Course 2 - 202 - Financial Analysis & Accounting - The Tools Flashcards
(44 cards)
What is accounting?
It is the systematic measurement, analysis, and interpretation used to communicate the financial information of the business.
The birth of modern day accounting is said to be tied to what publication?
The birth of modern-day accounting is said to be tied to the publication of a textbook written by Luca Pacioli in 1494.
What is a financial analysis? Why is it important to us in retail?
Financial analysis is a process that serves to provide an assessment of the stability and profitability of an organization. Financial analysis is important to the business as it gives the executive team and company decision makers the information needed to sustain or grow the organization, aids in the strategic direction of the company, and ultimately will impact decisions on growth of the infrastructure.
What are financial statements? What are they used for?
Financial statements are designed to offer an accurate picture of a company’s condition and operating results.
What is a Balance Sheet? What is it used for?
The balance sheet gives you a quick picture of what the company owns in physical assets, as well as the money it holds, has invested, or is owed to the organization.
A balance sheet is based on an equation defined by a fundamental accounting model:
Assets = Liabilities + Equity
In accounting terms, what is an asset?
Assets are items of economic value owned by a company. An asset consists of the physical properties of the company, money it holds or has invested, and money that is owed the company. Assets might typically include cash or cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses, office equipment, real estate, fleet vehicles, and other property and resources that could be converted to cash in less than one year. Current assets are important to most companies as a source of funds for day-to-day operations.
In accounting terms, what is a liability?
Liabilities are obligations that legally bind a company to settle a debt. In other words, financial obligations that a company owes to others. Examples of liabilities might include: accounts payable, taxes, wages, accrued expenses and deferred revenues. There are generally two types of liabilities that we must consider: Current liabilities, which are debts that a company expects to pay off within one year (such as bills and utilities, money owed to vendors and suppliers, payroll, short term loans, etc…); and long-term liabilities, which are debts payable over a longer period of time (for example, mortgages).
In accounting terms, what is equity?
Equity, or Owners Equity is often referred to as a company’s capital or net worth. In accounting terms, ownership equity is the remaining interest in all assets after all liabilities are paid. Simply stated, it is the money that would be left over if a company sold all its assets and paid off all its liabilities.
What is an Income/Profit & Loss Statement? What is the purpose of a P&L Statement?
Simply stated, an Income Statement shows how much money a company made and spent over the designated time period.
What are the four primary elements of income?
The elements of income are generally broken down into four primary categories: revenues, expenses, gains, and losses.
What is the Costs of Goods Sold?
This number represents the costs directly associated with manufacturing and/or acquisition of products. A retailer’s inventory is merchandise that has not yet been sold.
What is Gross Profit? What is the formula for determining Gross Profit?
This is derived by subtracting the cost of goods sold from net sales.
Gross Profit = Total Sales – Cost of Goods
What is the Gross Profit Margin Percentage? What is the formula for determining the Gross Profit Margin Percentage?
Ultimately, every business wants sales performance to show success beyond the Break-Even point; that is, beyond the point at which the sales equal the expenses.
Gross Margin % = (Retail Price – Cost) ÷ Retail Price
What is depreciation?
Depreciation is the process by which a company gradually records the loss in value of a fixed asset (For example, equipment used in the business such as copiers, computers, printers, fax machines, etc.)
What is Operating Income?
he profit realized from a business’s own operations, excluding operating expenses (such as cost of goods sold) and depreciation from gross income, also referred to as operating profit or recurring profit.
What is the formula for determining Operating Income?
Operating Income = Gross Income – Operating Expenses – Depreciation
What is a Cash Flow Statement? What is it used for?
The Cash Flow Statement explains where cash came from during the year, where the cash went, and what the company did with it.
What is an Annual Report?
An Annual Report is a formal financial publication that public companies must file annually which describe the preceding year’s financial results, operations, and financial conditions.
What information is typically contained in an Annual Report?
A general description of the industry in which the company is involved
Financial highlights and a brief description of the company’s business over the past year
Information related to the company’s various business segments
Letter to the Shareholders
Management’s Discussion and Analysis of the financial condition of the company
Financial Statements including:
Auditor’s Report on Financial Statements
Balance Sheet
Income/Profit & Loss Statement
Cash Flow Statement
Statement of Retained Earnings
Notes to Financial Statements
Summary Financial Data
Corporate Information, including a listing of the company’s directors and executive officers
Market price of the company’s stock and dividends paid
Generally speaking, how is “Shrink” defined?
Generally speaking, however, “shrink” or “shrinkage” refers to the total loss of assets between the point of purchase from a manufacturer or other vendor, to the point of sale to the consumer.
What is the formula for determining shrink percentage?
Shrink = Optimal Retail Value/Income – Actual Retail Value/Income
While shrink is measured in terms of total dollars lost, shrink is most often categorized in terms of a percentage to company sales. This concept is extremely important in understanding the interrelationship between loss prevention and other areas of the business. For example, the shrink percentage for most specialty and department store retailers will typically average around 2% of sales. In other words, for every $1 million in company sales volume, $20,000 is lost to shrink:
$20,000 Losses ÷ $1,000,000 Total Sales = 2% Shrink
Understanding this concept, we can then clearly see that by improving our company sales, we will as a result directly impact our shrink numbers. For instance, using our example above let’s say that we had $20,000 lost to shrink, but we improved our performance to $2 million in sales:
$20,000 Losses ÷ $2,000,000 Total Sales = 1% Shrink
What do we mean when we say that acceptable shrink percentages are not universal?
It is also important to recognize that acceptable shrink percentages are not universal, and may vary from business to business—and even product to product. For example, the profit margin isn’t as high in the specialty electronics industry (computers, televisions, etc…), and a 2% shrink for this type of product might be considered extremely poor and reflect a serious problem.
Briefly, what is an inventory?
Inventory represents one of the most important assets that a retail business can possess, as the turnover of our inventories denotes the primary source of revenue generation and subsequent earnings.
