presented by claire h gagnon, cpa january 9, 2014 understanding financial statements for a...
TRANSCRIPT
Presented by Claire H Gagnon, CPA
January 9, 2014
Understanding Financial Statements for a Non-Financial Person
Currently VP/Controller Easter Seals NH and Subsidiaries
Previous experience includes:◦ Finance Director TV Station◦ Controller for mid size non-profits◦ Manager Family CPA firm ◦ Staff Accountant/Tax Accountant
A little about me…….And about you!
Financial Analysis ≠ Math Wizard No Algebra, Calculus etc. required No need to be afraid……. No more MEGO syndrome when discussing
financial statements “my eyes glaze over”
Let’s get started…
Common terms and definitions:
◦ Financial Statements-Accounting information that are packaged with other information such as explanatory footnotes and a letter from management. Usually prepared at the end of an accounting period, i.e.; month, quarter or year. External-Audited Financial statements which will be used by non–accountants such as
investors, banks, and funders. Internal-Used by management to make business decisions. These can be tailored to the
business and the metrics that management would like to measure.
◦ Balance Sheet aka Statement of Financial Position Asset Liability Equity
◦ Income Statement aka Statement of Profit and Loss or Profit and Loss Statement (P&L) Revenue Expense
◦ Cash Flow Statement aka Statement of Cash flows Operating Activities Investing Activities Financing Activities
Financial Jargon
Receivables Payables Prepaid Expenses Accrued Expenses Key Indicators Ratio Analysis Current & LongTerm Debt Any others?????
More Financial Jargon
Top/Left lists all that the company owns ◦ Assets
Bottom/Right lists all that the company owes◦ LiabilitiesBalance sheet so whatever assets are not being used to pay off the liabilities belong to the shareholders and become…Net Worth, Shareholders Equity or Net Assets
The Balance SheetSnapshot of What a Company Owns and Owes at any given Date
◦ Current Assets-can easily be converted to cash within a short period. i.e.; Money market funds.
◦ Fixed Assets-long term assets that are not intended for sale and not easily converted to cash. i.e.; equipment and buildings.
◦ Other Assets-have no physical existence i.e.; goodwill.
AssetsItems of value that are owned and are measurable
Current liabilities-obligations that are due within one year. i.e.; accounts payable or debt payable within one year of balance sheet date.
Long term liabilities-obligations that are due over one year from the balance sheet date i.e.; mortgages, debt.
LiabilitiesObligations of the Business
Shareholders’ (owners’) stake after all the debts are paid (that is why stocks are also called equities)
Consists of two parts. Captital invested by shareholder (owners) and retained earnings. Retained earnings are generated by the profits of the business which are reinvested or retained.
For large corporations this can be comprised of Common Stock
Preferred StockRetained Earnings
Equity
Which one of these are considered a current asset?
A. Computer B. 2 year CD C. Cash
Pop Quiz
Provides the results of the operations by summarizing sales and other income and the expenses and losses of the business for a certain period of time.
Income StatementRather than a snapshot this is the movie that tells the story of the business
Accrual-Recognize revenue and expenses in period in which they are incurred. This is how you get receivables and payables.
Cash-Recognize revenue and expenses in the period in which the cash is received or disbursed respectively.
Methods of Accounting Accrual versus Cash
Receivables- Amount of money your business is due from others. All income that the business is expected to receive for both goods and services.
Prepaid Expenses-Money that is paid out for future services, expensed over time as value of service is recognized.ie; insurance.
Payables-Amount of money that is owed to pay for all services and goods provided by others.
Accrued Expenses- Expenses that have been incurred but not paid which no invoice will be received. I.e.; accrued salaries and related tax liabilities.
Accrual Basis Terms
Services were provided and billed in January, the cash was received in February. For accrual basis accounting when should revenue be recognized, January or February?
Office Supplies were purchased in March but were not paid for until April, for cash basis accounting when should the office supply expense be recognized?
Pop Quiz
A method to allocate the cost of a fixed asset over the period in which the asset is useable to the business.
The cost is recorded as an asset and then the value is of the asset is reduced by subtracting a portion of that value as depreciation expense each year.
This affects both the balance sheet and the income statement.
Depreciation
Company buys piece of office equipment for $5000 on 1/01/14, shipping is $ 1,000 and installation is $500. Equipment has useful life of 5 years.
Depreciation Example
Year 1 Year 2
Book Value 6,500 6,500Accumulated Depreciation (1,300) (2,600)
Net Book Value 5,200 3,900
Depreciation Expense 1,300 1,300
Sample Balance SheetXYZ CompanyBalance SheetDecember 31, 2012
Assets Liabilities and Net Assets
Current Assets: Current Liabilities:Cash 5,500$ Payables 2,500$ Accounts Receivable 10,000 Accrued Expenses 1,000 Other Current Assets 5,000 Current Portion of Long Term Debt 500 Total Current Assets 20,500 Total Current Liabilities 4,000
Property, Plant and Equipment 6,500 Long Term Liabilities: Less: Accumulated Depr (1,300) Debt (Less Current Portion) 5,000
Subtotal 5,200 Subtotal 5,000
Total Liabilities 9,000
Net Assets: 16,700$ Total Net Assets 16,700
Total Assets 25,700$ Total Liabilities and Net Assets 25,700$
Key Ratios: Quick Ratio 3.88 Debt to Equity 0.33 Days Outstanding 18
XYZ CompanyIncome StatementYear Ended 12/31/2012
Revenues:
Sales 200,000$ Other Income 10,000 Total Revenues 210,000
Expenses:
Salaries 100,000$ Taxes and Benefits 25,000 Professional Fees 20,000 Supplies 12,000 Occupancy 20,000 Depreciation/Amortization 1,300 Other Expenses 15,000 Total Expenses 193,300
Net Income (Loss) 16,700$
Key Ratios:Operating Profit Margin 7.95%
Sample Income Statement
Management tools to evaluate financial information to assist in decision making.
Tool for banks and investors to evaluate effectiveness of management.
Allows for comparison of industry standard. Provides trend analysis.
Key Indicators and Ratios
Detailed text provided as a supplement to the balance sheet, income statement, and statement of changes in financial position in a company's annual report to provide added facts and/or clarify unusual items or entries on the statements. These notes also provide valuable information to shareholders, such as accounting methodologies used in preparing the statements and details of pension plans, which affect the shareholders' investment in the company. They are placed after the statements so they do not obscure the data in the statements.
Read more: http://www.investorwords.com/16682/notes_to_the_financial_statement.html#ixzz2pdlMcD00
Notes to the Financial Statements(Used in Audited Statements)
A summary of incomings and outgoings of cash in a business during an accounting period. Reports the sources and uses of cash by operating activities.
Answers the questions:◦ Where did it come from?◦ Where it did it go?
Statement of Cash Flows
Accounting Data is presented in three main sections.
◦ Operating Activities: Sales of goods or services.◦ Investing Activities: Sales or purchase of an asset.◦ Financing Activities: Borrowings and repayments
of borrowings.
◦ All profit and loss information is captured here except for non-cash transactions such as depreciation or amortization.
Statement of Cash Flows
Purchasing equipment for the business with a loan would be categorized under which cash flow section?
A. OperatingB. InvestingC. Financing
Pop Quiz
Quick Ratio – (Liquidity)◦ [Cash + Mrkt Securities + AR]/Current Liabilities◦ Measures working capital/liquidity: availability
of current assets to meet current obligations. (Can I pay my bills?)
Debt to Equity Ratio – (Solvency)◦ Total liabilities/owners equity◦ Measures how company is leveraging debt
against capital employed by owners.◦ Should I invest/do I have capacity?
Key Indicators and Ratios
Operating Profit Margin (EBIT)◦ Earnings before interest & taxes / net sales◦ Measures overall operating efficiency
Net Profit Margin◦ Net income / net sales◦ Measures how much of each sale is reflected in
net income after all expenses are paid
Key Indicators and Ratios
Days Sales Outstanding (Efficiency)◦ [Receivables/Sales] x 360◦ Average time to turn receivables into cash
Inventory Turnover (Efficiency)◦ Net Sales/Inventory◦ Measures how quickly entity moves
merchandise
Key Indicators and Ratios
Financial Statements include the snapshot of the business, the story of the business and the money trail of the business for any given period.
Users are both internal and external. Understanding your financial statements is
key to making sound financial decisions and allow you to monitor the progress of your business.
In Conclusion
