Premium Essay

Analyzing and Interpreting Financial Statements

In: Business and Management

Submitted By rszierk
Words 4611
Pages 19
Module 4

Analyzing and Interpreting
Financial Statements

QUESTIONS

Q4-1. Return on investment measures profitability in relation to the amount of investment that has been made in the business. A company can always increase dollar profit by increasing the amount of investment (assuming it is a profitable investment). So, dollar profits are not necessarily a meaningful way to look at financial performance. Using return on investment in our analysis, whether as investors or business managers, requires us to focus not only on the income statement, but also on the balance sheet.

Q4-2.B ROE is the sum of an operating return (RNOA) and a nonoperating return (the effective use of financial leverage – specifically, leverage multiplied by the spread). Increasing leverage increases ROE as long as the spread is positive. Financial leverage is also related to risk: the risk of potential bankruptcy and the risk of increased variability of profits. Companies must, therefore, balance the positive effects of financial leverage against their potential negative consequences. It is for this reason that we do not witness companies entirely financed with debt.

Q4-3. Gross profit margins can decline because 1) the industry has become more competitive, and/or the firm’s products have lost their competitive advantage so that the company has had to reduce prices or is selling fewer units or 2) product costs have increased, or 3) the sales mix has changed from higher margin/slowly turning products to lower margin/higher turning products. Declining gross profit margins are usually viewed negatively. On the other hand, cost increases that reflect broader economic events or certain strategic product mix changes might not be viewed negatively.

Q4-4. Reducing advertising or R&D expenditures can increase current operating profit at the expense of the long-term competitive…...

Similar Documents

Premium Essay

Nothing

... | | |School of Business | | |ACC/230 (11/05/2012 – 01/20/2013) | | |Financial Reporting: Peeking Under the Financial Hood | Copyright © 2009, 2007 by University of Phoenix. All rights reserved. Course Description In this course, students will learn to analyze financial statements and methods used to value companies. Financial reports help managers choose between business paths. They also help investors and analysts evaluate the financial health of companies. This course is a practical means of discovering how financial data are generated and their limitations; techniques for analyzing the flow of business funds; and methods for selecting and interpreting financial ratios. It also presents analytical tools for predicting and testing assumptions about a firm’s performance. Policies Faculty and students/learners will be held responsible for understanding and adhering to all policies contained within the following two documents: • University policies: You must be logged into the student website to view this document. • Instructor policies: This document is posted in the Course......

Words: 2268 - Pages: 10

Premium Essay

Jkasdjfhsd

...University of Minnesota Carlson School of Management Spring 2014 ACCT 2050 - Introduction to Financial Accounting Professor Yu Gao CSOM 3-283 Tel: 612-624-1075 Email: gaoxx112@umn.edu Class: Section 003: Tuesday, Thursday: 11:50 am-01:30 pm, CSOM L-114 Section 006: Tuesday, Thursday: 03:45 pm-05:25 pm, CSOM L-110 Office Hour: Tuesday, Thursday: 3:00 pm – 3:40 pm, CSOM 3-283 or by appointment COURSE DESCRIPTION The course provides an introduction to the financial accounting and reporting process from the perspective of external decision makers. The course focuses on fundamental accounting concepts and principles. Students will learn how the economic transactions of an enterprise are reported in the financial statements and related disclosures. The goals of the course are to provide students with a basic set of skills that can be used to compile and analyze financial statements and to prepare students for more advanced financial statement analysis courses. COURSE MATERIALS |Text Book |Financial Accounting 7th edition; Robert Libby, Patricia Libby and Robert Short; McGraw-Hill Irwin;| |(Required) |2010. | | |Connect Access Code | I do not recommend old editions of this book, but you make the final decision. You are......

Words: 2830 - Pages: 12

Premium Essay

Importance of Finance for Non- Managers

...about the financials of a company, what it all means and impact of their actions on the bottom line. If one plans the financial side of a business accurately he/she will be able to track the progress of their business in terms of profit and cash surpluses. Accurate financial documents will allow them to keep track of their cash flow and monitor how much of their loans have been paid off. They can measure their success through accurate financial planning. Financial documents will help them in keeping the records as- when company has retained enough profits to expand and improve its business. Improving business performance requires an understanding of the components of profit and value. So as to analyze financial information, that will provide managers and business owners with effective financial skills to enable them to improve the financial performance of their business. Conclusion: Finance for Non-Finance Managers is required: To have a general understanding of business finance which will enable them to improve the profits and value of their business, including knowledge of: • improving business profit and value • understanding financial statements • analyzing financial statements to improve business performance • analyzing revenue and costs • financial analysis of business decisions • capital investment evaluation and decisions • return on investment • cash management. So that they can take decisions by: • identifying the key features of financial......

Words: 412 - Pages: 2

Premium Essay

Managerial Accounting

...Managerial Accounting, also known as Cost Accounting, is defined as: “A branch of accounting that observes and calculates the actual costs of a company’s operations. It is the process of identifying, measuring, analyzing, interpreting, and communicating information in the pursuit of a company’s business goals. “ Farlex Financial Dictionary. (2012). Retrieved from: financial-dictionary.thefreedictionary.com/Managerial+Accounting Managerial accountants provide information to managers within a company. The managers then use the information to make decisions, prepare external reports, and budgets. They make decisions by analyzing the statements to evaluate performance and control costs in the most efficient way possible to meet the company’s goal. Managerial accountants must have a bachelor’s degree, in some places a master’s degree, and in some states be a CPA. Once a person becomes a managerial accountant they can work in an office or from home depending on the employer. With the rise in globalization, the need for managerial accountants familiar with international finance is also on the rise. Managerial accounting should not be confused with financial accounting as there are many differences between the two, outlined in the following table: Financial Accounting Managerial Accounting Must be accurate and timely Usually approximate but relevant & flexible Is compulsory under company law Except for few industries, it is not mandatory Provides data for......

Words: 433 - Pages: 2

Premium Essay

Job Description

...historical reference by defining procedures for retention, protection, retrieval, transfer, and disposal of records after its expiration period. • Maintains office efficiency by planning and implementing office systems, layouts, and procurement of equipments. • Designs and implements office policies by establishing standards and procedures; measuring results against standards; making necessary adjustments. • Completes various tasks based on the requirements and follow up on work results. • Keep management informed by reviewing and analyzing special reports; summarizing information; identifying trends. • Maintains professional and technical knowledge by attending educational workshops on the web; reviewing professional publications; establishing networks; participating in professional societies. • Achieves financial objectives by preparing an annual budget; scheduling expenditures; analyzing variances; initiating corrective actions. • Contribute effort to accomplish related results as needed. • Renewal of Tenancy Contracts – Employee Residence, by having accurate information and proper documentation. • Arrange insurance for their accommodation being MPAM’s assets and renew the same on time. • Set up Insurance for the Office Premises, Assets, and Fidelity Guarantees. • Negotiate with the suppliers to get a competitive Pricing for all services required by the company i.e Rent A Car, Cleaning Companies,......

Words: 737 - Pages: 3

Premium Essay

Balance Sheet

...The Purposes and Components of Balance Sheet and Income Statement. An income statement of an organization shows its revenues and expenses during a particular period. It indicates how revenues are converted into net income. It shows revenues documented for a precise period, and the cost, taxes as well as the expenses that were charged (Helfert, 2001). The purpose of the income statement is to tell managers and investors if an organization made profit or not during the period that is being reported. Income statement represents a period of time whiles balance sheet shows the same information but at a single moment in time (Gapenski, 2012). Challenges that Might be Encountered in Interpreting Financial Statements There are certain problems and issues that might be encountered in analyzing financial statements which demand care and Verdict. The basic problem in financial statement is that there is no theory which tells us which numbers we need to look at and how to interpret them. In the absence of a fundamental theory, financial statement analysis appears to be informal and subjective. Again many organizations, particularly the big ones, have set-ups spanning a varied range of industries. This makes it very difficult in trying to find suitable standards for evaluating financial performance. In solving this issues organizations have to put in place an underlying theory and standards (Rao, 2008). This will prevent errors and confusion that arises after reading such......

Words: 352 - Pages: 2

Premium Essay

My Date

...decision to make sure it is moving forward is provided by accounting. Both managerial and financial accounting plays a big role by working along to ensure the growth of the organization is in the right path. However, both managerial and financial accounting has its own purpose of improving an organization or a business. “Earlier financial accounting experiments typically sought to determine whether specific accounting policy choices would affect investors’ decisions.” (Pg778-experimental research) (122words) Role of Financial Accounting Every organization or business should be able to know their monetary progress or else they would never be able to evaluate if the business is profitable or the other way around. “The purpose of financial accounting is to provide users of financial statements with information that is useful for efficient decision making.”(accounting for intangible-pg102).It prepares the answers to financial accountants whom are always asked by investors on how the organization or business is growing. Financial accounting reports the financial activities on the balance sheet and income of the company and cash flow statement. It is one of the limbs in accountancy to prepare financial statements for external decision makers who are implicated in the investment of the business or organization. “Financial accounting research is a broad field that examines financial communication between managers, auditors, information intermediaries, and investors, as......

Words: 1026 - Pages: 5

Free Essay

Financial Analysis

...Fourth Edition Financial Statement Analysis & Valuation Peter D. Easton University of Notre Dame Mary Lea McAnally Texas A&M University Gregory A. Sommers Southern Methodist University Xiao-Jun Zhang University of California, Berkeley Cambridge Business Publishers To my daughters, Joanne and Stacey —PDE To my husband Brittan, and my children Loic, Maclean, Quinn and Kay —MLM To my wife Susan, and my children Christian, Peter and Philip —GAS To my wife Sharon, my daughter Jasmine, and my parents 滕惠清 and 张祥林 —XZ Financial Statement Analysis & Valuation, Fourth Edition, by Peter D. Easton, Mary Lea McAnally, Gregory A. Sommers, and Xiao-Jun Zhang. COPYRIGHT © 2015 by Cambridge Business Publishers, LLC. Published by Cambridge Business Publishers, LLC. Exclusive rights by Cambridge Business Publishers, LLC for manufacture and export. ALL RIGHTS RESERVED. No part of this publication may be reproduced, distributed, or stored in a database or retrieval system in any form or by any means, without prior written consent of Cambridge Business Publishers, LLC, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Student Edition ISBN 978-1-61853-104-9 Bookstores & Faculty: to order this book, call 800-619-6473 or email customerservice@cambridgepub.com. Students: to order this book, please visit the book’s Website and order directly online. Printed......

Words: 28387 - Pages: 114

Premium Essay

Acounting Basic

...ACCOUNTING: Accounting is famously known as the "language of business". Through the financial statements, the end-product reports in accounting, it delivers information to different users. Accounting is a means through which information about a business entity is communicated. Accounting Definition: Technical definitions of accounting have been published by different accounting bodies. The American Institute of Certified Public Accountants (AICPA) defines accounting as: "the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least of financial character, and interpreting the results thereof." To further understand what accounting is, we must take a look at the different definitions. Accounting as a Science: Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgment and decisions by users of information. Accounting as an Art: Accounting is the art of recording (journalizing), classifying (posting to the ledger), summarizing in a significant manner and in terms of money, transactions and events which are, in part, at least of a financial character, and interpreting the results thereof to interested users. Accounting as an Information System: Accounting is a service activity, which functions to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in......

Words: 2265 - Pages: 10

Premium Essay

Justin Anson Distillery, Inc. Case

...it is obvious that the problem stems from costs. Analysis The Income Statement for 2012 results in a net loss due to the mistreatment of inventorial and period costs. The costs for manufacturing bourbon whiskey, that requires a 4-year-period of maturing before being ready for the market, burden current revenues. These costs (the cost of bottling, labor and supplies expense of chemical laboratory, cost of barrels used, warehouse labor and warehouse supervisor) are inventorial costs that increase the inventory amount (assets) in the Balance Sheet, and they are going to match revenues at the time they get sold, as part of Cost of goods sold in the relevant Income Statement. In the case the manufacturing costs for bottled whiskey are not considered in the Income Statement for 2012, the net loss changes into a net income of $682 million (Exhibit 1). Costs of goods sold cannot increase dramatically in case revenues constantly held. In that case, a company that has been profitable for years and is now making a good investment based on a serious market analysis can end up with a loss. It affects the company`s financial health and image in the eyes of the customers, creditors, investors, suppliers, employees and all the stakeholders. Consequently, the right allocation of costs is essential for preparing statements with relevant information that users can understand easily. This way, financial statements will be a true representation of the company`s operations and its......

Words: 429 - Pages: 2

Premium Essay

Accounting Process

...transactions of financial character that is required to be recorded In the books of accounts. Transactions is transfer of money or goods or services from one person or account to another person or account. 2. Measuring: This denotes expressing the values of business transactions and events in terms of money 3. Recording: It deals with recording of identifiable and measurable transaction and events in a systematic manner in the books of original entry that are in accordance with principles of accountancy. 4. Classifying: It deals with periodic grouping of transactions of similar nature that appear in the books of original entry into appropriate heads by posting or transfer entries 5. Summarizing: It deals with summarizing or condensing transactions in a manner useful to the users. This function involves the preparation of financial statements such as income statement, balance sheet, statement of changes in financial position and cash flow statement 6. Analyzing: It deals with the establishment of relationship between the various items or group of items taken from income statement or balance sheet or both. Its purpose is to identify the financial strengths and weakness of the enterprise. The above six present day scenario are generally performed using software packages 7. Interpreting: It deals with explaining the significance of those date in a manner that the end users of the financial statement can make a meaningful judgment about the profitability and......

Words: 544 - Pages: 3

Premium Essay

Candela Corporation

...Analyzing a Summary Analysis for Candela Corporation Analyzing a Summary Analysis To analyze a statement of cash flow means to investigate the cash flow of a company's operations, and study the cash inflows and outflows. Candela had severe growth in 2002 that severely affects the net cash of operating activities. Analyzing the cash flow may have given Candela the opportunity to change its cash from operations. An analysis of a cash flow will give the reader an indication of what changes would improve the company's growth. A cash flow statement divides three functions of a business into operating, investing, and financing. Interpreting the information is essential for a creditor, banker, investor, or even management. The cash flow provides details of cash changes between the periods of other statements. One of the most important factors is how the cash outflow reduces the inflows, and the effect each may have on operations. The details from the cash are taken from the balance and income statements (Fraser & Ormiston, 2007).. The Candela Corporation provides laser systems for the medical field. Performance of laser treatments are cosmetic, or necessary removal of a variety of undesirable physical appearances. Candela provides laser systems worldwide. An increasing desire of improving physical appearance among Baby Boomers contributes to Candela's growth in the 1990s (Fraser & Ormiston, 2007). In 2002, Candela's consolidated cash flow statement shows a net cash from......

Words: 872 - Pages: 4

Premium Essay

Bsbhrm506A

...system Job Purpose: Provides financial information to management by researching and analyzing accounting data; preparing reports. Job Duties: * Prepares asset, liability, and capital account entries by compiling and analyzing account information. * Documents financial transactions by entering account information. * Recommends financial actions by analyzing accounting options. * Summarizes current financial status by collecting information; preparing balance sheet, profit and loss statement, and other reports. * Substantiates financial transactions by auditing documents. * Maintains accounting controls by preparing and recommending policies and procedures. * Guides accounting clerical staff by coordinating activities and answering questions. * Reconciles financial discrepancies by collecting and analyzing account information. * Secures financial information by completing data base backups. * Maintains financial security by following internal controls. * Prepares payments by verifying documentation, and requesting disbursements. * Answers accounting procedure questions by researching and interpreting accounting policy and regulations. * Complies with federal, state, and local financial legal requirements by studying existing and new legislation, enforcing adherence to requirements, and advising management on needed actions. * Prepares special financial reports by collecting, analyzing, and summarizing account......

Words: 716 - Pages: 3

Premium Essay

Cash Flow Statements

...Upon studying its statement of cash flows, you note that over the last three years a firm has consistently reported negative cash flow from operating activities, positive cash flow from investing activities, and negative cash flow from financing activities. What does this combination of cash flows suggest to you about the firm? Is there any additional information that you would like to see? If so, what? When a company spends more than it receives, it is said to have a ‘negative’ cash flow. Negative cash flows are often viewed as indicators of financial ill health by investors. However, if this is a startup company, one could expect negatives on all cash flows as it grows customer base. That's why you need to look at income statements, balance sheets and read the annual reports before you can truly ascertain the health of a company. The cash flow from investing activities also indicates a firm’s ability to invest in non-current assets. If the company generates enough cash to invest continually in property, plant and equipment as well as other fixed assets, it is an indication that the firm aims at replacing technologically obsolete equipment to keep up with the latest trends. Increase in fixed assets indicates capital expansion and future growth. Negative cash flow from operations isn’t always bad. Because of the high costs of growing a business, it’s normal for fast-growing companies to spend more cash than they generate. Typically, such companies may rely on bank......

Words: 455 - Pages: 2

Premium Essay

Fsa-Homework5-7

...assets. The following table shows estimated useful lives of property and equipment. Classification Estimated Useful Lives Buildings 10 to 50 years(average 27 years) Equipment 3 to 20 years(average 11 years) During 2010, the company reported $1,207,450 ($000s) for depreciation expense. Required a. Compute the estimated useful life of Abbott Laboratories’ depreciable assets. How do you interpret this figure? b. Compute the estimated percent used up of Abbott Laboratories’ depreciable assets. How do you interpret this figure? E7 – 33 Determining Bond Prices, Interest Rates, and Financial Statement Effects Deere& Company’s 2010 1o K reports the following footnotes relating to long-term debt for its equipment operations subsidiary. Deere’s borrowings include $300 million, 7.125% notes, due in 2031. Long-term borrowings at October 31 consisted of the following in millions of dollars: Notes and debentures | 2010 | 2009 | 6.95% notes due 2014:($700 principal) Swapped $300 to | | | variable interest rate of 1.25%-2009 | $763 | $800 | 4.375% notes due 2019 | 750 | 750 | 7-1/2% debentures due 2022 | 105 | 105 | 6.55% debentures due 2028 | 200 | 200 | 5.375% notes due 2029 | 500 | 500 | 8.10% debentures due 2030 | 250 | 250 | 7.125% notes due 2031 | 300 | 300 | Other notes | 461 | 168 | Total |......

Words: 2702 - Pages: 11