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Chapter 15

Using Management and Accounting Information


MGT1101 Introduction to Business
Learning Objectives
For Chapter 5

1. Identify the people who use accounting information and possible careers
in the accounting industry.
2. Discuss the accounting process.
3. Read and interpret a balance sheet.
4. Read and interpret an income statement.
5. Describe business activities that affect a firm’s cash flow.
6. Summarize how managers evaluate the financial health of a business.

MGT1101 Introduction to Business Chapter 15


Refer to page 437

Accounting
A Definition

Examples of Financial
Information
The process of systematically How much profit did a
collecting, analyzing, and business earn last year?
report financial information
How much tax did a business
pay?

How much cash does a


business have to pay lenders?

MGT1101 Introduction to Business Chapter 15


Refer to page 438

Who Use Accounting Info.


The Users

Management Lenders and Stockholders Government


and Employees Suppliers and Investors Agencies

•• Planning
Confirm and
Evaluatetax Setting
credit
financial Goalsbeforeofcommitting
applicants
performance
liabilities firm beforeto short-term
buying stocksor long-term
• Organizing
financing
•• Leading
Evaluateand
Approve themotivate
new risk of aofcompany’s
issues stocks andsecurities
bonds (stocks or bonds)
• Control
Evaluate risk of nonpayment before selling products to firm

MGT1101 Introduction to Business Chapter 15


Refer to page 440

Different Types of Accounting


Two Broad Categories

• To provides managers and employees


within the organization with information
needed

• to make decisions about a firm’s financing,


investing, marketing, and operating activities
Management and Employees

MGT1101 Introduction to Business Chapter 15


Refer to page 440

Different Types of Accounting


Two Broad Categories

generates financial statements and reports for


interested people outside an organization

Lenders and Stockholders Government


Suppliers and Investors Agencies
MGT1101 Introduction to Business Chapter 15
Refer to page 441
Accounting (Financial) Reports
Financial Statements

Balance Sheet
A summary of the dollar amounts of a firm’s assets,
liabilities, and owners’ equity

Income Statement
A summary of a firm’s revenues and expenses during a
specified accounting period

Cash Flow Statement


A report of the cash generated and used during the
specified time interval

MGT1101 Introduction to Business Chapter 15


Refer to page 441
1. Balance Sheet
A summary of the dollar amounts of a firm’s assets, liabilities, and owners’ equity
It can be called Statement of Financial Position

a company has to pay for all the things it has (assets) by either borrowing money
(liabilities) or getting it from shareholders (shareholders' equity)

MGT1101 Introduction to Business Chapter 15


1. Balance Sheet Refer to page 441
A summary of the dollar amounts of a firm’s assets, liabilities, and owners’ equity

Assets
money and other valuables belonging to
an individual or business.
Types 1: Current Assets
can quickly be converted into cash or that
will be used in one year or less
Type 2: Fixed (Non-current) Assets
will be held or used for a period longer than
one year

MGT1101 Introduction to Business Chapter 15


1. Balance Sheet Refer to page 442
A summary of the dollar amounts of a firm’s assets, liabilities, and owners’ equity

Liabilities
debts of the business, represent creditors
claim on business assets
Types 1: Current Liability
debts to be repaid in one year or less
Type 2: Long-term (Non-current) Liability
debts that need not be repaid for at least one
year

Equity
funds "owing" to shareholders
Amount of fund (money) invested by owners

MGT1101 Introduction to Business Chapter 15


Exercise

Total Current Assets = 369,525-300,000 = 69,525


Total Assets = Total Current Assets + Total Non-current
369,525 300,000 Assets

?
Total Liabilities
? 40,000
Liabilities = Current Liabilities + 106,000 Liabilities
+ Non-current
Accounting Equation

Assets = Liabilities + Equity


MGT1101 Introduction to Business Chapter 15
2. Income Statement Refer to page 446
A summary of a firm’s revenues and expenses during a specified period

COGS: Consider only direct cost or


cost directly related to production
process

Operating Expenses: cost related


to selling and operating activities

Interest Expenses: Consider cost of


debts or liabilities

MGT1101 Introduction to Business Chapter 15


3. Statement of Cash Flow Refer to page 449
A report of the cash generated and used during the specified time interval
Distinct from the income statement and balance sheet
because it does not include the amount of future incoming
and outgoing cash that has been recorded on credit.

Cash flow is determined by looking at three


components by which cash enters and leaves a
company:

Operating, Investing and Financing


activities

MGT1101 Introduction to Business Chapter 15


Part 2

Evaluating Firm’s Financial Performance


By Using Financial Ratios
Refer to page 450

Financial Ratio
Measuring Firm’s Financial Performance

Financial Ratio: A tool to measure or evaluate firm’s financial


performance. Fraction of two values from financial reports
Two type of Analysis
 The firm’s own past ratios (Trend Analysis)
 Ratios of competitors or industry (Cross-sectional Analysis)

Trend Analysis Cross Sectional


MGT1101 Introduction to Business Chapter 15
See chapter supplement

Financial Ratio
Measuring Firm’s Financial Performance

4 Aspects of financial performance:


1. Liquidity Measurement (Example: Current Ratio)
2. Profitability Indicator (Example: Net Profit Margin)
3. Operating Performance (Example: Total Asset Turnover)
4. Debt Management (Example: Debt to Equity Ratio)

MGT1101 Introduction to Business Chapter 15


See chapter supplement

1. Liquidity Ratio
Financial Ratios

To analyze a company's ability to meet short-term financial obligations


Trend Analysis

100

2009
0.5
Current Ratio
200
Current assets are half of current liabilities
Measures
400

2010
ability to pay back its short-term liabilities with its short-term 2
assets. 200 liabilities
Current assets are two times of current
In 2010,
The higher the current ratio, the more capable the company’s ability to pay for
company is of paying its obligations. short-term debt is improving from 2009
MGT1101 Introduction to Business Chapter 15
See chapter supplement

2. Profitability Ratios

To analyze firm's ability to control expenses and earn profits through the
use of company's resources. Cross-sectional

50

Co. A
0.25
Net Profit Margin
200
25%
Profit is 25% of sales
Measures
120

Co. B
how much out of every dollar of sales a company actually 0.20
keeps in earnings. (How many %Profit
of sales
is is
20%profit?)
of sales 600 20%
A higher profit margin indicates a more profitable company
Co.A has ability to control cost
that has better control over its costs and make profit than Co.B has
MGT1101 Introduction to Business Chapter 15
See chapter supplement

3. Operating Performance
Or Asset Management Ratios

To analyze how quickly a company's resources can be converted


to cash or sales. Cross-Sectional
Each dollar of total asset investment can generate 0.20 dollar of sales
100

Co. A
0.20
Total Asset Turnover 500
20%
Each dollar of total asset investment can generate 0.23 dollar of profit
Measures 90

Co. B
measures a firm's efficiency at using its assets in
0.23
generating sales or revenue - the higher the number 400 23%
the better.
Co. B is better than Co.A in using its total assets to
generate sales
MGT1101 Introduction to Business Chapter 15
See chapter supplement

4. Debt Management Ratios


Or leverage ratios

To analyze the degree and effect of a company's use of borrowed funds


(debt) to finance its operations. Cross-Sectional
The total assets are equally financed by debt and equity
250

Co. A
1
Debt to Equity Ratio 250
The total assets are financed by equity more than by debt
Measures 200

Co. B
0.5
Indicates the relationship between the debt financing and
equity financing.
400
A high ratio generally means that a company has been
Co. A is more aggressive in financing its growth
aggressive in financing its growth with debt.
with debt than Co. B is
MGT1101 Introduction to Business Chapter 15
See chapter supplement

The Summary

Measurement Analyzing Example Formula Interpretation


1. Liquidity Ability to repay S-T Current Ratio = CA/CL Higher CR  Higher
debt (CR) ability to repay S-T debt
2. Profitability Ability to make Net Profit = NP/Sales Higher NPM  Higher
profit Margin (NPM) ability to make profit
3. Operating Ability to use Total Asset = Sales/TA Higher TATO Higher
assets Turnover ability to use assets to
(TATO) make revenue
4. Debt The degree of Debt to Equity =TL/TE Higher D/E  Relying
using debt Ration (D/E) more on debt financing

MGT1101 Introduction to Business Chapter 15


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