Learn: Financial Accounting for MBAs Module 1 | Quizlet

Operating Activities

Companies hire and train employees, manufacture products, deliver services, market and sell their goods, and manage customer support

Investing Activities

Acquiring land, buildings, and equipment, grow business w/ new products/services or acquire other companies (expand in new markets)

Financing Activities

Company raises cash to fund operation and investing activities

ex. selling stock or borrowing from banks/other lenders

Business Forces (3)

Market conditions, competitive pressures and regulations

How do investors/company analysts use financial reporting?

To judge a company's profitability and financial strength, to make reasonable estimates of the company's equity securities

How do lenders and credit analyst use financial reporting?

to assess a company's ability to repay debts and manage credit risk associated with the company's debt securities

How do company managers use financial reporting?

to inform decisions such as where to invest scarce resources, how to finance those investments, how to maximize the company's profitability, and how much cash to maintain

What product lines, geographic areas, or other segments are performing well compared with our peer companies and our own benchmarks?

Managers and employees use of financial information.

Should we consider expanding or contracting our business?

Managers and employees use of financial information.

How will current profit levels impact incentive and share-based compensation?

Managers and employees use of financial information.

What are expected future profits, cash flows, and dividends for input into stock-price models?

Investment analysts and information intermediaries use of financial information.

Is the company financially solvent and able to meet its financial obligations?

Investment analysts and information intermediaries use of financial information.

How do expectations about the economy, interest rates, and the competitive environment affect the company?

Investment analysts and information intermediaries use of financial information.

Should we extend credit in the form of a loan or line of credit for inventory purchases?

Creditor and supplier use of financial information.

What interest rate is reasonable given the company's current debt load and overall risk profile?

Creditor and supplier use of financial information.

Is the company in compliance with the existing loan covenants?

Creditor and supplier use of financial information.

Covenant

Contractual agreement normally included in loan agreements that restrict the borrower's behavior

Is the company management demonstrating good stewardship of the resources that have been entrusted to it?

Stockholders and directors use of financial information.

Do we have the information we need to critically evaluate strategic initiatives that management proposes?

Stockholders and directors use of financial information.

Will the company be a reliable supplier?

Customers and strategic partners use of financial information.

Is the strategic partnership providing reasonable returns to both parties?

Customers and strategic partners use of financial information.

10-K

AUDITED ANNUAL report that includes the four financial statements, with explanatory notes, and the management's discussion and analysis (MD&A) of financial results; filed 60-90 days after end of year

10-Q

The UNAUDITED QUARTERLY report that includes summary versions of the four financial statements and limited additional disclosures; filed 40-45 after quarter end

Costs of Disclosure(4)

-Preporation & dissmeniation costs

-Competitive disadvantages

-Litigation

-Political costs

Regulation Fiar Disclosure (Reg FD)

Curbs selective disclosure by public companies (issuers) to certain stockholders/financial analysts

AICPA

American Institute of Certified Public Accountants

GAAP

Generally Accepted Accounting Principles

IFRS

International Financial Reporting Standards; other countries GAAP

IASB

International Accounting Standards Board

FASB

Financial Accounting Standards Board

Four kinds of financial statements

-Balance Sheet

-Income Statement

-Statement of Stockholders Equity

-Statement of Cash Flows

-Reports companies finianical postion at one point in time

-Reports company resources (assets) and sources of assets (owner or non-owner)

Balance Sheet

Owner financing

From stockholders

Non-owner financing

banks or other creditors and suppliers

Other name for owner claims

Equity

Other name for non-owner claims

liabilities/debt

Accounting equation

Equity + Liabilities = Assets

Short term assets

Expected to generate cash within one year to balance sheet date

Long term assets

Will generate over a period of time - land, buildings, equipment

Resources, normally cash, contributed to company and profits are retained

Owner (or equity) financing

Borrowed financing

Non-owner financing (or liabliites/debt)

-Company's performance over period of time

-Lists topline revenues & its expenses

Income Statement

Topline revenues

Sales

Bottom-line net income

Revenues minus expenses, also called profits or earnings

COGS

Cost of goods sold

SG&A

selling, general, and administrative expenses

-Reports year-over-year changes in the equity accounts that are reported on the Balance Sheet

-Reports beginning balance, summary of the year's actions on the account, and closing balance

Statement of Stockholders Equity

Stockholders' net contributions to the company

Common stock and additional paid-in capitol

The cumulative total amount of income the company has earned and that has been retained in the business, links consecutive balance sheets via the income statement

Retained Earnings or reinvested capital

Beginning retained earnings + Net income for the period - dividends and other distributions to shareholders =

Ending retained earnings

-Reports changes in the company's cash balance over time (from operating, investing, and financial activities)

Statement of Cash Flows

Accounting Equation

Resources = Non-Owner + Owner

or

Assets = Liability + Equity

Asset

Resources a company has at its disposal

Owner Financing

Resources contributed by owners and profits retained by company

Non-Owner Financing

Debt. Will need to be repaid

What is the phrase for when a statement includes company and all subsidiary information?

Consolidated Statement

Income Statement

-Revenues

-Expenses

How do you calculate net income?

Revenues - Expenses = Net Income

How do you gross profit income?

Revenues - (Costs of Goods Sold) COGS = Gross Profit

What is a key factor to determining a company's level of operating profitablity?

Ability to create barriers to competitive pressure

How does a company create barriers to competitive pressure?

Patent protection or effective marketing

Statement of Stockholders Equity

Year over year changes in equity accounts reported on the Balance Sheet

-Common stock & additional paid in capital (Stockholders net contribution to company)

-Retained earnings

How do you calculate retained earnings?

(All Dividends Paid + All Stock Repurchases that are Held Not for Sale) - Net income Over the Life of the Company = Retained Earnings

Another phrase for negative retained earnings

Accumulated Deficit

Statement of Cash Flows

Money in & out for operating, investing, and financing

What business analysis uses competition, barganing power of buyers, bargaining power of suppliers, threat of substitutuion, and threat of entry to analyze a company's advantage?

Porter's Five Five Analysis

How does Porter's Five Five Analysis use competition to analyze a company's advantage?

How does the company's competition raise the costs of doing business

How does Porter's Five Five Analysis use bargaining power of buyers to analyze a company's advantage?

How do buyers with strong bargaining power extract price concessions?

-ex. buying in bulk, how textbooks were negotiated

How does Porter's Five Five Analysis use bargaining power of sellers to analyze a company's advantage?

How do sellers with strong bargaining power demand higher prices?

-ex. the people who build turbines with increase in demand, price goes up

How does Porter's Five Five Analysis use threat of substitution to analyze a company's advantage?

Is there a cheaper alternative?

How does Porter's Five Five Analysis use threat of entry to analyze a company's advantage?

Is there a possibility of new market entrants increasing competition?

How does a company prevent the threat of substitution?

Product/Service diferentation

-better product design, better customer service, better marketing distribution, technoloical innovation

How does a company prevent the threat of entry?

-Economies of scale

-Barrier to entry: patents, copy rights, other legal provisions

What business analysis uses postitive, negative, internal, and external factors to analyze a company's advantage?

SWOT Analysis

How does a company become a cost leader?

-Access to low cost raw materials or labor

-Manufacturing or service efficiency

-Greater bargaining power

-Sophisticated IT systems

What does ESG Reporting stand for?

Environmental, Social, and Governance Reporting

How do you calculate ROA?

Net Income / Average Assets = ROA

How do you calculate Profitability (Profit Margin/PM)?

Net Income / Sales = PM

How do you calculate Productivity (Asset Turnover/AT)?

Sales / Average Assets = AT

A company must manage ______ and ______ to achieve high levels of financial performance?

-Income Statements (profit)

-Balance Sheet (assets)

How do you calculate return on equity?

Net Income / Average Stockholders Equity = ROE

How do you calculate the average stockholders equity?

Average the Stockholders Equity from the start of the year and end of the year

Net income earned on each sales dollar

Profit Margin (PM)

Sales generated by each dollar of assets

Asset Turnover (AT)

Why is there a natural postiive relation between expected earnings and stock prices?

Stockholders expect dividends (paid out of earnings)

What does the PM represent?

Every dollar of sales the company recorded (X) amount of net income

What does ROA represent?

For every dollar of average assets, the company recorded (X) net income

What does AT represent?

For every dollar of average assets, the company recorded (X) in sales

What do these questions represent

-Does the company have an advantage? If so, what factors explain the advantage?

-If company has no competitive advantage, does its management plan to develop a sustainable advantage?

Analyzing the company advantage

Barriers to Entry

allows a company to achieve a competitive advantage and charge higher prices for their vices and thereby earn excess returns

Product Differentiation

Allows companies to earn excess returns - typically achieved from technological innovation that produces products and services with attributes valued by customers and not easily replicated by competitors

Cost Leader

strategy to recieve excess returns, found through access to low-cost raw materials or labor (while maintaining quality), manufacturing or service efficiency in the form of cost-efficient processes and manufacturing scale efficiencies, greater barganing power with suppliers, sophisticated IT systems that permit timely collection of key information and other avenues

Strategic Plans

If no competitive advantage, -- can the plan be achieved at ana cceptable cost given the current state of the industry?

Sustainability and Validity

Assess company through a critical and thorough investigation of financial statements, its footnotes, the MD&A, and all publicly available information

Summarizes data and describes observable patterns

Descriptive Analytics

Data analysis that seeks to understand what happened and why

Diagnostic Analytics

Data analysis that seeks to understand what is likely to happen and why

Predictive Analytics

Data analysis that suggests nexts steps

Prescriptive Analytics

What are the four type of data analytics?

Descriptive, Diagnostic, Predictive, and Prescriptive

What does SEC stand for?

Securities and Exchange Commission