Accounting Worksheet

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Review: Financial Accounting Statements
1. Statement of Financial Performance
– also known as the Income(?) or Profit and Loss Statement
– Shows how much profit the business generated over a given period
of time
2. Statement of Financial Position
– also known as the Balance sheet
– Shows the financial position at a given point in time
Which statements
measure what?
Liquidity
Profitability
3. Statement of Changes in Owners’ Equity:
– Shows all changes in owner’s interest in net assets
from transactions during the period (not examinable)
Solvency
4. Statement of Cash Flows:
– Shows cash movements over a given period of time
Public companies need to produce these Financial Reports every year.
They need to be audited independently and presented to shareholders
in the companies Annual Report.
Four different methods for analysing capital investments:
1. The Accounting Rate of Return (ARR % pa):
ARR = Average profit / Average investment … similar to ROA.
2. The Payback Period (PP years):
Time to receive return of initial investment.
3. Net Present Value (NPV $):
NPV = Sum of ALL cash flows discounted to the present
Use calculator, spreadsheet or discount tables.
The discount rate (r%) or cost of capital (interest rate) used to
calculate the NPV depends on the opportunity cost of interest
rt, the inflation rate rp, and the specific risk premium r,
r=rp + rp+r,
4. Internal Rate of Return (IRR % pa): not examinable
The exact discount rate which gives the NPV = 0.
r
ROI – Du Pont analysis
Further analysis can be conducted using Du Pont ROI.
Du Pont ROI
Profit
Investment
= Profit margin x Investment turnover
Profit X Sales
Sales
Investment
Example cont:
ROI
Corporate
x
Il
Department stores
11 11
х
$400 000
$2 200 000
18.2%
($70 000)
$75 000
-93.3%
$75 000
$225 000
31.1%
Return on sales
$400 000
$990 000
40.4%
($70 000
$400 000
-17.5%
$70 000
$520 000
13.46%
Investment turnover
$990 000
$2 200 000
0.45 times
$400 000
$75 000
5.3 times
$520 000
$225 000
2.31 times
х
= =
Specialty stores
X
II
х

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business

accounting

Finances

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