Inventory Accounts Receivable Turnover = Net Accounts Receivable / Net Daily Credit Sales Caveats on Financial Statement Analysis Industry matters! Size matters! You can be tighter in some areas of your financial structure, if you have more leeway in others. The DuPont Model a “simple” way to combine the strengths of ratio analysis. (Net Income / Sales) X (Sales / Total Assets) = Net Income / Total Assets Return on Investment Chapter 18 – Corporate Finance (3/5) Financial Planning Process Forecast cash flow o Short-term uses
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o Long-term uses Budget cash needs o Capital budget o Cash budget o Operating budget Control differences o Actual vs. projected flows Compare results o Modify forecasts and budgets The Three Financial Sins Undercapitalization Poor control over cash flow Inadequate expense control Financial Management: Responsibilities Short term finance o Working capital Long term finance o Retained earnings o Long term debt o Equity Corporate investment decision making Sources of Funds Short Term Trade Credit Promissory Notes Family/Friends Banks, etc. Secured Loan Unsecured Loan Factoring – selling company’s A/R Commercial Paper Long Term Debt Term-Loan Bonds o Secured o Unsecured Equity Stock Retained Earnings Venture Capital Use of Excess Funds Expansion Marketable securities – low yield instruments with high liquidity Treasury bills Commercial paper – unsecured promissory notes Certificates of deposit Asset purchases Weighted Average Cost of Capital
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Cost of retained earnings is based on the alternatives that could otherwise be used for the money and what else could be done Guest Speaker – Cheryl Francis (3/7) What is the Goal? The Goal is to maximize: a) Revenue b) Profit c) Cash flow d) Return on investment e) Assets Economic Value The sum in today’s dollars of all expected future cash flow generated by the company. Why is Economic Value Important? Indication of financial health and potential Focus on value creation keeps eye on “right” thing Where does Economic Value come from? Productivity of assets Profitable growth What we have today and what we will create in the future.
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