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Analyzing Year End Financial Reports to Evaluate the Business

Analyzing Year End Financial Reports to Evaluate the Business. Objectives : The student will describe five key factors of year end financial analysis The student will use sound guidelines to interpret financial data.

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Analyzing Year End Financial Reports to Evaluate the Business

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  1. Analyzing Year End Financial Reports to Evaluate the Business Objectives: • The student will describe five key factors of year end financial analysis • The student will use sound guidelines to interpret financial data. • The student will list and describe three important financial statements necessary to complete a statement of owner’s equity and analyze a business.

  2. Five key factors of year end financial analysis • Liquidity • Ability to convert assets to cash to meet financial obligation without disrupting the business • Primarily measured with the balance sheet using current assets and current liabilities

  3. 2. Solvency • Ability of a business to pay all debts • Primarily measured with the balance sheet using current assets and current liabilities • Profitability • How a business generates profit or net income from labor, management, and capital • Primarily measured using revenue and expense information on the income statement

  4. 4. Repayment Capacity • Ability of a business to repay term debt using net income from operation • Primarily measured using data from the income statement 5. Financial Efficiency • Measures how efficient labor, management, and capital were used. • Gross revenue is the primary figure used in measuring financial efficiency

  5. Financial data can be calculated and compared with • Historical information – data from prior years • Current data – from this production year • Projected figures – based on estimated costs and returns

  6. To analyze financial calculations, a business owner can: • Compare and cross reference financial reports with each other • Compare the same report and calculations over multiple years

  7. Compare one business to another business that is similar in size and type • Compare the business to a completely different business • Compare financial data to industry standards and benchmarks to determine strengths and weaknesses

  8. Three financial statements are necessary to complete a statement of owner’s equity • Cash Flows • Balance Sheet • Profit/Loss (Income) Statement

  9. Cash Flow Statement • A projected budget of all the financial transactions to be incurred throughout the year • Normally planned on a monthly basis

  10. Statement of Cash Flows • An analysis and planning tool that organizes information into: 1) Operating activities 2) Investing activities 3) Financing activities

  11. Balance Sheet • Measures the financial condition of a business at a specific point in time • A balance sheet totals assets and liabilities, determines net worth, and is used to calculate financial ratios and figures that measure a business

  12. Profit/Loss (Income) Statement • Used to determine the profit or loss of a business and explain changes in net worth • Summarizes the income and expense over a given period of time

  13. What is the main purpose of the Statement of Owner’s Equity? • Reconciling or verifying the accuracy of change in net worth and net income with the balance sheet, income statement, and statement of cash flows.

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