Integrated Accounting Issues Winter 2006

1. Integrated Accounting IssuesWinter 2006 Rodney K. Rogers, Ph.D., CPA School of Business Administration Portland State University

2. Traditional Stakeholders of Firm Operations/Investing $ Goods Vendor Customer $ Goods $ $ $ $ Information Intermediaries Financial Intermediaries Creditors Investors

3. Expanded Stakeholders Customers Employees Shareholders Internal Auditors Firm Competitors Government External Auditors Management Creditors Vendors

4. From Business Activities to Financial Statements Organization Structure Market Environment Organization Strategy Organization Activities Accounting Environment Accounting Strategy Accounting System Financial Statements

5. Analysis of a Company • Market Environment – “Context” • Macroeconomic, governmental, legal considerations, • Organization Strategy Analysis – “Expectations” • Key profit drivers, business risks and profit potential • Organization Structure – “Capabilities” • Current structure of organization • Accounting Analysis • Evaluate the “quality” of the accounting numbers • Financial Analysis • Evaluate performance using financial and non-financial information – (past and current results) • Prospective Analysis • Forecasts and valuation

6. SWOT Analysis • Internal • Strengths • Weaknesses • External • Opportunities • Threats

7. Market Environment • Interest Rates • US and foreign GNP Growth • Unemployment Levels • Trends in Consumer savings/borrowing • Others

8. Business Strategy Analysis • Specific Industry Structure (Porter’s “five forces”) • Rivalry among existing firms • Industry Growth, Concentration, Switching Costs, Fixed/Variable Costs, Excess Capacity • Threat of new entrants • Scale Economies, First mover, Relationships • Threat of substitute products • Price/Performance trade-off • Bargaining power of buyers and suppliers • Switching cots, number and volume of buyers/suppliers • Competitive Strategy • Cost Leadership • Differentiation

9. Competitive Strategy • Cost Leadership • Same product or service at lower cost • Economies of scale, efficient production, design • Differentiation • Unique product or service at a premium price • Product design, variety, customer service, brand, R&D, innovation • How to maintain competitive status?

10. Business Strategy Analysis • Quality of Management • Regulatory Developments • Social Issues • Technology

11. Output: Basic Financial Statements • Balance Sheet • Income Statement • Statement of Cash Flows • Retained Earnings Statement • Statement of Comprehensive Income

12. Analyzing a Firm Operations/Investing $ Goods Vendor Customer $ Goods $ $ $ $ Information Intermediaries Financial Intermediaries Creditors Investors

13. Accounting Analysis • Quality of Disclosures • Quality of Numbers

14. Quality of Numbers • Sales • Price vs. volume Charges • Real vs. nominal growth • Cost of Goods Sold • Cost-flow assumptions • LIFO liquidation • Loss/Reserves on write-down of inventory

15. Quality of Numbers • Operating Expenses • Discretionary expenses • R&D • Repair and Maintenance • Advertising and Marketing • Depreciation • Methods • Estimates • Pension Accounting

16. Quality of Numbers • Nonoperating Revenue and Expenses • Gains/Losses from Sales of Assets • Interest Income • Equity Income • Loss recognition on write-down of assets • Accounting changes • Extraordinary items • Reserves on restructuring charges

17. Financial Analysis:Levers for Value Creation Return on Equity = Net Income Shareholder’s Equity

18. Interrelationships of Ratios Return on = Profit Margin x Asset Turnover x Financial Equity Leverage • Change revenues • higher prices • greater volume • Change costs • product/process design • supply relationships net income = net income x sales x assets owner’s equity sales assets owner’s equity Advantageous financing (external) Reduce need for investment (capital intensity) Rev/Exp Assets Liabilities/Equity Managing

19. Managing Sales and Expenses • Gross Profit • Operating Profit • Issues to Consider • Price vs. Volume Changes • Real vs. Nominal Growth • Inventory Issues

20. Many terms • Net Income • EBIDA • EBIT or Operating Income (pre-tax) • EBITDA • FCF • NOPAT or prefinancing operating earnings

21. Profitability Ratios Gross Profit Margin = Gross Profit Net Sales Operating Profit Margin = Operating Profit Net Sales Net Profit Margin = Net Earnings Net Sales

22. Profitability Ratios SGA % = Selling, General and Admin. Expenses Net Sales Return on Investment (ROI) = Net Earnings Total Assets Return on Assets (ROA) = NOPAT Total Assets Cash Flow Margin = Cash flow from operations Net Sales

23. Managing Assets Days in Receivables = Accounts Receivable Avg.Daily Sales A.R. Turnover = Net Sales Accounts Receivables Inventory Turnover = Cost of Goods Sold Inventory Fixed Asset Turnover = Net Sales Net Prop.Plant&Equip. Total Asset Turnover = Net Sales Total Assets

24. Managing Liabilities and Equity Current Ratio = Current Assets Current Liabilities Quick Ratio = Current Assets-Inventory Current Liabilities

25. Managing Liabilities and Equity Debt Ratio = Total Liabilities Total Assets L.T. Debt to Total Capital = LT Debt LT Debt + S.E. Debt to Equity = Total Liabilities Shareholders’ Equity Times Interest Earned = Operating Profit Interest Expense

26. Interrelationships of Ratios (capital structure leverage) (common earnings leverage) Return on = Profit Margin x Asset Turnover x Financial Equity Leverage • Change revenues • higher prices • greater volume • Change costs • product/process design • supply relationships net income = net income x sales x assets owner’s equity sales assets owner’s equity Advantageous financing (external) Reduce need for investment (capital intensity) Rev/Exp Assets Liabilities/Equity Managing

27. Market Ratios Earnings Per Share = Net Earnings Avg. Shares Outstanding Price to Earnings Ratio = Market Price of Common Stock Earnings Per Share Dividend Payout Ratio = Dividends Per Share Earnings Per Share Dividend Yield = Dividends Per Share Market Price of Common Stock

28. Financial Performance Measures by Area and Viewpoint