1. 1. 1 Basic principles of Accounting & Financial Analysis Roger Claessens, Prof. UBI
2. 2. Accounting&Financialanalysis 1 The need for financial reporting 2 The balance sheet 3 The basic rules of accounting 4 The profit and loss account 5 The structure of a balance sheet 6 Financial flows 7 Key financial ratios 8 Different balance sheets Basic principles of accounting & financial analysis
3. 3. A learning Curve Step by StepA learning Curve Step by StepStepbystep Knowledge in accounting Time
4. 4. Theneedforfinancialreporting 1 Sources of information 2 Management reports 3 Financial and legal requirements Basic principles of accounting & financial analysis 2 3
5. 5. What are indicators that things are going, or not going, as they should? FinancialReporting Financial reporting
6. 6. Sources of financial informationFinancialReporting Why do we need financial information? What could be the sources of financial information? What might be the difference between management accounts and statutory accounts, and who needs them?
7. 7. FinancialReporting Financial reporting CarCar Accelerator Gear Brake ActualActual SpeedSpeed DriverDriver SpeedometerSpeedometerDesiredDesired SpeedSpeed Control actionsControl actions
8. 8. FinancialReporting Financial reporting BusinessBusiness Key Performance Indicators ActualActual ResultsResults ManagerManager ReportsReportsBudgetedBudgeted ResultsResults Control actionsControl actions
9. 9. The need for financial reportingFinancialReporting The speedometerThe speedometer = information that allows for control : daily recording of activities the financial situation the financial activities the situation versus budget Performance improvement depends on the use and reliability of financial information:
10. 10. Management requires control Control requires knowing what is happening Knowing what is happening requires reporting Management reportsManagement reports PERFORMANCE MANAGEMENT CONTROL REPORTING FinancialReporting
11. 11. Financial and legal requirementsFinancialReporting Statutory Annual After audit Legally defined Accurate Public record Management Monthly Promptly after the end of the period Suited to individual needs Estimate / Provisions Internal Use
12. 12. The four functions of management : Manage1 MEMO : MOPC 2 Organise 3 Plan 4 CONTROL FinancialReporting The need for financial reporting
13. 13. What type of information do managers need ? We really need various types of information: Financial : % Gross Margin / Invested capital Commercial : Total credit cards sold Activities : Total calls made FinancialReporting
14. 14. The annual accounts do not provide real time information, we need information reports which allow for timely controls and allow for: The comparison of results versus budget Fast actions in order to improve performance The assurance that the company is on the right track! FinancialReporting What type of information do managers need ?
15. 15. The three sources of financial information There are 3 sources of financial information: The balance sheet shows what the company has and what it owes The Profit and Loss Account or Income statement shows what the company earns or looses (results) The cash flow report the source and application of funds Basicprinciplesofaccounting
16. 16. The three sources of financial information The car dealer as a base for many examples. Why? Simple process : purchase - show room (stock) sales No production, we do not take into account the other activities, such as maintenance. Basicprinciplesofaccounting
17. 17. The need for financial reportingFinancialReporting A?A? A?A? A?A? A?A? A?A? ProfitProfit A?A? Profit Leaks
18. 18. The concept of a balance sheetExercise1 What I HAVE What I OWE
19. 19. Exercise1 What I HAVE What I OWE House Car Furniture Equipment Savings Petty Cash Mortgage Car loan Equipment loan Invoices Overdraft The concept of a balance sheet
20. 20. Exercise1 What I HAVE What I OWE House 100 Car 10 Furniture 30 Equipment 20 Savings 10 Petty Cash 5 Adding up 175 Mortgage 65 Car loan 5 Equipment loan 10 Invoices 5 Overdraft 10 Adding up 95 The concept of a balance sheet
21. 21. Exercise1 What I HAVE What I OWE House 100 Car 10 Furniture 30 Equipment 20 Savings 10 Petty Cash 5 Total 175 Net worth 80 Mortgage 65 Car loan 5 Equipment loan 10 Invoices 5 Overdraft 10 Total 175 The concept of a balance sheet
22. 22. Exercise1 What I HAVE What I OWE House at purchase price 70 Car 10 Furniture 30 Equipment 20 Savings 10 Cash 5 Total 145 Net worth 50 Mortgage 65 Car loan 5 Equipment loan 10 Invoices 5 Overdraft 10 The difference is a matter of evaluation of the assets The concept of a balance sheet Total 145
23. 23. Exercise1 What I HAVE What I OWE House at expected sales price 120 Car 10 Furniture 30 Equipment 20 Savings 10 Cash 5 Net Worth 100 Mortgage 65 Car loan 5 Equipment loan 10 Invoices 5 Overdraft 10 The difference is a matter of evaluation of the assets The concept of a balance sheet Total 195 Total 195
24. 24. Exercise1 Asset Valuation What I OWE How do we value an asset? The simple answer is the original cost LESS the depreciation BUT the alternative is : realisable value replacement value useable or economic value (i.e. cost,which would be incurred in any event) The concept of a balance sheet
25. 25. Exercise1 What I HAVE What I OWE All this does not tell us much about our income or expenses during a given period of time This would be shown in other reports, i.e. The Profit and Loss report or Income statement & The Cash flow report The concept of a balance sheet
26. 26. Accounting&Financialanalysis 1 The need for financial reporting 2 The balance sheet 3 The basic rules of accounting 4 The profit and loss account 5 The structure of a balance sheet 6 Financial flows 7 Key financial ratios 8 Different balance sheets Basic principles of accounting & financial analysis
27. 27. Accounting&Financialanalysis The concept of a balance sheet The key elements of a balance sheet Facts of a balance sheet and management decisions Basic principles of accounting & financial analysis 1 2 3
28. 28. The concept of a balance sheet Assets = Have Liabilities = Owe LONG TERM ASSETS SHORT TERM ASSETS OWN FUNDS Assets Liabilities to third parties LONG TERM DEBT SHORT TERM DEBT Thebalancesheet
29. 29. Can we draw a conclusion as to the viability of a company by looking at its balance sheet on any given time? Would a balance sheet be sufficient? Why do we pay so much attention to balance sheets? Are there rules for a balance sheet structure? Thebalancesheet The concept of a balance sheet
30. 30. answers a. The balance sheet is a picture at any given moment of the company : The balance sheet is subject to interpretation The balance is only meaningful after analysis: - over various periods - in line with balance sheets of the competition - in function of sector - in function of the economic cycle The balance sheet shows the financial health of a company and its capacity to borrow in order to finance its assets! Thebalancesheet The concept of a balance sheet
31. 31. Fixed assets Current assets Equity & Reserves LT debt Current debt Workingcapital The key elements of a balance sheet Fixed assets Current assets Equity & Res LT debt Current debt Our car dealer A bank
32. 32. Fixed Assets Current Assets Equity & Reserves LT Debt ST Debt The trend of a balance sheet 115105100 Year 1 Year 2 Year 3 100 85 75 Thetrendofabalance Ratio 1 .81 .65 Debt Equity
33. 33. Facts (F) and decisions (D) (5) CURRENT ASSETS - Stock (D) - Debtors (D) TREASURY (F) OWN FUNDS Equity (F) Reserves (D) Revaluations (D) (1) LT DEBT (F) (2) OPERATIONAL DEBT (F) Suppliers (F) Provisions (D) ST BANK DEBT (F) (3) FIXED (D) Intang. Fixed (F/D) - Goodwill, Patents Tang. Fixed (D) - Land - Buildings, equipment - Amortisation (D) - Revaluations (D) (4) ASSETS LIABILITIES Factsanddecisions
34. 34. OWN FUNDS Equity (F) Reserves (D) Revaluations (D) Advance owners (D) EQUITY = FACT The amount invested by the shareholder RESERVES = DECISION The retained earnings REVALUATIONS Based on expertise The shareholders can decide to finance their company in current account (or subordinate loans) Balance block 1 Factsanddecisions Facts (F) and decisions (D) F = a fact D = a mgt decision
35. 35. LT DEBT= FACT Borrowed funds less amounts repaid LT DEBT Loans (F) Investment credits (F) Balance block 2 Factsanddecisions Facts (F) and decisions (D)
36. 36. Most are facts, others such as provisions are the result of an assessment or future charges (accruals) OPS DEBT (F) Suppliers (F) Provisions (D) ST Bank debt (F) Balance block 3 Factsanddecisions Facts (F) and decisions (D)
37. 37. The intangible assets are subject to amortisation The amount is a decision INTANGIBLES FIXED Goodwill (D) Balance block 4 Factsanddecisions Facts (F) and decisions (D)
38. 38. A building is put on the books at a purchase value and is amortised over a period of time in function of the rhythm of annual amortisation. The method of amortisation is a matter of decision TANGIBLES FIXED Land (F) Buildings (F & D) Equipment (F &D) Balance block 4 Factsanddecisions Facts (F) and decisions (D)
39. 39. STOCK is based on purchase price or net sales price -When the sales price is deemed lower than the purchase price a stock depreciation needs to be recorded : depreciation for stock with a low rotation - It is a decision CURRENT ASSETS Stock (D) Balance block 5 Factsanddecisions Facts (F) and decisions (D)
40. 40. DEBTORS = FACT However the principle of prudence entails two corrections for: -past due debtors -uncollectable = Management decision CURRENT ASSETS Debtors - past due (D) Cash (F) - investments (D) - banks (F) - cash account (F) Balance block 5 Factsanddecisions Facts (F) and decisions (D)
41. 41. The effect of an over-evaluation of current assets (with unchanged liabilities) The balance sheet but in fact Factsanddecisions The effect of a management decision
42. 42. The over- or understatement of profits Brand accounting Changes in valuation methods Changes in depreciation policy Off balance sheet finance Capitalisation of R & D Factsanddecisions
43. 43. Accounts over a long period, plus notes to the accounts, are likely to provide the best basis for the analysis of the financial position of a company Accounting and financial analysis have their own vocabulary Key elements allow for ratio-analysis Summary Key points to rememberSummary Key points to rememberThebalancesheet
44. 44. Accounting&Financialanalysis 1 The need for financial reporting 2 The balance sheet 3 The basic rules of accounting 4 The profit and loss account 5 The structure of a balance sheet 6 Financial flows 7 Key financial ratios 8 Different balance sheets Basic principles of accounting & financial analysis
45. 45. Accounting&Financialanalysis Double entry accounting Depreciation versus amortisation Cash and non-cash transactions The four principles of accounting Basic principles of accounting 1 2 3 4
46. 46. A balance sheet must balance What would the opening balance sheet look like? HAVE = Assets OWE = Liabilities Basicprinciplesofaccounting
47. 47. Example : The balance sheet of a newly founded company Assets Liabilities Current Asset Equity A balance sheet must balanceBasicprinciplesofaccounting
48. 48. Double entry concept LIABILITIES Increases = DEBIT ASSET Basicprinciplesofaccounting
49. 49. Double entry concept ASSETS LIABILITIES Increase = CREDIT Basicprinciplesofaccounting
50. 50. The double entry concept Petty Cash Equity ASSETS LIABILITIES Basicprinciplesofaccounting
51. 51. The dual entry conceptBasicprinciplesofaccounting ASSET Accounts Increase Decrease LIABILITY Accounts Increase Decrease
52. 52. The P & L Account or Revenue Account P & L Basicprinciplesofaccounting
53. 53. The dual entry conceptBasicprinciplesofaccounting ASSET Accounts Increase Decrease LIABILITY Accounts Increase Decrease Charge Revenue P & L Accounts
54. 54. EQUIPMENT SUPPLIERS ASSETS LIABILITIES EQUITY The company purchases equipment for 50 (without VAT) CASH The double entry conceptBasicprinciplesofaccounting
55. 55. ASSETS LIABILITIES EQUITY (1) (1) SUPPLIERSCASH EQUIPEMENT Basicprinciplesofaccounting The double entry concept The company purchases equipment for 50 (without VAT)
56. 56. ASSETS LIABILITIES EQUITY (1) (1)(2) (2) SUPPLIERSCASH EQUIPMENT The double entry concept The company purchases equipment for 50 (without VAT) Basicprinciplesofaccounting
57. 57. EQUITY The company re-sells the equipment for 60 ! (without VAT) CASH PROFIT & LOSS DEBTORS ASSETS LIABILITIES EQUIPEMENT The double entry conceptBasicprinciplesofaccounting
58. 58. EQUITY DEBTORS ASSETS LIABILITIES (3) (3) (3) CASH PROFIT & LOSS EQUIPMENT The double entry concept The company re-sells the equipment for 60 ! (without VAT) Basicprinciplesofaccounting
59. 59. EQUITY DEBTORS ASSETS LIABILITIES (3) (3) (3) (4) (4) CASH PROFIT & LOSS EQUIPMENT The double entry concept The company resells the equipment for 60 ! (without VAT) Basicprinciplesofaccounting
60. 60. EQUIPMENT SUPPLIERS ASSETS LIABILITIES EQUITY The company purchases equipment for 50 (inclusive of VAT at a rate of 25 % ) CASH The double entry conceptBasicprinciplesofaccounting
61. 61. ASSETS LIABILITIES EQUITY (1) (1) SUPPLIERS CASH EQUIPEMENT The double entry concept The company purchases equipment for 50 (inclusive of VAT at a rate of 25%) VAT RECEIVABLE (1) Basicprinciplesofaccounting (2) (2)
62. 62. ASSETS LIABILITIES EQUITY (1) (1) SALESCASH DEBTORS The double entry concept The company invoices a customer for a fee in the amount of 50 (inclusive of VAT at a rate of 25%) Basicprinciplesofaccounting VAT PAYABLE (1)
63. 63. ASSETS LIABILITIES EQUITY (1) (1) SALESCASH DEBTORS The double entry concept The company invoices a customer for a fee in the amount of 50 (inclusive of VAT at a rate of 25%) Basicprinciplesofaccounting VAT PAYABLE (1) (2) (2)
64. 64. ASSETS LIABILITIES EQUITY (1) (1) SALESCASH DEBTORS The double entry concept The company invoices a customer for a fee in the amount of 50 (inclusive of VAT at a rate of 25%) Basicprinciplesofaccounting VAT PAYABLE (1) (2) (2) (3) (3)
65. 65. EQUITY We take a depreciation of an asset into account for 10 P & L Account EQUIPMENT Cash and non cash entries ASSETS LIABILITIES CASH Basicprinciplesofaccounting
66. 66. EQUITY P & L Account EQUIPMENT Cash and non cash entries ASSETS LIABILITIES CASH Basicprinciplesofaccounting We take a depreciation of an asset into account for 10
67. 67. Depreciation A decrease in value of current assets stock - spare parts - accessories - debtors Amortisation A decrease in value of fixed assets (long term assets) fixed assets - land and buildings - plant and equipment - renovation costs Depreciation and AmortisationBasicprinciplesofaccounting
68. 68. The influence of a depreciation is a decrease in current assets & the equity and reserves (debts remain unchanged) Basicprinciplesofaccounting Depreciation and Amortisation
69. 69. The influence of an amortisation is a decrease in fixed assets AND the equity and reserves (debts remain unchanged) Basicprinciplesofaccounting Depreciation and Amortisation
70. 70. Methods of amortisation A fixed asset with a value of 100.000 at 10 % per year A fixed asset with a value of 100.000 at 20% per year LINEAR Amortisation 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000 Residual Value 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 DIGRESSIVE Amortisation 20000 16000 12800 10240 10000 10000 10000 10000 960 0 Residual Value 80000 64000 51200 40960 30960 20960 10960 960 0 0 Amortisation
71. 71. Amortisation 0 10000 20000 30000 40000 50000 60000 70000 80000 90000 1 2 3 4 5 6 7 8 9 10 Linear Digressive Accounting Value Time Basicprinciplesofaccounting
72. 72. Cash and non cash transactionsFinancialReporting When Profit and Cash Differ Difference P&L expense, no cash outflow Cash outflow, no P&L expense P&L income, no cash inflow Cash inflow, no P&L income Example Depreciation Payment of Creditor Sale on credit Debtors settle account
73. 73. The four principles of accounting Accruals: Each change needs to be recorded during the relevant period Consistency: The same logic needs to be followed over the periods of accounting Going Concern: Accounting on the basis of a functioning company, in opposition to a gone basis Prudence The financial situation has to be accurately and factually represented MEMO : ACGP FinancialReporting
74. 74. The significance of financial management Financial management allows for the optimisation of the use of working capital It is a matter of management of the business cycle! STOCKS SALES DEBTOR S TREASURY SUPPLIERS PURCHASE Financialmanagement
75. 75. Activity Ratios The management of stock of spare parts One of the management issues is the stock rotation, in this case we use two ratios: The definition of the two ratios 1. Stock turn Annual sales of spare parts at cost Stock spare parts 2. Stock turn in days 365 Stock turn The utility of the ratio This ratio indicates how often the stocks rotates on an annual basis or alternatively how many days stock days the company has Financialmanagement
76. 76. The utility of the management of the working capital Turn over parts 500.000 Gross margin 150.000 Stock 70.000 Stock rotation 500.000-150.000 70.000 5 times p.a. Stock in days 70.000 x 365 350.000 73 days Other computing method 365 5 = 73 days Financialmanagement Activity Ratios
77. 77. The purpose of the spare parts management by means of Ratios Factors influencing the stock: - The need to match inventory with customer requests - The express order surcharge - Obsolescence - The discounts on spare parts Financialmanagement Activity Ratios
78. 78. Outstanding debtors in days Outstanding debtors x 365 Turnover with VAT Outstanding suppliers in days Outstanding suppliers x 365 Purchases with VAT Financialmanagement Activity Ratios The purpose of the debtors and suppliers management by means of Ratios
79. 79. Summary & key pointsSummary & key points The source of working capital allows for a stable base of financing The management of the working capital allows for the management of the activities cycle The management of the rotation of stock, debtors and suppliers will lead to improved results The activity ratios allow for a trend analysis! Financialmanagement
80. 80. Accounting&Financialanalysis 1 The need for financial reporting 2 The balance sheet 3 The basic rules of accounting 4 The profit and loss account 5 The structure of a balance sheet 6 Financial flows 7 Key financial ratios 8 Different balance sheets Basic principles of accounting & financial analysis
81. 81. TheP&LAccount Expenses and profits Key elements of a P & L Direct and variable expenses The concept of profit centres Basic principles of accounting 1 2 3 4
82. 82. Expenses and profits A turnover generates expenses: Fixed expenses are the result of the activity of the company. For example: Salaries Rental Training Advertising TheP&LAccount
83. 83. The benefits of profits Profits: reward shareholders with dividends reward shareholders with capital growth pay interest on loans provide protection for future business provide funding for additional fixed assets provide funding for additional working capital provide customer confidence protect the employment of the employees TheP&LAccount
84. 84. Profits do not necessarily mean cash! There is often a time lag between earnings and cash inflows. Indeed : Stock may be purchased on payment conditions and may be sold and replaced before paying the supplier Stock may be sold, the earnings accounted for, but the payment is made at a much later date A spare part has been sold but had been paid to the supplier already a long time ago TheP&LAccount The benefits of profits
85. 85. P & L N-1 EURO N Turnover (1) Purchased goods - Inventory = Cost of goods sold (2) Gross margin (3)=(1)-(2) + Other business related income = Income from operations (4) - Goods and services (5) = Added Value (6)=(4)-(5) - Personnel expense - Other operational expenses = Gross operating income + Financial revenues + Exceptional results = Gross total revenue (EBITDA) - Amort., provisions, depreciations = EBIT - Financial expenses - Taxes = NET PROFIT ExceptionalExceptional OperationsOperations InvestmentsInvestments FinancingFinancing Key elements of a P & LTheP&LAccount
86. 86. N-1 EURO N Net Result + Amortisation and provisions = Cash Flow - Paid dividends (Shareholders) - Repayment LT debt = Net self-financing margin cash flowTheP&LAccount
87. 87. The charges to the P & L Net Result TheP&LAccount Other operation al income Gross margin Added Value Gross ops profit Profit before taxes Goods & services Personnel -expense Other ops expenses Amortisa tion EBIT Financial expenses Taxes Result of Operations Financial Income & exceptional Gross Profit Other income
88. 88. Fixed and variable expenses There are two types of expenses: The fixed expenses these expenses are incurred irrespective of the activities or production process Variable expenses fluctuate in function of the volume of production TheP&LAccount
89. 89. The break-even point There will be a point where production covers both fixed and variable cost This crucial point is called break-even and is the point as of which profit is being earned TheP&LAccount
90. 90. Break-even VOLUME Total costs Fixed costs Variable costs TheP&LAccount
91. 91. Break-even VOLUME Gross margin Total costs Fixed costs BREAK-EVEN Variable costs LOSS PROFIT TheP&LAccount
92. 92. The concept of a profit centreTheP&LAccount SalesSales Gross ProfitGross Profit Variable ExpensesVariable Expenses Direct ExpensesDirect Expenses Department ProfitDepartment Profit SalesSales Gross ProfitGross Profit Direct ExpensesDirect Expenses Department ProfitDepartment Profit SalesSales Gross ProfitGross Profit Direct ExpensesDirect Expenses Department ProfitDepartment Profit Sales Service Parts Total Departmental ProfitTotal Departmental Profit Indirect ExpensesIndirect Expenses Operating ProfitOperating Profit Other Income (Expenses)Other Income (Expenses) Total Company Net ProfitTotal Company Net Profit
93. 93. Reflects the structure of the organisation Allows for a specific reporting per profit centre Allows for educated decisions Adequate measures for performance improvement Allows for a better allocation of resources Could inhibit an overall approach Could encourage independence Could encourage internal competition Could encourage the pursuit of department proper goals ADVANTAGES DISADVANTAGES The P & L per profit centreTheP&LAccount
94. 94. BALANCE Fixed assets Assets Current assets Reserves LT Debt ST Debt P & L Amortisation Turn over Depreciation Profit Financial charges Financial charges The link between the balance sheet and the profit and loss account Basicprinciplesofaccounting
95. 95. Accounting&Financialanalysis 1 The need for financial reporting 2 The balance sheet 3 The basic rules of accounting 4 The profit and loss account 5 The structure of a balance sheet 6 Financial flows 7 Key financial ratios 8 Different balance sheets Basic principles of accounting & financial analysis
96. 96. The key elements of a balance sheet Fixed Assets Land & Buildings Plant & Equipment Fixtures & Fittings Company Vehicles Intangible assets Current Assets Stocks Debtors Work in Progress Prepayments Cash Equity & Reserves Share Capital Revenue Reserves Capital Reserves Long Term Liabilities Long Term Loans Mortgages Thebalancesheet Current Liabilities Bank Overdraft Creditors (inc Tax & VAT) Accruals Short Term Loans
97. 97. Norms There are certain basic principles such as: LT Assets > LT Liabilities ST Assets > ST Liabilities LT Liabilities should finance: - 100% LT assets - the permanent ST Assets LT ASSET S N.W. LT DEBT ST ASSETS ST DEBT Thebalancesheet Long term The concept of a balance sheet
98. 98. Assets Permanent Non Permanent Liquidity Fixed assets Operating assets Treasury Stocks Debtors Cash Thebalancesheet Current assets
99. 99. Liabilities Permanent Temporary Operating Liabilities Treasury Suppliers ST Bank facilities Permanent liabilities LT debt Share capital Thebalancesheet Current liabilities Disposal
100. 100. (2) Use of Working capital (3) Treasury (1)Source of Working capital Working capital management Fixed assets Source of working capital Shares & Reserves LT debt Stock Debtors ST debt Use of working capital ST Bank debt Cash Treasury Workingcapitalmanagement
101. 101. The structure of a balance sheet Fixed assets Own funds LT debt Inventory Debtors Use of working capital ST Debt Workingcapitalmanagement
102. 102. Treasury Source of Working Capital Use of Working Capital Maximise Minimise The goal is to have a positive treasury Workingcapitalmanagement Financial management
103. 103. The definition of the working capital The origin of the working capital = the difference between equity & l.t. debt and l.t.assets The use of working capital = is the difference between current assets and current liabilities Treasury = the difference between the origin of working capital and the use of working capital Theworkingcapital
104. 104. The Net Worth The difference between assets and liabilities towards third parties : Ownership interest (permanent capital) Capital + retained earnings (losses) The difference between ownership and liabilities is of great practical importance. Normally claims which belong to the owners will only be paid directly to them if the organisation ceases trading. Theworkingcapital
105. 105. SummaryThestructureofabalancesheet 1. Quite a large number of elements of the balance sheet are subject to judgement. 2. The source of working capital and the use of working capital relate to each other and determine the level of the treasury 3. Net worth (equity and reserves) can be over- or undertstated.
106. 106. Accounting&Financialanalysis 1 The need for financial reporting 2 The balance sheet 3 The basic rules of accounting 4 The profit and loss account 5 Financial flows 6 The structure of a balance sheet 7 Key financial ratios 8 Different balance sheets Basic principles of accounting
107. 107. Accounting&Financialanalysis Basic principles of accounting The financing of assets Liquidity The financial flows 1 2 3
108. 108. Business Growth Business growth can take three basic forms: Increased profitability on current volume Increased volume on current profitability Increased profitability on increased volume Accounting&FinancialanalysisAccounting&Financialanalysis
109. 109. To cover the effects of inflation and/or growth we need extra funds to: The Need For Extra Funding Carry more stock Support more debtors Update/add to fixed assets Pay more staff Accounting&Financialanalysis
110. 110. ... but where will it come from? Growth Will Require More of This... Accounting&Financialanalysis
111. 111. Sources of Funding Internal Share Capital Reserves External Long Term Loans Stocking Loans Bank Overdrafts Working Capital Loan Venture Capital Accounting&Financialanalysis
112. 112. The financial flows underline the significance of the profitability of the operations and the financial management of the company The company should generate enough cash to: Finance the investments : repayment of loans and the financial charges Finance the use of working capital Pay out dividends and taxes : Shareholders dividends State taxes Financialflows The financial flows
113. 113. Accounting&Financialanalysis 1 The need for financial reporting 2 The balance sheet 3 The basic rules of accounting 4 The profit and loss account 5 The structure of a balance sheet 6 Financial flows 7 Key financial ratios 8 Different balance sheets Basic principles of accounting & financial analysis
114. 114. Accounting&Financialanalysis Key ratios The link between the ratios Trend analysis Performance measurement Basic principles of accounting & financial analysis 1 2 3 4
115. 115. Accounting&Financialanalysis Basic principles of accounting & financial analysis The analysis of a company financial statements is indertaken for the purpose of extracting information related to: The companys activities Profitability Efficiency Degree of risk
116. 116. Accounting&Financialanalysis Basic principles of accounting & financial analysis This is achieved by using ratios relating to key financial variables
117. 117. Financial ratios Numerator Denominator Denominator + The concept of a ratio A ratio is a fraction Accounting&Financialanalysis
118. 118. Financial ratios The concept of a ratio A ratio is a fraction Accounting&Financialanalysis +
119. 119. The financial ratios Examples of key performance ratios Profitability ratios Return on capital Return on sales Efficiency ratios Sales / Fixed assets Stock / Total assets Risk ratios Current ratio Debt to equity Stock market Price to earnings Asset value per share Accounting&Financialanalysis
120. 120. Keyratios Return on capital employed The definition of the ratio Operating profit Capital employed The meaning of the ratio Capital employed is defined as fixed assets plus current assets Gives an indication of the profitability of the company = A high profitability could be the result of a high mark-up on goods sold and/or an efficient usage of assets
121. 121. Keyratios Return on sales The definition of the ratio Operating profit Sales The meaning of the ratio Gives an indication of the profitability of the company = A high profitability could be the result of an efficient production or distribution process
122. 122. Keyratios Sales on fixed assets The definition of the ratio Sales Fixed Assets The meaning of the ratio Provides an assessment on the efficiency of management in using the companys assets
123. 123. Keyratios Stock on total assets The definition of the ratio Stock Total Assets The meaning of the ratio The ratio assess the degree of stability in the stock figure throughout the years.
124. 124. Keyratios Current ratio The definition of the ratio Current Assets Current Liabilities The meaning of the ratio Assess short-term liquidity and examines the ability of the company to meet its short-term commitments.
125. 125. Keyratios Debt to equity The definition of the ratio Long-term debt Shareholders equity The meaning of the ratio This ratio is used to assess the companys ability to meet both interest and principal repayments on loans as they fall due.
126. 126. Keyratios Price to earnings ratio (P/E) The definition of the ratio Current market Price Earnings per share The meaning of the ratio This ratio gives the number of years earnings represented by the current price The P/E ratio is a mixture of current price reflecting expectations about the future and historic profit for the most recent accounting period.
127. 127. Keyratios Asset value per share The definition of the ratio Net assets attributable to ordinary shareholders Number of shares issued The meaning of the ratio The result of this fraction is often compared with the market value to see to what extend the current price is supported or backed by assets
128. 128. The significance of trend analysis Ratio Time TREND PEERS Keyratios
129. 129. A series of key ratios provide us a good indication of the structure of the balance sheet, of the profit and loss account and about the trend of the companys performance Ratios show either positive or negative correlations The trend analysis allows for timely decisions and the comparison of the companys performance versus a peer group Ratios allow for standard deviations and the evaluation of the relative performance of the company SummarySummaryKeyratios