Fundemental Characteristics of Financial Reporting (RF)
1.) Relevance
2.) Faithful Representation
Fundemental Characteristic #1:
2 Aspects of Characteristic (PC)
Relevance: Can make a difference in a decision
Predictive Value
Confirmatory Value
Fundemental Characteristic #2:
3 Aspects of Characteristic (NFC)
Faithful Representation: Describes events purported to represent
Neutrality
Free of errors
Completeness
Enhancing Charaacteristics (CUTV):
Comparability
Understandability
Timeliness
Verifiability
Constraints (CM)
Cost Effective
Materiality
2 Components of Discontinued Operations:
Gain/Loss from discontinued segment
Gain/Loss on sale disposal of segment
Accting for Discontinued Operations:
Insert after 'Income from Continued Operations (post-tax)' - NET TAX
2 components of Extraordinary Events: Example:
Unual AND Infrequent
Example: Disasters
Accting for Extraordinary Events:
Below 'Income from Cont'd Ops' and below 'Discnt'd Ops' (if applicable)
"Other Items" affecting N/I Example:
Unusual OR Infrequent (not both)
Example: Restructing Costs
Accting for Other Items
Included at end of calc of 'Income from Cont'd Ops (pre-tax)'
Treatment of corrections or errors in filings
Applied RETROACTIVELY
Treatment of changes in Accouting Principles (Mandatory & Voluntary)
Mandatory: Per Standard
Voluntary: Retroactively
Treatment of changes in estimates
Applied PROSPECTIVELY - use new method going forward, no adjustment to previous years.
Compehensive Income =
N/I [Rev - Exps +Gains - Losses] + OCI
Examples of OCI:
Foreign Currency Transactions Gains/Losses
Unrealized Gains/Losses on marketable securities
Exercise of stock options
Why OCI items are not included in N/I
Volatility of earnings from FV accting.
Most common presentation of Comprehensive Income:
S/E Statement, difficult to read and hidden from income statement
Scaling of Financial Statements
Puts numbers into %'s of a total
Income Statements Scaling
Represents all numbers as % of Sales
Balance Sheet Scaling
Puts all numbers as % of Assets
Benchmarks of Financial Analysis
Histrocial Data
Industry Performance
Analysts Expectations
Absolute Benchmarks
Current Ratio (equation and meaning):
Currents Assets / Current Liabilities
Shows liquidity of firm to pay debts due within 1 year
Quick Ratio (equation and meaning):
(Cash+A/R+Short Term Investments) / Current Liabs.
Ammount of cash that can be generated in short time
Debt to Equity (equation and meaning):
Total Liab / Total S.E.
Proportion of assets borrowed vs. assets owned.
Higher Ratio = Higher Leverage = Higher Risk
Times Interest Earned (equation and meaning):
(N/I + Int Exp + Tax) / Int Exp
# of times Interest owed could be paid with current earnings
A/R Turnover Ratio (equation and meaning):
Sales / Avg. A/R
# of times A/R was filled and collected in a year
Inventory Turnover Ratios (equation and meaning):
COGS / Avg Inv.
# of times Inventory was filled and emptied in year
Days To Collect (equation and meaning):
365 / A/R turnover Ratio
Avg. # of days to collect accounts
Days In Inventory (equation and meaning):
365 / Inv. Turn. Ratio
# of days inventory on hand
Assets Turnover (equation and meaning):
Sales / Avg. Tot. Assets
How much sales are generated from assets owned
Profit Margin (equation and meaning):
N/I / Sales
How much of each $1 in sales is kept as profit
Return on Assets (equation and meaning):
N/I / Avg. Tot. Assets
FIRM PROFITABILITY
How much every dollar of assets contributes to profits
Return on Equity (equation and meaning):
N/I / Avg. Tot. S.E.
SHAREHOLDERS PROFITABILITY
Share of profits from owners contributions
Leverage (Equation and Meanings):
Avg. Tot. Assets / Avg. Tot. S.E.
Proportion of total asets owned by firm
Dupont Analysis
ROE = Profit Margin X Asset Turn X (1+Leverage)
Income Statement:
Sales
(COGS)
___________ (Operating Expenses)
+/- Other Items
___________ +/- Other Rev & Exps
___________ (Tax Expense)
Income From Cont'd Ops (post-tax)
+/- ___________ +/- ___________ = Net Income
Sales - COGS = Gross Margin
- Oper Exps - Other Items = Operating Income
+/- Other Rev & Exp = Income from Con't Ops
- Tax Expense = Inc from Cont'd Ops (post-tax)
+/- Discontiued Operations
+/- Extraordiary Events = Net Income
Firm Value =
NPV of future Cash Flows
Cash Flow (Operating)
Cash Recieved From Customers
(Cash Paid for Expenses)
= Cash Flow From Operations
Cash Flow (Investing)
( Cash paid for Long Term Assets)
= Cash Flow From Investing Activities
Cash Flow (Financing)
Cash contributed by owners
Cash Received from Loans
= Cash Flow from Financing Activities
Cash Flow Statements
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Cash Flow From ___________ Activies
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Cash Flow From ______________ Activies
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Cash Flow From ______________ Activies
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Total Cash Flow XX
____Bal XX
______ Bal XX