Accounting Fundamentals--Summer 2000 1 Income Statement Classification Operating income Other income and expense Income from continuing operations Income,

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  • Accounting Fundamentals--Summer 2000 1 Income Statement Classification Operating income Other income and expense Income from continuing operations Income, gains & losses from discontinued operations Extraordinary gains and losses Changes in accounting principles
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  • Accounting Fundamentals--Summer 2000 2 Statement of Cash Flows FASB 95--1987 Components Operating cash: Operations and working capital Investing cash: Non-current assets and investments Financing cash: L/T debt, equity and dividends
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  • Accounting Fundamentals--Summer 2000 3 Roots = Financing Activities Trunk & Branches = Investing Activities Fruit = Operating Activities Businesses are like Fruit Trees
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  • Accounting Fundamentals--Summer 2000 4 Net Income vs. Cash Flow Indirect Method Net Income +/- Non-cash Items +/- Changes in Operating Working Capital = Cash Flow from Operations
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  • Accounting Fundamentals--Summer 2000 5 Indirect vs. Direct Method FASB prefers the direct method FASB requires net income to cash from operations reconciliation Components: Cash from customers Cash from dividends Cash from interest income Other operating cash receipts Cash paid to suppliers Cash paid to employees Cash paid for taxes Cash paid for interest Other operating cash payments
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  • Accounting Fundamentals--Summer 2000 6 Economic Value Added Income from Capital - Cost of Capital = E V A
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  • Accounting Fundamentals--Summer 2000 7 Sources of Capital Debt (interest %) Equity (interest % + 6%)
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  • Accounting Fundamentals--Summer 2000 8 Capital Working capital Net tangible non-current assets Capitalized R & D Capitalized Employee Devel. Costs
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  • Accounting Fundamentals--Summer 2000 9 Adj. Operating Income Operating income Plus: R & D Emp. Devel. Costs Minus: R & D Amort. Emp. Devel. Cost Amort
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  • Accounting Fundamentals--Summer 2000 10 Keys to Success Make it a way of life K I S S CEO / Management buy-in Gradual introduction Thorough training
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  • Accounting Fundamentals--Summer 2000 11 Todays Session Financial Statement Analysis The Goal
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  • Accounting Fundamentals--Summer 2000 12 Target Your Efforts Solvency assurance Wealth enhancement Performance improvement
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  • Accounting Fundamentals--Summer 2000 13 Start with the 3 Ps Planning Processing Presenting
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  • Accounting Fundamentals--Summer 2000 14 Include the Trifecta: Q-S-T Q: Quantitative analysis S: Strategic assessment T: Tactical feasibility
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  • Accounting Fundamentals--Summer 2000 15 Tools for Financial Statement Analysis Ratio analysis Trend analysis Common-size analysis Base period analysis Comparative analysis Horizontal and vertical analyses
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  • Accounting Fundamentals--Summer 2000 16 A Financial Statement Approach Look for key relationships Focus on spending drivers Dont overlook the Statement of Cash Flows Remember to measure trends Tell a story
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  • Accounting Fundamentals--Summer 2000 17 Guidelines for a Presentation Clarity Accuracy Simplicity Visually friendly Limit page content
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  • Accounting Fundamentals--Summer 2000 18 Cash Flow Red-Flags Receivable and inventory growth rate exceeds sales growth rate Payables growth rate exceeds inventory growth rate Current liabilities grow faster than sales Sustained operating losses (negative net income)
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  • Accounting Fundamentals--Summer 2000 19 Cash Flow Red-Flags (contd) Negative operating cash flow Capital expenditures exceed operating cash flow Sustained capital expenditures reductions Sustained sales of marketable securities in excess of purchases Substantial shift from long to short term borrowing Dividend reduction or elimination
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  • Accounting Fundamentals--Summer 2000 20 Cash Sufficiency Ratio Cash Flow From Operations + Interest + Taxes PPE + Debt Servicing + Taxes + Dividends Should be greater than 1 Can easily disaggregate Different footprints for different development stages
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  • Accounting Fundamentals--Summer 2000 21 Cash Conversion Cycle Cash conversion cycle Days in payables DSO + Days in inventory
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  • Accounting Fundamentals--Summer 2000 22 Typical Common Ratios Solvency & liquidity Earnings Performance
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  • Accounting Fundamentals--Summer 2000 23 Ratio Analysis General guidelines: Be consistent Ascertain contents of numerator and denominator Apply common sense
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  • Accounting Fundamentals--Summer 2000 24 Trend Analysis Static analysis is virtually useless Trend direction is key Combine with other approaches
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  • Accounting Fundamentals--Summer 2000 25 Common-size Analysis Helpful for size discrepancies Keyed to sales or total assets Helpful for industry comparisons
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  • Accounting Fundamentals--Summer 2000 26 Base Period Analysis Combines trending and percentage analysis Select representative base year and set the index at 100 Measure subsequent periods in terms of the base year Helpful for industry comparisons Eliminates size bias
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  • Accounting Fundamentals--Summer 2000 27 Comparative Analysis Cautions Timing variances GAAP variances Conservative vs. Aggressive GAAP Management attitudewin at all cost! Size Geographic venues
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  • Accounting Fundamentals--Summer 2000 28 Horizontal and Vertical Analysis The most basicand most powerful analytical tool Key element in fraud detection Keeps the organization under control
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  • Accounting Fundamentals--Summer 2000 29 Horizontal Analysis Period versus period changes Value changes Percentage changes Look for irregularities
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  • Accounting Fundamentals--Summer 2000 30 Horizontal Analysis - Example
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  • Accounting Fundamentals--Summer 2000 31 Vertical Analysis Relationships within the same period: Numerical relationships Percentage relationships Look for irregularities
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  • Accounting Fundamentals--Summer 2000 32 Vertical Analysis - Example
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  • Accounting Fundamentals--Summer 2000 33 Theory of Constraints The Concept The Process The Measures
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  • Accounting Fundamentals--Summer 2000 34 The Concept Presented in Eliyahu Goldratts The Goal The goal of a business is to make moneyconsistent with customer satisfaction Continuous flow Avoid the herbies Eliminate the bottlenecks first
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  • Accounting Fundamentals--Summer 2000 35 The Process Identify the constraints Exploit the constraints (reduce the bottlenecks) Subordinate everything else Elevate the constraints (remove the bottlenecks) Reiterate the process
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  • Accounting Fundamentals--Summer 2000 36 The Measures Throughput-Net income Inventory-ROI Ops. Expenses-Cash Flow