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FINANCIAL PLANNING AND ANALYSIS

Chapter 3

Accounting concepts and Standards

Table of Contents

Table of Contents

• Accounting concepts and Standards

• Accounting and external financial Reporting

• Income Statement

• Balance Sheet

• Statement of Cash Flows

• Interactions Among Common Financial Statement

Key Accounting Concepts and Standards

Elements

-Assets

-Liabilities

-Equity

-Revenues

-Expenses

Accounting refer to the records within each element.

Accounting Standards

Global Accounting Standards

-International financial reporting standards (IFRS) as pronounced accounting standards board (IASB)

U.S Accounting Standards

-generally accepted accounting principles (GAAP) as pronounced by the financial accounting standards bord (FASB)

IFRS is focused more on principles ,

while GAAP is more rules based

Accrual Accounting

Used by GAAP and IFRS

Provides management with some latitude .

-Earnings management versus earning manipulation

Key Financial Statements

Accounting and External Financial Reporting

Accounting and External Financial Reporting

Areas of Financial Reporting Support Provided

By FP&A

-Accounting cycle

-journal entries

-financial reporting analysis

-critical financial issues and potential transactions

-profitability reporting

Journal Entries

credit

Debit

Account decreases

Account increases

Assets

Expenses

Dividends

Debit

credit

Account increases

Account decreases

Liabilities

Revenues

Capital stock

Retained earnings

Journal Entries

Example

suppose a firm borrows $1000 from a line of credit at the bank

-cash (an asset account ) is increased. this result in a debit to cash for$1000.

-notes payable (a liability account ) is increased. this results in a credit t notes payable $1000.

Key Financial Statements

Income Statement

Income Statement

Income Statement

Earnings Per Share (EPS)

Earnings Per Share (EPS)

A Widely used measure of profitability and must be reported on the income statement if the company is publicly traded .

Net income - Preferred Dividends

Basic EPS =

Weighted average outstanding shares

Key Financial Statements

Balance Sheet

Balance Sheet

Balance Sheet

Represents a snapshot of the firm is holding a specific point in time .

most are classified .

the swiss army knife of financial identities :

Assets = Liabilities + Equity

Balance Sheet

-Assets

-liabilities

-shareholders equity

Assets

The Balance Sheet - Assets

Liabilities

The Balance Sheet - Liabilities

The difference between Debt and Liabilities.

liabilities

Liabilities are amounts owed, regardless of form.

Debt refers only to obligations that require interest payments.

Debts are a subset of liabilities.

Debt

Account payable

Shareholders Equity

The Balance Sheet - Shareholders Equity

Key Financial Statements

Statement of Cash Flows

Statement of Cash Flows

Statement of Cash Flows

Sources of uses of Cash Flow

Source of funds :

1- Decrease in an asset

2- Increase in a liability

Use of funds :

1- Decrease in a liability

2- Increase in an asset

Statement of Cash Flows

- Indirect method

- Direct method provides more information

Key Financial Statements

Interactions Among Common Financial Statement

Interactions Among Common Financial Statement

Interactions Among Common Financial Statement

Do the financial match up with the firm is intended strategy

How is the organization financing growth or reinvesting its earnings ?

Is it efficient and effective at managing its assets and liabilities?

Is it in a position to have strong growth ?

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