BUS7010 Quantitative Prep Course

1. Week 3 Dr. Jenne Meyer BUS7010Quantitative Prep Course

2. Class Activity • Work as a group to come up with a business concept • What is the concept? • How would you organize? Why? • Check out Legalzoom.com for more info.

3. 4 Maintain and Analyze Financial Records

4. Finance and Accounting • Accounting • organizes a system of financial records • records financial data • prepares, analyzes and interprets financial statements • work is guided by Generally Accepted Accounting Principles (GAAP) • Finance • saving, investing, and using money by individuals, businesses, and governments • is broader than accounting

5. Accounting vs Finance • Accounting focuses on history • Finance focuses on the future. • Decision-makers must understand the financial past to plan for the financial future.

6. Finance consists of three interrelated areas • money and capital markets • determining monetary needs and obtaining adequate cash • investments • analyzing and choosing among investment alternatives while considering returns and risks • financial management • applies management principles to financial decision-making for organizations

7. Principles of Accounting • Equities • the financial claims on a company’s resources • Fundamental accounting equation • Assets = Liabilities + Owner’s Equity • Assets - resources used by a business in its operations • Liabilities - claims against the business resources by those to whom the business has financial obligations • Owner’s equity - financial interest in the business held by all owners

8. Principles of Accounting • Accounts - the financial records for each of the specific assets, liabilities, and categories of owner’s equity • Accounting transaction • the act of recording a financial activity that results in a change in the value of an organization’s resources • financial activities are recorded as entries in the accounts

9. The Accounting Cycle

10. Accounting Principles • Historic Costs • Revenue Recognition • accrual accounting • recognizing revenue and expenses when they are incurred rather than when cash is received or spent • Expense and Revenue Matching • Full Disclosure • Standard Practice and Conservatism

11. Maintaining Financial Records • Developing and maintaining a financial records system that has integrity requires decisions in several areas.

12. Financial Reporting • Each user of financial information has specific concerns. • Managers need to operate a profitable business and maximize shareholder value. • Investors want to maximize the value of their investment. • Creditors want to be sure the company has assets sufficient to cover debt. • The government requires accurate financial disclosure and tax payments.

13. Private v Public Financial Reporting • Privately owned companies are not required to disclose financial information. • Public companies must report financial information. • Annual Report – a statement of a company’s operating and financial performance issued at the end of its fiscal year • Form 10-K - a form required by the SEC that may be even more detailed than an annual report

14. Financial Management Activities • The primary objective of financial management is to maximize the wealth of owners.

15. The Structure of Financial Management • Board of directors • provide business oversight • establish corporate policy • hire key executives • review major business decisions

16. The Structure of Financial Management • Chief Executive Officer (CEO) • the top manager of a corporation • executes the strategy and the policy of board of directors • leads management and employees • sets long-term operational direction • Chief Operating Officer (COO) • directs business operations • Chief Financial Officer (CFO) • plans and manages financial resources

17. The Structure of Financial Management • Treasurer • manages cash, investments, and other financial resources • manages relationships with investors and creditors • Controller • in charge of accounting and financial records

18. Financial Managers • Three major decisions define the work of financial managers: • what investments need to be made • how investments should be financed • how to efficiently manage investments

19. BALANCE SHEET • retained earnings • profits earned by a company that are not paid to shareholders as dividends • working capital • working capital = current assets – current liabilities • shareholder’s equity • the value of all classes of stock and retained earnings

20. INCOME STATEMENT • Comparing income statements over multiple time periods provides a strong assessment of a company’s performance. • improvements in efficiencies of generating revenues • cost containment

21. CASH FLOW STATEMENT • Cash flow is the movement of cash into and out of a business. • Solvency • the ability of a company to meet its financial obligations as they become due • A company with an increasing positive cash flow is a healthy company.

22. Understanding Financial Ratios • financial ratios • comparisons of financial data used to evaluate business performance • ratio analysis • the study of relationships in a company’s finances in order to understand and improve financial performance

23. LIQUIDITY RATIOS • An important measure of a company’s health is its ability to pay debts on time. • need a favorable liquid position

24. Current Ratio • Current ratio = current assets current liabilities • The current ratio shows how well the company is prepared to pay current liabilities. • due within a year • A ratio of 2:1 represents a strong position in most industries.

25. Quick Ratio • Quick Ratio = current assets – inventory current liabilities • A more precise liquidity measure that reduces the value of current assets by the value of inventory • Inventory is a particular problem in some industries. • A ratio of 1:1 is acceptable in many industries.

26. ASSET MANAGEMENT RATIOS • Asset management ratios compare the value of key assets to sales performance.

27. Inventory Turnover Ratio • Inventory Turnover = net sales avg inventory • Measures the efficiency of a company in maintaining inventory to generate sales • A company doesn’t earn money until its inventory is sold. • If a business has a low inventory ratio: • inventory should be reviewed to determine if it is obsolete

28. Total Assets Turnover Ratio • Total Assets Turnover = Sales Total Assets • Measures how efficiently all assets generate sales • Used to determine if a company has a reasonable amount of assets for the sales being produced. • A low value suggests assets are not being used efficiently. • Fixed asset turnover ratio - examines the efficiency of land, buildings, and major equipment

29. Accounts Receivable Turnover Ratio • Accounts Receivable = total credit sales/accts receivable • Measures how quickly credit sales are converted to cash • Higher ratios mean that accounts receivable are collected quickly. • Lower ratios might indicate losses. • when older accounts are not paid • Average collection period ratio • (accounts receivable) ÷ (average daily sales) • identifies how many days on average it takes to collect accounts receivable • a small number of days shows effective credit procedures

30. DEBT MANAGEMENT RATIOS • financial leverage • using debt financing to increase the rate of return on assets

31. Debt Ratio • Debt Ratio = Total Debt (current & long-term liabilities Total Assets (current and long term) • Measures how much a company’s assets are owned by creditors. • The appropriate ratio is guided by • the industry in which the company operates • the financial stability of the company

32. Times-Interest-Earned Ratio • Times-Interest-Earned = Operating Income Total Interest Charges • Shows how well-positioned the company is to pay interest on its debt • A high ratio means the company has a high margin of safety in being able to pay creditors.

33. PROFITABILITY RATIOS • Ratios are used to track bottom-line performance. • useful for comparison with competitors • a tool to asses performance relative to other possible investments

34. Profit Margin of Sales Ratio • Profit Margin on Sales Ratio = Net Profit Net Sales • Measures the profit generated by each dollar of sales • Gross profit margin ratio • (gross profit) ÷ (net sales) • Operating profit margin ratio • (operating income) ÷ (net sales) • Operating income - earnings before interest and taxes

35. Return on Total Assets Ratio • Return on Total Assets = Net Income Total Assets • Measures the company’s earnings on each dollar of assets • This ratio evaluates the efficiency of the assets of the company.

36. Return on Equity Ratio • Return on Equity = Net Profit Stockholder’s Equity • Measures how each dollar of investment by stockholders contribute to net income

37. MARKET PERFORMANCE RATIOS • Market performance ratios serve a variety of functions • examine the overall financial performance of a business in contributing to shareholder value • a metric of the effectiveness of executive leadership • helps compare multiple companies

38. Earnings per Share Ratio • Earnings per share ratio = Net Income # of Shares Issued • Measures the amount of profit earned by each share of stock • If preferred stock is issued • the dividends paid to preferred stockholders are subtracted from net income • before dividing by the number of shares of common stock issued

39. Price Earnings Ratio • Price Earnings Ratio = Market Stock Price Earnings per share • A measure of the strength of a company’s earnings in affecting the price of its stock • Anticipated earnings on investments • help investors decide what price to pay for a company’s stock

40. Market to Book Ratio • Market to Book Ratio = Market Price per share Book Value per share • When this ratio is greater than 1, investors are willing to pay more for the stock than it is valued by the company

41. Use Financial Ratios • Comparing ratios over several time periods provides a better picture of the company’s financial condition. • Industry trends can also be analyzed using financial ratios.

42. DEVELOP A FINANCIAL ANALYSIS PLAN • Organize financial records. • Determine key financial ratios. • Develop baseline data. • Identify comparative information sources. • Identify benchmark companies (a competitor with outstanding performance) • Calculate ratios regularly. • Use ratio analysis as a tool to establish financial goals.

43. SOURCES OF COMPARATIVE INFORMATION • Financial information is relatively easy to obtain for public corporations. • Information provided by trade associations • may be provided only to members • may have a usage fee

44. Stock Analysis • Pick two comparative companies (ie, Coke and Pepsi) and compare their financial ratios. • How do they differ? • Why do you think they differ? • How do you think they compare in the marketplace?

45. 5 Short-Term Financial Activities

46. Cash Budgeting Process • cash budget - an estimate of future cash receipts and cash payments for a specific time period • A cash budget has three main components • cash receipts • cash payments • cash excess or shortage

47. CASH RECEIPTS • Cash Sales • products and services are sold for cash • Collections on Account • account receivable • the money owed for purchases bought on credit • Other Cash Receipts • variable, non-routine sources of cash

48. CASH PAYMENTS • Variable Cash Expenses • expenses that vary monthly • Fixed Cash Expenses • business payments that are consistent each month • Other Cash Payments • cash expenses that are not related to day-to-day operations

49. CASH EXCESS OR SHORTAGE • cash excess • when receipts exceed payments • cash shortage • when payments exceed receipts • A sufficient amount of cash should be available at all times to cover expenses for at least one month.

50. Working Capital • (current assets) – (current liabilities)