Topic 6 and 7.pdf - Topic 6: Financial Analysis Accounting...

Topic 6: Financial Analysis
Accounting information
- Accounting is the process of measuring, interpreting and recording data that reflect the
financial condition of a firm ( value of assets, profits and capability to pay debts) .The most
important financial statements are the income statement (it indicates the firm´s revenue, costs
and earnings over a period of time) and the balance sheet (reports the book value of all the firm´s
assets, liabilities and owner´s equity at a point in time). Both statements must be analyzed to
perform a complete financial evaluation.
- Income statement : (explain transition from balance 1 to 2)
-Balance sheet : to make information provided by the Financial Accounting System reliable, the
process of “collecting, classifying, summarizing and reporting financially significant events”, must
follow generally accepted accounting principles ( GAAPs) .
The double-entry bookkeeping system: Transaction and Accounts; every business transaction will
involve to accounts (or more/ opposites) (ex, $100 sales require a debit (cash) and a credit
(revenue) entry of $100). Basic accounting equation:
ASSETS= LIABILITIES + OWNER´S EQUITY
ECONOMIC STRUCTURE= FINANCIAL STRUCTURE
Assets : any item of value owned by a firm which could be converted into cash. Three types:
Current assets, assets having a short life, which could be converted into cash in less than one
year (inventory); Fixed assets , assets that will last a longer time and that could be converted into
cash in in more than one year (long term investments); Intangible assets , assets that have no
physical form or clearly defined value (patents).
Liabilities : claims held by someone against firm´s assets (debts). Two types: Current (will be paid
off within a year) and Long-term (will not be paid off within a year (loans)).
Net sales Sales – any discount or returns granted to customers
Cost of goods sold Cost of materials used to produce goods sold
Gross Profit Net sales – cost of goods sold
Operating expenses Selling + general and administrative expenses (not
directly linked to cost of production)
Wages and salaries
General and administrative expenses
Earnings before interest and taxes
(EBIT)
Gross profit – firm´s operating expenses
Interest expenses
Earnings before taxes EBIT – interest expenses
Taxes
Net income Earning before taxes – taxes

Owners´ equity : the value of the firm remaining to owners after all liabilities have been repaid:
Capital stock , original investment made by firm´s owners) and Retained earnings (previous
profits not distributed to the firm´s owners (dividends)).
(más abajo + liquity)
Financial analysis
Ratios : the aim is to measure a firm´s financial condition, by assessing the relationship among
firm´s accounts; to assess the evolution over time of a firm´s financial condition; and to compare
the performance of several firms. Classification: (profitability, solvency, liquidity, stability)
- Liquidity : firm´s ability to meet short-term obligations , the greater the level of current assets
available relative to current liabilities, the greater the firm´s liquidity