FinStatements and ratios - handout

FinStatements and ratios - handout - Financial Statements...

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Financial Statements Financial Statements
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Mind Map Why?: Accrual accounting is a great construct for understanding the operations of an enterprise. However, the standard accounting principles create an environment where a simplistic reading of the standard financial statements is almost always misleading
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Mind Map Learning objective: Develop an understanding of how to read simple financial statements Identify the fictions inherent in financial statements Demonstrate an ability to use standard form to create financial statements Analyze financial statements using ratios
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Mind Map Key words/concepts: Income statement, balance sheet, Cash Flow statement Accrual accounting, historical cost, matching principle Earnings management Free cash flow (FCF) Retained earnings evolution Ratio definitions/interpretation (many)
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Balance Sheet Balance Sheet Assets Assets Current Assets Current Assets Cash Cash Marketable Securities Marketable Securities Accounts Receivable Accounts Receivable Inventories Inventories Fixed Assets Fixed Assets Land Land less: depreciation less: depreciation Current Liabilities Current Liabilities Accounts Payable Accounts Payable Notes Payable Notes Payable Accrued Salaries Accrued Salaries Long-Term Liabilities Long-Term Liabilities Mortgage Debt Mortgage Debt Debentures Debentures Owners’ Equity Owners’ Equity Common Stock ($1 Par) Common Stock ($1 Par) Add’l Paid In Capital Add’l Paid In Capital Retained Earnings Retained Earnings
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REVENUE - Cost of Services GROSS PROFIT - Operating Expenses NET OPERATING INCOME (NOI ) or EARNINGS BEFORE INTEREST & TAXES (EBIT) - Interest Expense - Income Taxes NET INCOME INCREASE IN RETAINED EARNINGS Income Statement Income Statement
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Important Note!!! Notice that there are only two things that you can do with net income: Pay it out as dividends Retain it within the firm Remember this relationship: New RE = old RE + NI - dividends
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THE IDIOT TEST You are seeking financing for your new facility in a nearby city. While discussing the project with your banker, you tell her that you will be able to make scheduled payments because your Net Income is positive even in the first quarter of operations. You just failed the “Idiot Test”!! Why???? Because Earnings Lie!!!
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WAYS EARNINGS LIE 1.Watch the Inventories 2.Beware of Rising Receivables 3.Uncover Extraordinary Expenses/Revenue 4.Investigate Asset Sales 5.Who’s Skimping on Research
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6.Note Reduced Capital Spending 7.When is Revenue Really Not? 8.Look for Pension Shenanigans
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This note was uploaded on 03/06/2012 for the course BUS M 201 taught by Professor Mcgregor during the Fall '11 term at BYU.

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FinStatements and ratios - handout - Financial Statements...

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