DECA Financial Analysis PI's Tier 3

Discuss the nature of depreciation

Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes.

Describe the nature of cash flow

Incomings and outgoings of cash, representing the operating activities of an organization.

In accounting, cash flow is the difference in the amount of cash available at the beginning of a period (opening balance) and the amount at the end of that period (closing balance). It is called positive if the closing balance is higher than the opening balance, otherwise called negative. Cash flow is increased by (1) selling more goods or services, (2) selling an asset, (3) reducing costs, (4) increasing the selling price, (5) collecting faster, (6) paying slower, (7) bringing in more equity, or (8) taking a loan. The level of cash flow is not necessarily a good measure of performance, and vice versa: high levels of cash flow do not necessarily mean high or even any profit and high levels of profit do not automatically translate into high or even positive cash flow.

Discuss the nature of corporate bonds

The corporate bond is a debt instrument, and the company's payment ability is its backing, typically in the form of profits from future operations. The physical assets of a business entity may also serve as collateral for corporate bonds.

Discuss the cost of corporate bonds

Bond prices are quoted as a percentage of the face value of the bond, based on $100. For example, if a bond is selling at 95, it means that the bond may be purchased for 95% of its face value; a $10,000 bond, therefore, would cost the investor $9,500. Interest on bonds is usually paid every six months.

Discuss the issuance of stock from a corporation

Preferred stock, common stock, additional paid‐in‐capital, retained earnings, and treasury stock are all reported on the balance sheet in the stockholders' equity section. Information regarding the par value, authorized shares, issued shares, and outstanding shares must be disclosed for each type of stock.

Discuss the cost of common stock

Companies sell shares to grow or expand. This way, the owner gets the money to expand his business and make more profit, and the lender gets a portion of profit every time the company makes some.

Discuss the nature of stock options

An initial public offering (IPO) is the first time that the stock of a private company is offered to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded.

Discuss the nature of Initial Public Offerings

An initial public offering (IPO) is the first time that the stock of a private company is offered to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded.

Describe the components of a payment system

A payment system is any system used to settle financial transactions through the transfer of monetary value, and includes the institutions, instruments, people, rules, procedures, standards, and technologies that make such an exchange possible.

Describe components of a collection system

Cash payments, primarily from individuals in a retail business

Checks, from individuals in a retail environment and business customers

Credit and debit card payments from individuals and businesses

Online payment methods such as PayPal, from individuals and companies.

Credit or payment plans, from both individuals and business customers.

Other external payment sources, such as insurance companies, in certain types of companies.

Manage bank accounts (e.g., scoper of services, fee sutructures, system integration)

Describe the nature of short-term financial management

Companies develop short-term financial plans to meet budget and investment goals within one fiscal year. These plans have a higher degree of certainty compared to long-term plans. Short-term plans often are amended as financial and investment goals change. Businesses and individuals alike use short-term plans to manage short-term cash deficits.

Describe the cash management procedures

Cash Management Procedure. ... The company should ensure cash availability through managing cash on hand, cash deposits in daily, medium, and long term accounts, and cash disbursements to best meet the company cash and liquidity needs while managing risk.

Explain the use of cash budgets

A cash budget is an estimation of the cash inflows and outflows for a business over a specific period of time, and this budget is used to assess whether the entity has sufficient cash to operate.

Analyze the impact of accounts payable schedules on working capital

The schedule of accounts payable is a listing of all vendors in the accounts payable ledger that the company currently owes money along with the current account balances. In other words, the schedule of accounts payable is a list of all the people whom the company owes in the accounts payable system. (Relates to how to calculate working capital).

Analyze the impact of accounts receivable collection on working capital cycle

Accounts receivable collection becomes necessary when customers or clients do not pay their accounts when they fall due, and when they become overdue. This affects the working capital cycle because the money owed to the client is need calculate the working capital.

Discuss the impact of employee benefits on business financials

By helping employees achieve financial wellness, businesses can increase employee loyalty, build and maintain productivity, and improve job satisfaction. But the benefits are cut from the profits of the business.

Discuss the impact of obsolescence on business expense

In accounting, useful life is related to the concept of depreciation. At the end of an asset's useful life, it becomes "fully depreciated,"and is written off the business balance sheet. The difference between the cost basis of the asset and its value at write off is considered a capital loss, which affects the business taxes.

Prepare cash flow budgets/forecasts

A cash flow forecast is the most important business tool for every business. The forecast will tell you if your business will have enough cash to run the business or pay to expand it. It will also show you when more cash is going out of the business, than in.

Use below Cash flow worksheet to forecast and record cash flow. The worksheet will update your figures as you type.

The easiest way to prepare a cash flow forecast is to break the task into several steps. Then bring all the information together at the end.

For existing businesses, look at last year's sales figures. Then decide what adjustments you will need to make based on past trends, i.e. sales increasing or decreasing, or staying the same.

If you're a new business, when you prepare your cash flow forecasts, start by estimating all the cash outflows. If you do this you'll get an idea of how much cash needs to come in to cover the cash going out, and therefore what sales you'll need to make to cover this.

Analyze cash budget/forecast variances

Sales figures always change because they depend on various factors, such as the types of customers you sell to, how quickly they have to pay you, what the economy is doing (e.g. interest rate increases or unemployment rates), and what your competitors are doing.

Evaluate leases

A lease is a contractual arrangement calling for the lessee to pay the lessor for use of an asset. Property, buildings and vehicles are common assets that are leased. Industrial or business equipment is also leased.

There are various kinds of financial lease by which assets like land, buildings, equipment, vehicles and others can be leased for a specific period. The duration of the lease period varies with different assets. It can be either a long-term or intermediate-term lease arrangement, depending on the life and nature of the asset. Throughout the lease period, the lessor remains the owner, and the lessee has to pay the interest and other applicable payments but can enjoy using the asset.

Legal Restrictions

There are four basic qualification criteria for financial leases in the United States. Every financial lease should satisfy one of these four criteria:

The lessor must give the lessee an option of purchasing the leased asset at a low price at the end of the lease period.

The purchase price of the leased asset after the end of lease period must be lower than the market value of the asset.

The lease period must cover at least 3/4 of the projected life of the asset to be leased.

The net value of all payments made during the lease period should cover at least 90 percent of the original purchase value of the asset, so that after the lease and final purchase, the lessor should eventually have made profits.

Develop policies to manage trade credit

For many businesses, trade credit is an essential tool for financing growth. Trade credit is the credit extended to you by suppliers who let you buy now and pay later. Any time you take delivery of materials, equipment or other valuables without paying cash on the spot, you're using trade credit.

Trade credit insurance

Trade credit insurance, business credit insurance, export credit insurance, or credit insurance is an insurance policy and a risk management product offered by private insurance companies and governmental export credit agencies to business entities wishing to protect their accounts receivable from loss due to credit risks such as protracted default, insolvency or bankruptcy.

Explain the role of capital markets in business finance

calculate stock-related values (e.g., the value of a constant growth stock, the expected value of future dividends)

Calculate bond-related values (e.g., the price of a bond given its yield to maturity, the coupon interest payment for a band, the effects of interest rates on the prie of a bond, etc.)

Explain the nature of capital investment

Explain methods used to analyze capital investments