Presentation Transcript

1. Understanding Financial Statements for a Non-Financial Person Presented by Claire H Gagnon, CPA January 9, 2014
2. A little about me…….And about you! Currently VP/Controller Easter Seals NH and Subsidiaries Previous experience includes: Finance Director TV Station Controller for mid size non-profits Manager Family CPA firm Staff Accountant/Tax Accountant
3. Let’s get started… Financial Analysis ≠ Math Wizard No Algebra, Calculus etc. required No need to be afraid……. No more MEGO syndrome when discussing financial statements “my eyes glaze over”
4. Financial Jargon Common terms and definitions: Financial Statements-Accounting information that are packaged with other information such as explanatory footnotes and a letter from management. Usually prepared at the end of an accounting period, i.e.; month, quarter or year. External-Audited Financial statements which will be used by non–accountants such as investors, banks, and funders. Internal-Used by management to make business decisions. These can be tailored to the business and the metrics that management would like to measure. Balance Sheet aka Statement of Financial Position Asset Liability Equity Income Statement aka Statement of Profit and Loss or Profit and Loss Statement (P&L) Revenue Expense Cash Flow Statement aka Statement of Cash flows Operating Activities Investing Activities Financing Activities
5. More Financial Jargon Receivables Payables Prepaid Expenses Accrued Expenses Key Indicators Ratio Analysis Current & LongTerm Debt Any others?????
6. The Balance SheetSnapshot of What a Company Owns and Owes at any given Date Top/Left lists all that the company owns Assets Bottom/Right lists all that the company owes Liabilities Balance sheet so whatever assets are not being used to pay off the liabilities belong to the shareholders and become…Net Worth, Shareholders Equity or Net Assets
7. AssetsItems of value that are owned and are measurable Current Assets-can easily be converted to cash within a short period. i.e.; Money market funds. Fixed Assets-long term assets that are not intended for sale and not easily converted to cash. i.e.; equipment and buildings. Other Assets-have no physical existence i.e.; goodwill.
8. LiabilitiesObligations of the Business Current liabilities-obligations that are due within one year. i.e.; accounts payable or debt payable within one year of balance sheet date. Long term liabilities-obligations that are due over one year from the balance sheet date i.e.; mortgages, debt.
9. Equity Shareholders’ (owners’) stake after all the debts are paid (that is why stocks are also called equities) Consists of two parts. Captital invested by shareholder (owners) and retained earnings. Retained earnings are generated by the profits of the business which are reinvested or retained. For large corporations this can be comprised of Common Stock Preferred Stock Retained Earnings
10. Pop Quiz Which one of these are considered a current asset? A. Computer B. 2 year CD C. Cash
11. Income StatementRather than a snapshot this is the movie that tells the story of the business Provides the results of the operations by summarizing sales and other income and the expenses and losses of the business for a certain period of time.
12. Methods of Accounting Accrual versus Cash Accrual-Recognize revenue and expenses in period in which they are incurred. This is how you get receivables and payables. Cash-Recognize revenue and expenses in the period in which the cash is received or disbursed respectively.
13. Accrual Basis Terms Receivables- Amount of money your business is due from others. All income that the business is expected to receive for both goods and services. Prepaid Expenses-Money that is paid out for future services, expensed over time as value of service is recognized.ie; insurance. Payables-Amount of money that is owed to pay for all services and goods provided by others. Accrued Expenses- Expenses that have been incurred but not paid which no invoice will be received. I.e.; accrued salaries and related tax liabilities.
14. Pop Quiz Services were provided and billed in January, the cash was received in February. For accrual basis accounting when should revenue be recognized, January or February? Office Supplies were purchased in March but were not paid for until April, for cash basis accounting when should the office supply expense be recognized?
15. Depreciation A method to allocate the cost of a fixed asset over the period in which the asset is useable to the business. The cost is recorded as an asset and then the value is of the asset is reduced by subtracting a portion of that value as depreciation expense each year. This affects both the balance sheet and the income statement.
16. Depreciation Example Company buys piece of office equipment for $5000 on 1/01/14, shipping is $ 1,000 and installation is $500. Equipment has useful life of 5 years.
17. Sample Balance Sheet
18. Sample Income Statement
19. Key Indicators and Ratios Management tools to evaluate financial information to assist in decision making. Tool for banks and investors to evaluate effectiveness of management. Allows for comparison of industry standard. Provides trend analysis.
20. Notes to the Financial Statements(Used in Audited Statements) Detailed text provided as a supplement to the balance sheet, income statement, and statement of changes in financial position in a company's annual report to provide added facts and/or clarify unusual items or entries on the statements. These notes also provide valuable information to shareholders, such as accounting methodologies used in preparing the statements and details of pension plans, which affect the shareholders' investment in the company. They are placed after the statements so they do not obscure the data in the statements. Read more: http://www.investorwords.com/16682/notes_to_the_financial_statement.html#ixzz2pdlMcD00
21. Statement of Cash Flows A summary of incomings and outgoings of cash in a business during an accounting period. Reports the sources and uses of cash by operating activities. Answers the questions: Where did it come from? Where it did it go?
22. Statement of Cash Flows Accounting Data is presented in three main sections. Operating Activities: Sales of goods or services. Investing Activities: Sales or purchase of an asset. Financing Activities: Borrowings and repayments of borrowings. All profit and loss information is captured here except for non-cash transactions such as depreciation or amortization.
23. Pop Quiz Purchasing equipment for the business with a loan would be categorized under which cash flow section? A. Operating B. Investing C. Financing
24. Key Indicators and Ratios Quick Ratio – (Liquidity) [Cash + Mrkt Securities + AR]/Current Liabilities Measures working capital/liquidity: availability of current assets to meet current obligations. (Can I pay my bills?) Debt to Equity Ratio – (Solvency) Total liabilities/owners equity Measures how company is leveraging debt against capital employed by owners. Should I invest/do I have capacity?
25. Key Indicators and Ratios Operating Profit Margin (EBIT) Earnings before interest & taxes / net sales Measures overall operating efficiency Net Profit Margin Net income / net sales Measures how much of each sale is reflected in net income after all expenses are paid
26. Key Indicators and Ratios Days Sales Outstanding (Efficiency) [Receivables/Sales] x 360 Average time to turn receivables into cash Inventory Turnover (Efficiency) Net Sales/Inventory Measures how quickly entity moves merchandise
27. In Conclusion Financial Statements include the snapshot of the business, the story of the business and the money trail of the business for any given period. Users are both internal and external. Understanding your financial statements is key to making sound financial decisions and allow you to monitor the progress of your business.
28. Questions? Feel free to contact me anytime. cgagnon@eastersealsnh.org 603-621-3559 Thanks for listening!