tag:blogger.com,1999:blog-43436695437579211102024-03-12T18:48:02.460-07:00Financial StatementsLessons in Financial Statements, Ratios, and Financial Analysis from Ken PirokKen Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.comBlogger24125tag:blogger.com,1999:blog-4343669543757921110.post-4729835454043862912018-12-05T15:19:00.002-08:002018-12-05T15:23:29.500-08:00Profit Margins<br />
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<br /></div>
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<span style="font-family: "verdana" , "sans-serif";"><span style="mso-tab-count: 1;"> </span>Gross Profit Margin = <u>Gross Profit</u><o:p></o:p></span></div>
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<span style="font-family: "verdana" , "sans-serif";"><span style="mso-tab-count: 4;"> </span><span style="mso-spacerun: yes;"> </span>Net Revenue<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "verdana" , "sans-serif";">The Gross
Profit Margin expresses gross profit as a percentage of sales.<span style="mso-spacerun: yes;"> </span>Gross profit is what remains after cost of
good sold (or direct costs) are subtracted from revenues.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "verdana" , "sans-serif";">Note that
net (as opposed to gross) revenue is used in the denominator of profit
margins.<span style="mso-spacerun: yes;"> </span>Sometimes a company will
express “gross sales” less “returns and allowances,” equaling “net sales” on
their income statement.<span style="mso-spacerun: yes;"> </span>When a business
presents both gross and net revenues, it is <i style="mso-bidi-font-style: normal;">net</i>
revenues that are used in profit margins and common size reports.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "verdana" , "sans-serif";">A higher
percentage (or profitability) is obviously desirable for this ratio.<span style="mso-spacerun: yes;"> </span>The gross profit margin can be an invaluable
indicator of performance and profitability (or pricing strategy) when compared
with other firms in the industry.<span style="mso-spacerun: yes;"> </span>It is
among the most basic and widely used financial ratios.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "verdana" , "sans-serif";"><span style="mso-tab-count: 1;"> </span>Operating Profit Margin = <u>Operating
Profit<o:p></o:p></u></span></div>
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<span style="font-family: "verdana" , "sans-serif";"><span style="mso-tab-count: 5;"> </span><span style="mso-spacerun: yes;"> </span>Net Revenue<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "verdana" , "sans-serif";">The
Operating Profit Margin expresses operating profit (or net sales, less cost of
sales, less operating expenses) as a percentage of net sales.<span style="mso-spacerun: yes;"> </span>This is also a crucial measure of
profitability, which is often compared to industry averages.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "verdana" , "sans-serif";">Company
profit margins are also compared year over year, and trends are studied by
management and financial analysts.<o:p></o:p></span><br />
<span style="font-family: "verdana" , "sans-serif";"><br /></span>
<span style="font-family: "verdana" , "sans-serif";"></span><br />
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<span style="font-family: "verdana" , "sans-serif";">In this <i>Street Smarts</i> <a href="http://www.inc.com/magazine/20081001/street-smarts-secrets-of-a-110-million-man.html" target="_blank">article</a> on Inc.com, Norm
Brodsky argues that the gross profit margin is the most important number on the
income statement (<a href="http://www.inc.com/magazine/20081001/street-smarts-secrets-of-a-110-million-man.html">http://www.inc.com/magazine/20081001/street-smarts-secrets-of-a-110-million-man.html</a>).<o:p></o:p></span></div>
</div>
<br />Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com0tag:blogger.com,1999:blog-4343669543757921110.post-80007981837416537372018-11-24T19:55:00.002-08:002019-02-01T08:12:09.393-08:00Debt to EBITDA<span style="font-family: "verdana" , "sans-serif";">This
multiple compares total debt to one year’s worth of Earnings before Interest,
Taxes, Depreciation, and Amortization (or “EBITDA”).<span style="mso-spacerun: yes;"> </span>EBITDA is, therefore, a proxy for funds
available to service the debt.<span style="mso-spacerun: yes;"> </span>The
resulting multiple indicates how much EBITDA (or approximately how many periods)
it would take to retire the debt with EBITDA.<span style="mso-spacerun: yes;">
</span>This ratio is, therefore, a measure of “cash flow leverage”.<o:p></o:p></span><br />
<br />
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<span style="font-family: "verdana" , "sans-serif";"><span style="font-family: "verdana" , "sans-serif";">Obviously,
a lower multiple indicates less leverage and lower risk.<span style="mso-spacerun: yes;"> </span>Keep in mind that you are comparing a balance
sheet item to an income statement measure with this ratio.<span style="mso-spacerun: yes;"> </span>This can be problematic if the debt balance
at the end of a given period is unusually high or low or if EBITDA is measured
in only a partial year.<o:p></o:p></span></span><br />
<span style="font-family: "verdana" , "sans-serif";"><span style="font-family: "verdana" , "sans-serif";"><br /></span></span>
<span style="font-family: "verdana" , "sans-serif";"><span style="font-family: "verdana" , "sans-serif";">Note that total interest-bearing debt should comprise the numerator, and it may also be appropriate to subtract cash and cash equivalents from total debt to construct a more meaningful ratio.</span></span></div>
Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com1tag:blogger.com,1999:blog-4343669543757921110.post-52458572967237350952018-11-24T19:37:00.003-08:002018-11-24T19:39:45.366-08:00Senior Debt to Tangible Net Worth plus Subordinated Debt<span style="font-family: "verdana" , "sans-serif";">As
discussed in the previous post, an analyst may want to exclude intangible
assets from the calculation of net equity when constructing a debt to worth
ratio.<span style="mso-spacerun: yes;"> </span>You subtract net intangible
assets from the denominator to make this adjustment.<span style="mso-spacerun: yes;"> </span>This results in a higher (but more
conservative and maybe also a more accurate) measurement of leverage.<o:p></o:p></span><br />
<br />
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<span style="font-family: "verdana" , "sans-serif";"><span style="font-family: "verdana" , "sans-serif";">Also
described earlier, the debt to worth ratio represents capital contributed by
creditors against capital contributed by owners.<span style="mso-spacerun: yes;"> </span>If you examine the Smith Heating and Cooling,
Inc. balance sheet, you will see that some of the company’s debt is actually
due to a company owner.<span style="mso-spacerun: yes;"> </span>An analyst might
consider this to be a form of owner’s equity and alter the ratio accordingly to
take a truer picture of leverage.<o:p></o:p></span></span></div>
<br />
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<span style="font-family: "verdana" , "sans-serif";"><span style="font-family: "verdana" , "sans-serif";">To do this,
you would subtract loans from owners from total liabilities in the numerator
and add the same amount to equity in the denominator.<span style="mso-spacerun: yes;"> </span>Only “senior debt” or the bank debt in the
first position in the event of liquidation is actually included as liabilities
in this case.<o:p></o:p></span></span></div>
<br />
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<span style="font-family: "verdana" , "sans-serif";"><span style="font-family: "verdana" , "sans-serif";">Making
these adjustments results in a “senior debt to tangible net worth plus
subordinated debt” ratio.<span style="mso-spacerun: yes;"> </span>For Smith
Heating and Cooling, Inc., this ratio is $9.44 to 1, which is still pretty
high.<span style="mso-spacerun: yes;"> </span>The company is, indeed, highly
leveraged.<span style="mso-spacerun: yes;"> </span>But, the ratio is more
meaningful in this case, and this number can be compared to an industry average
to see how it measures up.<o:p></o:p></span></span></div>
Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com0tag:blogger.com,1999:blog-4343669543757921110.post-36873587423142991152018-07-05T12:49:00.003-07:002018-07-05T13:25:11.486-07:00Leverage and Debt to Worth<br />
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<br /></div>
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<span style="font-family: "arial" , "sans-serif";">"Leverage"
measures the extent to which debt is used to finance a business.<span style="mso-spacerun: yes;"> </span>Higher leverage results from greater
proportions of debt financing as opposed to equity financing, and greater risk
generally accompanies higher leverage.<span style="mso-spacerun: yes;">
</span>The most basic measure of leverage is the Debt to Worth Ratio:<o:p></o:p></span></div>
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<span style="font-family: "arial" , "sans-serif";"><span style="mso-tab-count: 1;"> </span>Debt to Worth = <u>Total Liabilities</u></span><br />
<div style="text-indent: 0px;">
<span style="text-indent: 0.5in;"><span style="font-family: "arial" , sans-serif;"> </span></span><span style="font-family: "arial" , sans-serif; text-indent: 0.5in;">Net Equity</span></div>
</div>
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<br /></div>
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<span style="font-family: "arial" , "sans-serif";">The debt to
worth ratio presents the relationship between capital contributed by lenders
and capital contributed by owners.<span style="mso-spacerun: yes;">
</span>Higher debt to worth implies more leverage and, therefore, more risk or
potential for volatility.<span style="mso-spacerun: yes;"> </span>A lower ratio
implies that the business may have untapped borrowing capacity.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "arial" , "sans-serif";">The debt to
worth of Smith Heating and Cooling, Inc. is $234 to 1.<span style="mso-spacerun: yes;"> </span>So, one might say that, for every dollar the
owners have contributed, the company has borrowed $234 to operate the business.<span style="mso-spacerun: yes;"> </span>This amount seems astronomical.<span style="mso-spacerun: yes;"> </span>The business is indeed highly leveraged, but
their debt to worth ratio is anomalous.<span style="mso-spacerun: yes;">
</span>The ratio is not informative.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "arial" , "sans-serif";">When equity
is very small or negative due to losses on the income statement, the ratio
loses its meaning.<span style="mso-spacerun: yes;"> </span>A deficit or near
zero equity position may be a problem itself, as losses have eroded the capital
that was originally contributed by the owners.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "arial" , "sans-serif";">Other balance
sheet items may throw off the meaning of the debt to worth ratio as well.<span style="mso-spacerun: yes;"> </span>For example, heavily depreciated buildings
may cause an artificially high debt to worth if their market values are
significantly higher than their book values.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "arial" , "sans-serif";">The existence
of intangible assets may have the opposite effect, by inflating equity with
items that have little or no real value.<span style="mso-spacerun: yes;">
</span>A solution is to calculate “tangible net worth” by excluding the book
value of intangible assets.<span style="mso-spacerun: yes;"> </span>You may then
calculate a “Debt to Tangible Net Worth” ratio:<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "arial" , "sans-serif";"><span style="mso-tab-count: 1;"> </span>Debt to Tangible Net Worth = <u><span style="mso-spacerun: yes;"> </span><span style="mso-tab-count: 2;"> </span>Total
Liabilities <span style="mso-spacerun: yes;"> </span><span style="letter-spacing: -.1pt;"><span style="mso-tab-count: 1;"> </span></span><span style="mso-spacerun: yes;"> </span></u></span><br />
<div style="text-indent: 0px;">
<span style="text-indent: 0.5in;"><span style="font-family: "arial" , sans-serif;"> N</span></span><span style="font-family: "arial" , sans-serif; text-indent: 0.5in;">et
Equity-Net Intangible Assets</span></div>
</div>
<br />Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com0tag:blogger.com,1999:blog-4343669543757921110.post-90587734920424433982018-07-02T07:19:00.000-07:002018-07-02T07:22:53.350-07:00Accounts Payable Turnover Ratios<br />
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<br /></div>
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<span style="font-family: "arial" , "sans-serif";"><span style="mso-tab-count: 1;"> </span>Accounts Payable Turnover =<span style="mso-tab-count: 1;"> </span><u>Cost of Goods Sold</u><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";"><span style="mso-tab-count: 6;"> </span><span style="mso-spacerun: yes;"> </span>Accounts Payable<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "arial" , "sans-serif"; letter-spacing: -0.1pt;">The Accounts Payable Turnover Ratio represents the
average number of times per year that payables “turn over” or get paid with
cash.<span style="mso-spacerun: yes;"> </span>A higher (more rapid) turnover is
generally favorable, since accounts payable are being paid more quickly.<o:p></o:p></span></div>
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<br /></div>
<div class="MsoBodyText2">
<span style="font-family: "arial" , "sans-serif";">But, paying debts too quickly uses up needed
cash.<span style="mso-spacerun: yes;"> </span>Many businesses extend these
payments as much as possible to make the best use of their cash.<span style="mso-spacerun: yes;"> </span>Businesses that manage their payables in this
way or which receive extended payment terms from suppliers will, therefore,
have lower (less rapid) accounts payable turnover.<o:p></o:p></span></div>
<div class="MsoBodyText2">
<br /></div>
<div class="MsoBodyText2">
<span style="font-family: "arial" , "sans-serif";">At the same, businesses experiencing cash
flow crunches or disputed invoices with their suppliers will also exhibit
slower payables turnover.<span style="mso-spacerun: yes;"> </span>Additional
research is often necessary to determine the cause of slow or slowing accounts
payable turnover.<span style="mso-spacerun: yes;"> </span>Is it a sign of
trouble or a result of good cash flow management?<span style="mso-spacerun: yes;"> </span>To learn more, compare payables turnover to
the industry average and to the payment terms of vendors.<span style="mso-spacerun: yes;"> </span>Explore payables turnover from previous
periods, and look for trends.<span style="font-size: 12pt;"><o:p></o:p></span></span></div>
<div class="MsoNormal" style="mso-hyphenate: none;">
<br /></div>
<div class="MsoNormal" style="mso-hyphenate: none;">
<span style="font-family: "arial" , "sans-serif"; letter-spacing: -0.1pt;">Like the other turnover ratios, this one compares cost of
goods sold over a period of time with the accounts payable balance at a single
point in time.<span style="mso-spacerun: yes;"> </span>Perhaps the payables
balance is inflated due to a seasonal buildup or a big discount from a
supplier.<span style="mso-spacerun: yes;"> </span>An analyst may compare
purchases (as opposed to Cost of Goods Sold) to average accounts payable
balances to obtain more meaningful ratios.<o:p></o:p></span></div>
<div class="MsoNormal" style="mso-hyphenate: none;">
<br /></div>
<div class="MsoNormal" style="mso-hyphenate: none; text-indent: .5in;">
<span style="font-family: "arial" , "sans-serif"; letter-spacing: -0.1pt;">Days Payables
Outstanding =<span style="mso-tab-count: 1;"> </span><u><span style="mso-spacerun: yes;"> </span>365<span style="mso-tab-count: 2;"> </span></u><o:p></o:p></span></div>
<div class="MsoNormal" style="mso-hyphenate: none;">
<span style="font-family: "arial" , "sans-serif"; letter-spacing: -0.1pt;"><span style="mso-tab-count: 6;"> </span>Accounts
Payable Turnover Ratio<o:p></o:p></span></div>
<div class="MsoNormal" style="mso-hyphenate: none;">
<br /></div>
<div class="MsoNormal" style="mso-hyphenate: none;">
<span style="font-family: "arial" , "sans-serif"; letter-spacing: -0.1pt;">“Days Payables Outstanding” expresses turnover as the
average length of time in days between purchases and their payment.<span style="mso-spacerun: yes;"> </span>Although, this ratio has the same limitations
as the Accounts Payable Turnover Ratio, it may be more intuitive to look at
payables turnover in terms of days rather than in number of times per period.<o:p></o:p></span></div>
<div class="MsoNormal" style="mso-hyphenate: none;">
<br /></div>
<div class="MsoNormal" style="mso-hyphenate: none;">
<span style="font-family: "arial" , "sans-serif"; letter-spacing: -0.1pt;">The payables of Smith Heating and Cooling, Inc. turn over
2.33 times per year or every 157 days.<span style="mso-spacerun: yes;">
</span>This represents extraordinarily slow payables turnover.<span style="mso-spacerun: yes;"> </span>The company’s accounts payable are certainly
due in less than an average of 157 days.<span style="mso-spacerun: yes;">
</span>An analyst would explore whether the company is experiencing cash flow
problems that are resulting in very slow payments.<o:p></o:p></span></div>
<br />Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com0tag:blogger.com,1999:blog-4343669543757921110.post-34841987594344180332018-06-28T09:12:00.004-07:002018-06-28T09:22:43.736-07:00Inventory Turnover Ratios<br />
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";"><span style="mso-tab-count: 1;"> </span>Inventory Turnover = <u>Cost of Goods
Sold</u></span><br />
<div style="text-indent: 0px;">
<span style="text-indent: 0.5in;"><span style="font-family: "arial" , sans-serif;"> </span></span><span style="font-family: "arial" , sans-serif; text-indent: 0.5in;">Inventory</span></div>
</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">Inventory
turnover represents the average number of times per year that inventory
"turns over" or that all goods are sold from inventory.<span style="mso-spacerun: yes;"> </span>A higher, more rapid turnover is generally
favorable, with goods being sold more quickly.<span style="mso-spacerun: yes;">
</span>Rapid turnover may result from good inventory management, but it can be
a symptom of an inventory shortage as well.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">A lower, less
rapid turnover may indicate overstocking or the presence of obsolescent
goods.<span style="mso-spacerun: yes;"> </span>Slow inventory turnover often
coincides with liquidity problems, since working capital is tied up in
inventory.<span style="mso-spacerun: yes;"> </span>Slow inventory turnover may
also result from planned seasonal build-ups or from making a large, bulk purchase
to obtain a good price.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">As with other
turnover ratios, this one compares inventory at a single point in time to an
entire period’s cost of sales.<span style="mso-spacerun: yes;"> </span>To
correct for seasonality or other anomaly, consider using average inventory in
the denominator instead of the ending balance.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";"><span style="mso-tab-count: 1;"> </span>Days Inventory Outstanding = <u><span style="mso-tab-count: 1;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-tab-count: 1;"> </span>365<span style="mso-spacerun: yes;">
</span><span style="mso-tab-count: 1;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-tab-count: 1;"> </span></u><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";"><span style="mso-tab-count: 3;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-tab-count: 3;"> </span>Inventory Turnover Ratio<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">This ratio
expresses turnover as the average length of time in days between the purchase
and the sale of inventory items.<span style="mso-spacerun: yes;"> </span>A lower
value (more rapid turnover) is generally more favorable, and interpretation and
problems are similar to those of the Inventory Turnover Ratio.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">The measures
of <a href="http://www.financialstatements.commercialloananalysis.com/2018/06/quick-ratio-or-acid-test.html">liquidity</a> for Smith Heating and Cooling, Inc. seemed to indicate that the
company would be dependent upon inventory turnover to service short-term
obligations.<span style="mso-spacerun: yes;"> </span>Because of this, their
inventory turnover ratios are crucial.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">The company’s
inventory turnover is only 2.11 times per year, so inventory is outstanding for
an average of 173 days.<span style="mso-spacerun: yes;"> </span>This is likely
to be very problematic.<span style="mso-spacerun: yes;"> </span>An analyst would
want to explore how these rates compare to those of the company’s recent past
as well as to those of other companies in the industry.<span style="mso-spacerun: yes;"> </span>It would also be important to know if
seasonal fluctuations are affecting the inventory balance and whether the goods
are becoming obsolete as they sit.<o:p></o:p></span></div>
<br />Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com0tag:blogger.com,1999:blog-4343669543757921110.post-9987324736481040552018-06-26T11:52:00.000-07:002018-06-26T11:52:01.588-07:00Activity Ratios and Accounts Receivable Turnover<br />
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">“Activity
ratios” measure "turnover" or the rates at which current assets and
current liabilities are used-up or paid-off through ordinary business
operations.<span style="mso-spacerun: yes;"> </span>Quicker turnover ratios
generally imply greater efficiency and better management.<span style="mso-spacerun: yes;"> </span>The first such ratio is the accounts
receivable turnover ratio:<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><span style="mso-tab-count: 1;"> </span>Accounts Receivable Turnover = <u>Annual
Net Revenue<o:p></o:p></u></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><span style="mso-tab-count: 4;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-tab-count: 2;"> </span><span style="mso-spacerun: yes;"> </span>Accounts Receivable<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Accounts
receivable turnover represents the average number of times per year that trade
receivables "turn over" or are converted to cash.<span style="mso-spacerun: yes;"> </span>Higher, more rapid turnover is favorable,
since sales on credit are being converted to cash more quickly.<span style="mso-spacerun: yes;"> </span>Lower, less rapid turnover is unfavorable
since default becomes more likely as receivables remain uncollected, and since
conversion to cash is necessary to service obligations or to earn interest.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">A problem
with this ratio is the fact that it compares accounts receivable at a single
point in time to an entire year of sales.<span style="mso-spacerun: yes;">
</span>If the accounts receivable balance is unusually high or low on the date
of the financial statements due to seasonal variations or other factors, then
this measurement may not provide an accurate picture.<span style="mso-spacerun: yes;"> </span>Substituting average receivable balances over
the year in the denominator, may help correct this.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Another
potential problem exists when cash sales represent a large percentage of total
revenues.<span style="mso-spacerun: yes;"> </span>The ratio will be very
favorable in this case.<span style="mso-spacerun: yes;"> </span>A more useful
measure may be taken by considering only credit sales in the numerator.<span style="mso-spacerun: yes;"> </span>Such a ratio is probably best used only in
comparison with the company’s own historical turnover and with the actual
payment terms the business requires of its customers.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Another way
to look at accounts receivable turnover is in days:<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><span style="mso-tab-count: 1;"> </span>Days Receivables Outstanding= <u><span style="mso-tab-count: 1;"> </span><span style="mso-spacerun: yes;"> </span>365<span style="mso-tab-count: 2;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></u><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><span style="mso-tab-count: 6;"> </span><span style="mso-spacerun: yes;"> </span>Receivables Turnover Ratio<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">This ratio
expresses the average length of time in number of days between sales and the
cash collection of receivables.<span style="mso-spacerun: yes;"> </span>The
average number of days that receivables are outstanding can seem like a more
intuitive measure than turnover expressed in number of times per year.<span style="mso-spacerun: yes;"> </span>In this case, a lower value (or fewer days)
is favorable because it represents more rapid turnover.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">For Smith
Heating and Cooling, Inc., accounts receivable turnover is 11.27 times per
year, and the average number of days that receivables are outstanding is
32.39.<span style="mso-spacerun: yes;"> </span>To put these numbers into better
context, an analyst would compare them to receivables turnover from prior
years, receivables turnover from similar businesses, and the company’s payment
terms.<span style="mso-spacerun: yes;"> </span>If Smith Heating and Cooling
requires its customers to pay in thirty days, then receivables turnover is a
bit slow.<span style="mso-spacerun: yes;"> </span>If some customers pay cash at
the time of service, then receivables collection may be really slow for those
customers who pay on account.<o:p></o:p></span></div>
<br />Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com0tag:blogger.com,1999:blog-4343669543757921110.post-52438570947249272952018-06-24T13:07:00.005-07:002018-06-28T09:25:50.071-07:00Quick Ratio or Acid Test<br />
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";"><o:p> </o:p></span><span style="font-family: "arial" , sans-serif; text-align: right;">Quick Ratio = </span><u style="font-family: Arial, sans-serif; text-align: right;">Cash & equivalents + Current
Accounts & Notes Receivable</u></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";"><span style="mso-tab-count: 6;"> </span>Total
Current Liabilities<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">The quick
ratio or “acid test” is a more conservative measure of liquidity than the
<a href="http://www.financialstatements.commercialloananalysis.com/2018/06/liquidity-working-capital-and-current_24.html">current ratio</a>.<span style="mso-spacerun: yes;"> </span>The numerator includes
only the most liquid assets, and it excludes inventory and other accounts such
as prepaid expenses.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">Some
accounting and finance experts simply present the quick ratio numerator as
“Current Assets minus Inventory.”<span style="mso-spacerun: yes;"> </span>This
is the most basic way to calculate the quick ratio.<span style="mso-spacerun: yes;"> </span>The quick ratio presented here is actually
more conservative, since its assets include only cash, cash equivalents, and
accounts and notes receivable due within a year.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">A quick ratio
below one implies that the business will be dependent upon turning its
inventory to service short-term debts.<span style="mso-spacerun: yes;">
</span>This may be problematic for a business that is susceptible to seasonal
or cyclical fluctuations, a manufacturer with significant unfinished goods, or
any business holding obsolete inventory.<span style="mso-spacerun: yes;">
</span>If inventory is an issue for a business, then you may study their
inventory and accounts receivable turnover ratios to learn more about their
ability to turn inventory into cash.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">For Smith
Heating and Cooling, Inc., their quick ratio is 0.43 versus a current ratio of
1.12.<span style="mso-spacerun: yes;"> </span>It appears that the company will,
indeed, be dependent upon inventory turnover to service its short-term
obligations.<span style="mso-spacerun: yes;"> </span>For this reason, it will be
important to carefully study the quality of the company’s inventory as well as
their turnover ratios to perform a complete financial analysis.<o:p></o:p></span></div>
<br />Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com0tag:blogger.com,1999:blog-4343669543757921110.post-87338488538639481732018-06-24T13:01:00.002-07:002018-06-24T13:18:52.221-07:00Liquidity, Working Capital, and the Current Ratio<br />
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">"Liquidity"
(or "current position") is the measurement of a firm’s ability to
service its short-term obligations through the "liquidation" of
current assets.<span style="mso-spacerun: yes;"> </span>Liquidation refers to
the act of turning assets into cash, that is, selling inventory and collecting
receivables and amounts due to the business.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">The simplest
measure of liquidity is “working capital,” or total current assets minus total
current liabilities.<span style="mso-spacerun: yes;"> </span>This measurement
yields a dollar amount.<span style="mso-spacerun: yes;"> </span>If the number is
positive, then the business has a cushion of current assets over current
liabilities.<span style="mso-spacerun: yes;"> </span>A working capital shortfall
may imply that a problem servicing obligations will arise during the upcoming
year.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">Perhaps the
most commonly used measurement of liquidity is the “current ratio.”<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="text-indent: .5in;">
<span style="font-family: "arial" , "sans-serif";">Current
Ratio = Total Current Assets / Total Current Liabilities <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">The current
ratio is analogous to the calculation of working capital.<span style="mso-spacerun: yes;"> </span>The difference is that the cushion between
current assets and current liabilities is measured as a ratio instead of a dollar
amount.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">A current
ratio above one implies that a cushion exists between current assets and
current liabilities.<span style="mso-spacerun: yes;"> </span>The higher the
ratio, the greater the liquidity, since the coverage of current liabilities by
current assets becomes larger.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">It is also important
to analyze the composition and quality of current assets.<span style="mso-spacerun: yes;"> </span>Are they comprised primarily of cash and
liquid assets?<span style="mso-spacerun: yes;"> </span>Or, are most of the
liquid assets comprised of receivables that may be difficult to collect or
inventory which may be difficult to sell?<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">Liquidity
ratios may also be affected by accounting policies such as whether a borrower
uses LIFO, FIFO, or some other inventory valuation method.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">Keep in mind
that liquidity ratios are affected by seasonality and that the cash conversion
cycle or the makeup of the balance sheet may affect liquidity ratios.<span style="mso-spacerun: yes;"> </span>For example, a business with a high
concentration of fixed assets financed by long-term debt, but with no inventory
or receivables, may appear to have liquidity issues (due to the current portion
of long-term debt within the denominator of the current ratio).<span style="mso-spacerun: yes;"> </span>If fixed assets (as opposed to sales from
inventory) generate consistent cash flow, then this income may be sufficient to
service the debt and current obligations.<span style="mso-spacerun: yes;">
</span>In such a case, an analysis of the cash flows and the debt service
coverage ratios may be a better indicator of liquidity.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">For Smith
Heating and Cooling, Inc., current assets total $309,000, while current
liabilities add up to $275,000.<span style="mso-spacerun: yes;"> </span>This
means that the company has working capital of $34,000 and a current ratio of
1.12.</span><br />
<span style="font-family: "arial" , "sans-serif";"><br /></span>
<span style="font-family: "arial" , "sans-serif";"></span>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";"><span style="font-family: "arial" , "helvetica" , sans-serif;">In this <i>Street Smarts</i> <a href="http://www.inc.com/magazine/20081001/street-smarts-secrets-of-a-110-million-man.html">article</a> on Inc.com, Norm
Brodsky argues that paying attention to working capital and the current ratio
are essential to success in business.</span></span></div>
</div>
Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com0tag:blogger.com,1999:blog-4343669543757921110.post-53104330792006219692018-06-24T12:55:00.000-07:002018-06-24T12:55:00.788-07:00Sample Income Statement<div class="separator" style="clear: both; text-align: center;">
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<br />Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com0tag:blogger.com,1999:blog-4343669543757921110.post-39388657867672406062018-06-24T12:39:00.001-07:002018-06-24T12:42:17.590-07:00Sample Balance Sheet<div class="separator" style="clear: both; text-align: center;">
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<br />
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<br />Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com0tag:blogger.com,1999:blog-4343669543757921110.post-15736139855666429402018-06-24T12:06:00.002-07:002018-06-24T12:06:34.914-07:00Financial Statement Quality<br />
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Financial
statements may be prepared internally a business or externally by an
accountant.<span style="mso-spacerun: yes;"> </span>Historical statements that
have been prepared by a Certified Public Accountant will explain the level of
examination that has been made in a letter preceding the statements.<span style="mso-spacerun: yes;"> </span>The levels of CPA-prepared financial
statements are:<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial","sans-serif";">Compiled:</span></b><span style="font-family: "Arial","sans-serif";"> These statements have been put
together by a CPA, and, therefore, should be correct with respect to
format.<span style="mso-spacerun: yes;"> </span>However, the accountant makes no
opinion as to the accuracy of the numbers, and the accountant is not required
to be independent of the business.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial","sans-serif";">Reviewed:</span></b><span style="font-family: "Arial","sans-serif";"> The statements are examined for
accuracy by the accountant, but the scope of the examination is significantly
smaller that of an audit.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial","sans-serif";">Qualified Audit:</span></b><span style="font-family: "Arial","sans-serif";"> In an audit, the accountant strictly
examines the financial statements.<span style="mso-spacerun: yes;">
</span>Account balances including loans, deposits, receivables, payables, and
inventory are audited, and a selection of individual transactions is tested for
accuracy.<span style="mso-spacerun: yes;"> </span>The auditor also examines the
internal controls of the business and expresses an opinion on the ability of
the firm to continue as a going-concern.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">An audit is
considered "qualified" because there is some discrepancy or
disagreement between the figures of the business and the auditor's
findings.<span style="mso-spacerun: yes;"> </span>Any such discrepancies will be
explicitly listed in the letter preceding the statements.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial","sans-serif";">Unqualified Audit:</span></b><span style="font-family: "Arial","sans-serif";"> This is also a strict examination as
described above, except that no discrepancies exist between the business and
the auditor.</span></div>
Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com0tag:blogger.com,1999:blog-4343669543757921110.post-17947607906148338692018-06-24T12:05:00.002-07:002018-06-24T12:05:48.524-07:00Cash Basis Versus Accrual Basis Accounting<br />
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">There are two
methods of accounting and financial statement preparation, “cash basis” and
“accrual basis.”<span style="mso-spacerun: yes;"> </span>Cash basis accounting
does not use accounts receivable and accounts payable; instead, income is
booked when cash is actually received, and expenses are booked when checks are
written.<span style="mso-spacerun: yes;"> </span>Many small businesses use cash
basis accounting, because it is easier to perform, and it involves fewer
entries and less bookkeeping.<span style="mso-spacerun: yes;"> </span>Many
businesses also use the cash basis for their income tax returns.<span style="mso-spacerun: yes;"> </span>It can minimize taxable income, since sales
are not booked until payment is received.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Virtually all
big businesses use accrual accounting (including accounts receivable and
accounts payable) for their financial reporting.<span style="mso-spacerun: yes;"> </span>Accrual accounting is beneficial because of
the “matching” principle.<span style="mso-spacerun: yes;"> </span>The use of
accrual accounting allows revenues to be matched with corresponding expenses
that are incurred in the same period (without regard for when the cash actually
comes in or goes out the door.)<span style="mso-spacerun: yes;"> </span>This
often allows financial statement analysis to be more meaningful (for both the
company and outside analysts.)<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Accrual
accounting can be easily converted to cash basis accounting; in fact, most
accounting programs allow you to choose to create either cash or accrual
reports.<span style="mso-spacerun: yes;"> </span>But, conversely, cash
accounting cannot be converted to accrual accounting without the receipt of additional
information.</span></div>
Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com0tag:blogger.com,1999:blog-4343669543757921110.post-59848152236939984192018-06-24T12:04:00.002-07:002018-06-24T12:04:38.616-07:00Equity<br />
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Equity represents
the difference between the assets and the liabilities of a business.<span style="mso-spacerun: yes;"> </span>On the balance sheet, “Total Assets” minus
“Total Liabilities” equals “Net Equity.”<span style="mso-spacerun: yes;">
</span>Quite a few types of equity accounts exist on balance sheets.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">All
corporations issue “common stock,” which is the most basic form of ownership of
a corporation.<span style="mso-spacerun: yes;"> </span>Stock equity may also be
referred to as “Paid-In Capital” on a corporate balance sheet.<span style="mso-spacerun: yes;"> </span>Some balance sheets include an “Additional
Paid-In Capital” account as well, representing excess funds invested in stock
over and above its arbitrary “par value.”<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">If a
corporation subsequently purchases some of its stock back from shareholders,
the amounts paid in these transactions are booked as “Treasury Stock.”<span style="mso-spacerun: yes;"> </span>Treasury stock will, therefore, have a
negative balance as an equity account.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Other forms
of business ownership may use somewhat different terminology than this;
however, all businesses will have “retained earnings,” which simply represent
the sum of all of their profits and losses for all periods.</span></div>
Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com0tag:blogger.com,1999:blog-4343669543757921110.post-39863420775630351272018-06-24T12:03:00.005-07:002018-06-24T12:03:53.843-07:00Notes Payable<br />
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Notes payable
are loans due to banks or other creditors.<span style="mso-spacerun: yes;">
</span>A “note” is a legal contract; it represents an obligation to repay a
debt.<span style="mso-spacerun: yes;"> </span>A note payable may be either
current or non-current or a combination of both.<span style="mso-spacerun: yes;"> </span>“Notes Payable” are often individually listed
on the balance sheet, and the amounts represent outstanding principal balances
only.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Most notes
payable consist of long-term loans (or mortgages) that are repaid in
installments.<span style="mso-spacerun: yes;"> </span>These notes are listed as
non-current liabilities on the balance sheet.<span style="mso-spacerun: yes;">
</span>However, the sum of principal payments due in the upcoming year are
subtracted and listed separately as current liabilities called, “Current Portion
of Long-Term Debt” or “Current Maturities of Long-Term Debt”<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">If a note
payable, such as a revolving line of credit or a loan coming due, expires or
balloons within the year, then the entire balance is listed as a current
liability.</span></div>
Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com0tag:blogger.com,1999:blog-4343669543757921110.post-43066678305050138062018-06-24T12:03:00.002-07:002018-06-24T12:03:13.155-07:00Accounts Payable<br />
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">An account
payable is an amount due to a vendor from which a business has purchased goods
or services “on account.”<span style="mso-spacerun: yes;"> </span>“Accounts
Payable,” the plural form of the term, is a current liability listed on the
balance sheet representing the total outstanding payables on the date of the
statement.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Accounts
payable are analogous to accounts receivable; the vendor making a sale on
credit books an account receivable, while the purchaser books an account
payable.</span></div>
Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com0tag:blogger.com,1999:blog-4343669543757921110.post-37049064430260697282018-06-24T12:02:00.002-07:002018-06-24T12:02:25.263-07:00Intangible Assets<br />
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">An intangible
asset exists only on paper or in accounting transactions; it is not a physical
item or a receivable.<span style="mso-spacerun: yes;"> </span>Instead, it is an
intangible item, such as a patent, copyright, or goodwill.<span style="mso-spacerun: yes;"> </span>(“Goodwill” represents the price paid for the
assets of a business over and above the book value.)<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Ownership of
an intangible asset often leads to some type of income generation or cost
savings.<span style="mso-spacerun: yes;"> </span>Intangible assets, therefore,
have value, and they are listed on the balance sheet as non-current assets.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Intangible
assets are written off slowly over time in a similar manner as fixed
assets.<span style="mso-spacerun: yes;"> </span>They are gradually written down
or “amortized” over their existence.<span style="mso-spacerun: yes;"> </span>For
example, a patent would be amortized until its expiration.<span style="mso-spacerun: yes;"> </span>Similarly, expenditures made for loan costs
or franchise fees are generally capitalized and amortized as well.</span></div>
Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com0tag:blogger.com,1999:blog-4343669543757921110.post-32789516942091873712018-06-24T12:01:00.002-07:002018-06-24T12:01:44.628-07:00Fixed Assets and Depreciation<br />
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">A fixed asset
is a physical item, such as a piece of equipment, a vehicle, or real
property.<span style="mso-spacerun: yes;"> </span>Fixed asset expenditures must
be “capitalized;” that is, they are listed as assets on the balance sheet, as
opposed to being expensed on the income statement.<span style="mso-spacerun: yes;"> </span>Fixed assets are considered non-current, and
they are listed on the balance sheet at their historical costs.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Fixed assets
are “depreciated” over time, and “depreciation” is an expense that is listed on
the income statement.<span style="mso-spacerun: yes;"> </span>Each period, a
fixed asset receives some depreciation write-down until its useful life is used
up.<span style="mso-spacerun: yes;"> </span>The length of time over which a
fixed asset is depreciated very roughly approximates its useful life.<span style="mso-spacerun: yes;"> </span>For example, a computer may be depreciated
over five years, while a building may be depreciated over twenty or even as
many as forty years.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">The balance
sheet usually lists gross amounts of fixed assets (at historical cost) in
categories such as “Office Equipment,” “Vehicles,” and “Real Estate.”<span style="mso-spacerun: yes;"> </span>The sum of these amounts represents “Gross
Fixed Assets.”<span style="mso-spacerun: yes;"> </span>“Accumulated
Depreciation” is typically listed next, consisting of the sum of all
depreciation expense, past and present.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">So, on the
balance sheet, “Gross Fixed Assets” less “Accumulated Depreciation” equals “Net
Fixed Assets.”</span></div>
Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com0tag:blogger.com,1999:blog-4343669543757921110.post-63854684263821209072018-06-24T09:38:00.003-07:002018-06-24T09:40:13.737-07:00Inventory Valuation<br />
<div class="BodySingle">
<span style="font-family: "arial" , "sans-serif";">Over time,
many businesses build up inventories of goods available for sale.<span style="mso-spacerun: yes;"> </span>Prices change; they generally increase over
time due to inflation.<span style="mso-spacerun: yes;"> </span>Because of this
effect, an item that cost the business one amount a year ago, may cost more
when purchased today.<span style="mso-spacerun: yes;"> </span>A decision must be
made as to which item gets sold and removed from inventory.<span style="mso-spacerun: yes;"> </span>This decision affects both the inventory
value as well as the cost of goods sold account related to the sale.<o:p></o:p></span></div>
<div class="BodySingle">
<br /></div>
<div class="BodySingle">
<span style="font-family: "arial" , "sans-serif";">A popular
method of inventory valuation is LIFO or, “last in, first out.”<span style="mso-spacerun: yes;"> </span>In other words, the most recent cost (often
the most expensive) is the one that is removed from inventory and booked as the
cost of goods sold.<span style="mso-spacerun: yes;"> </span>This method
minimizes profits (and therefore income taxes.)<o:p></o:p></span></div>
<div class="BodySingle">
<br /></div>
<div class="BodySingle">
<span style="font-family: "arial" , "sans-serif";">Another
method is FIFO or, “first in, first out.”<span style="mso-spacerun: yes;">
</span>Using this method, the oldest cost is the one that is booked.<span style="mso-spacerun: yes;"> </span>Some businesses may also use an “average
cost” method to value inventory and book costs of goods sold.<o:p></o:p></span></div>
<div class="BodySingle">
<br /></div>
<div class="BodySingle">
<span style="font-family: "arial" , "sans-serif";">When a
company uses LIFO, it will list a “LIFO Reserve” on its balance sheet or in the
footnotes to the financial statements.<span style="mso-spacerun: yes;">
</span>The LIFO reserve represents the difference between LIFO and FIFO; it is
the amount by which inventory under LIFO would be adjusted to be valued using
FIFO.<o:p></o:p></span></div>
<div class="BodySingle">
<br /></div>
<div class="DefaultText">
<span style="font-family: "arial" , "sans-serif";">Another
important aspect of inventory valuation and inventory analysis involves whether
the business regularly conducts a physical count of its inventory.<span style="mso-spacerun: yes;"> </span>This activity helps ensure that the stated
balance is accurate and identifies “shrinkage” or loss of inventory due to
misplacement, theft, and bookkeeping error.<span style="mso-spacerun: yes;">
</span>Similarly, businesses occasionally write off obsolete inventory that no
longer has value or cannot be sold.<span style="mso-spacerun: yes;"> </span>If
the business has not performed an inventory count or written off obsolete
items, then the inventory value on the balance sheet is likely to be
overstated.</span></div>
Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com0tag:blogger.com,1999:blog-4343669543757921110.post-73868571123944300882018-06-24T09:38:00.000-07:002018-06-24T09:40:01.597-07:00Inventory<br />
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">Inventory
consists of goods that are held for sale.<span style="mso-spacerun: yes;">
</span>“Inventory” is a current asset account listed on the balance sheet.<span style="mso-spacerun: yes;"> </span>Inventory might consist of raw materials,
work-in-progress, or finished goods.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">The quality
of inventory is explored by financial analysts.<span style="mso-spacerun: yes;">
</span>For example, raw materials and finished goods typically have more value
in liquidation (and therefore as collateral) than work-in-progress.<span style="mso-spacerun: yes;"> </span>Inventory that has become obsolete may also
have decreased value.<o:p></o:p></span></div>
<br />Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com0tag:blogger.com,1999:blog-4343669543757921110.post-76753277957738481532018-06-24T09:34:00.002-07:002018-06-24T09:39:47.125-07:00Accounts Receivable<br />
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">Accounts
receivable are amounts due from customers who have purchased goods or services
“on account.”<span style="mso-spacerun: yes;"> </span>Such accounts are
typically due within thirty days or on a certain date each month.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">“Accounts
Receivable” is a current asset account that is listed on the balance
sheet.<span style="mso-spacerun: yes;"> </span>“Accounts receivable” is the
proper plural form of the singular, “account receivable.”<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "arial" , "sans-serif";">The quality
of accounts receivable is an important aspect of financial statement
analysis.<span style="mso-spacerun: yes;"> </span>Analysts explore whether
payments are being received in a timely manner as well as from whom the
receivables are due and whether the customers are creditworthy.<o:p></o:p></span></div>
<br />Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com0tag:blogger.com,1999:blog-4343669543757921110.post-87870782030245781092018-06-24T09:33:00.002-07:002018-06-24T09:33:32.891-07:00Current and Non-Current<br />
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">There are two
types of assets and liabilities, “current” and “non-current.”<span style="mso-spacerun: yes;"> </span>Current assets are those that are expected to
be converted to cash in one year or less, and current liabilities are those
that will come due in one year or less.<span style="mso-spacerun: yes;">
</span>So, cash, marketable securities, accounts receivable, and inventory are all
considered current assets, while accounts payable and the principal amounts of
loans due within a year are considered current liabilities.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Non-current
assets and non-current liabilities are due or converted to cash in more than a
year.<span style="mso-spacerun: yes;"> </span>Fixed assets and intangible assets
are considered non-current, and loan amounts which are due in more than a year
are also considered non-current.<o:p></o:p></span></div>
<br />Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com0tag:blogger.com,1999:blog-4343669543757921110.post-236398543349228972018-06-24T09:32:00.002-07:002018-06-24T09:32:15.549-07:00The Income Statement<br />
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">The “income
statement” (or “profit and loss” or “P & L”) presents income and expenses
over a period of time.<span style="mso-spacerun: yes;"> </span>It is important
to note that the income statement covers a range of dates, usually an entire
month, quarter, or year.<span style="mso-spacerun: yes;"> </span>The statement
starts by listing income or “revenues” or the “top line.”<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Direct costs
or “cost of goods sold” are then subtracted from revenues to arrive at “gross
profit.”<span style="mso-spacerun: yes;"> </span>Note that direct costs are
generally variable in nature; that is, these costs directly correspond to
revenues and vary along with them.<span style="mso-spacerun: yes;"> </span>For
example, a store sells a television.<span style="mso-spacerun: yes;"> </span>The
amount that the store originally paid to the manufacturer for the television
represents a “cost of goods sold.”<span style="mso-spacerun: yes;"> </span>This
cost is directly related to the revenue that the store earns from the
customer.<span style="mso-spacerun: yes;"> </span>To further illustrate, when
the manufacturer sells another television to the store, the labor and materials
that go into making it represent direct costs to the manufacturer.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Next,
operating or “general” expenses or “overhead,” such as rent and office supplies
are subtracted to arrive at “operating profit.”<span style="mso-spacerun: yes;">
</span>Operating costs are generally fixed in nature, as they tend not to increase
in the short-term.<span style="mso-spacerun: yes;"> </span>For example, a
company’s rent often remains the same for months or years at a time.<span style="mso-spacerun: yes;"> </span>Similarly, operating costs such as rent are
not directly tied to any specific sales transactions.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Finally,
non-operating and extraordinary items such as interest expense and income taxes
are subtracted to arrive at net income or the “bottom line.”<span style="mso-spacerun: yes;"> </span>An income statement might have the following
format:<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Gross Revenue
(or “sales” or “income”)<o:p></o:p></span></div>
<div class="MsoNormal">
<u><span style="font-family: "Arial","sans-serif";">Less:
Returns & Allowances<o:p></o:p></span></u></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Equals: Net
Revenue<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<u><span style="font-family: "Arial","sans-serif";">Less: Direct
Costs (or “cost of goods sold”)<o:p></o:p></span></u></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Equals: Gross
Profit<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<u><span style="font-family: "Arial","sans-serif";">Less:
Operating Expenses (or “overhead”)<o:p></o:p></span></u></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Equals:
Operating Profit<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<u><span style="font-family: "Arial","sans-serif";">Less:
Non-Operating Expenses<o:p></o:p></span></u></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Equals Net
Income<o:p></o:p></span></div>
<br />Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com0tag:blogger.com,1999:blog-4343669543757921110.post-84855390750882180912018-06-24T09:30:00.002-07:002018-06-24T09:30:51.416-07:00The Balance Sheet<br />
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">The “balance
sheet” is the financial statement that lists account balances on a given
date.<span style="mso-spacerun: yes;"> </span>The important thing to remember is
that it represents a single moment in time.<span style="mso-spacerun: yes;">
</span>The statement is referred to as the “balance sheet” because it presents
balances in the asset, liability, and equity accounts at the end of business on
a certain date.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">The balance
sheet lists assets such as bank deposits, accounts receivable, inventory, and
equipment, as well as liabilities like loans and accounts payable.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">“Equity” is
the difference between the assets and the liabilities of a business; equity can
also be described as “what you own, less what you owe.”<span style="mso-spacerun: yes;"> </span>So, the formula for a balance sheet is as
follows:<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="text-indent: .5in;">
<span style="font-family: "Arial","sans-serif";">assets
- liabilities = equity, or<o:p></o:p></span></div>
<div class="MsoNormal" style="text-indent: .5in;">
<br /></div>
<div class="MsoNormal" style="text-indent: .5in;">
<span style="font-family: "Arial","sans-serif";">assets
= liabilities + equity.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">The balance
sheet actually contains two “sides” or two sections.<span style="mso-spacerun: yes;"> </span>One side consists of assets, and the other
side consists of liabilities plus equity.<span style="mso-spacerun: yes;">
</span>The sum of each of these two sides must equal each other or be in
“balance.”<span style="mso-spacerun: yes;"> </span>Perhaps, this is another
reason why the statement is referred to as the “balance sheet.”</span></div>
Ken Pirokhttp://www.blogger.com/profile/14475177526121551514noreply@blogger.com0