Financial statements - rates calculation and analyze | Accounting Is a Piece of Cake | Skillshare

Financial statements - rates calculation and analyze

Accounting Is a Piece of Cake, Passionate Accountant

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14 Lessons (40m)
    • 1. Introduction

      0:53
    • 2. Balance sheet clear explanation

      1:27
    • 3. Types of balance sheet

      2:55
    • 4. Balance sheet ratio analysis

      1:01
    • 5. Current ratio

      2:37
    • 6. Quick ratio

      3:16
    • 7. Working capital

      2:12
    • 8. Debt to equity ratio

      2:45
    • 9. Total debt ratio

      2:25
    • 10. Income Statement - explanation

      4:08
    • 11. Profitability ratios

      5:13
    • 12. Profitability ratios - examples

      6:12
    • 13. Statement of cash flows - explanation

      2:22
    • 14. Methods of preparing statement of cash flows

      2:44
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About This Class

This course is created to lighten the process of understanding one of the three most important financial statements – Balance sheet, Income statement and Statement of cash flows.  In order to explain what a balance sheet is, I’ll make an interesting comparison between this financial statement and a photo picture. I’ll go through the two types of balance sheet and I'll pay attention to the structure of a balance sheet. After that, the focus of the course will be on 5 main balance sheet ratios which represent business' liquidity and solvency, and of course, I’ll show you how to analyze them. The next step will be to explain briefly the most important points related to the single-step income statement and multiple-step income statement. Another important theme will be the six crucial profitability rates. In the last two videos, I'll help you to see the difference between the direct method and the indirect method of preparing a statement of cash flows.

Transcripts

1. Introduction: this course is created toe light on the process of understanding one of the most important financial statements. Yes, I'm talking about the balance sheet in order to explain what the budget is. I'll make an interesting comparison between this financial statements and a photo picture. I'll go through the two types of championship and out by attention to the structure of this financial statement. But the focus of the course will be on five men balance sheet ratios that represents business, liquidity and solvency. And, of course, I'll show you how toe analyze registrations. At the end of the course, you'll be able to use the information on the balance sheet toe, understand how business is going on. 2. Balance sheet clear explanation: we can compare a balance sheet with a picture that has dreamin objects on it. Assets, liabilities and owner's equity. This picture provides information about the company's accounting equation at a specific point in time and shows us what the company owns, what it calls and what is left after it based hours obligations toe third parties. The balance sheet has took parts. The 1st 1 presents all assets, and the 2nd 1 presents a liabilities and owner's equity. And because the balance sheet is based on the accounting equation, this two part must equal each other with other words. The balance sheet is a table with two main parts, one that reveals our resources that the company uses toe operate its activity and another that presented the sources of funding all these resources. Third parties are investors. Important point is that the balance sheet can be prepared in a vertical or horizontal former. In the following video, we'll look at these two types of balance sheet 3. Types of balance sheet: both abolish eight formats have three men sections, assets, liabilities and owner's equity. The main difference between the vertical and horizontal balance sheet is the way this tree sections are ordered within the vertical bar ownership. The men tree sections off its liabilities and almost equity are listed from top to bottom. In contrast, the horizontal format of power shed has two sides left which off? Oh, aphids and right, which are all liabilities and owner's equity. Within both types of balance sheet, the assets are typically listed in order of their liquidity. Liquidity shows how fast and acid can be converted into money. The assets are classified, typically from malt liquid toe laced liquid. As you can see, the assets can be current assets, which can be converted into money within 12 months, and long term assets, which needs more time to be converted into money. Current assets are cash and cash equivalents, account receivable, inventories, short term in waste months, prepaid expenses and so on. No current or a long term off its can be tangible and intangible. The long term tangible assets are physical items such as land, buildings, machinery and equipment construction in progress, long term in west months and so on. Intangible assets can be physically observed. Good will attend. Trademarks are typical intangible assets. The liabilities are listed in order of their due date. The balance sheet shows first the liabilities that are do it in 12 months and after that those that are due after 12 months. Gronckle abilities our accounts payable salary, people interest payable tax, Babel and so on. Non current liabilities are, for example, notes payable and mortgage obligation. The third main part of the balance sheet is the owner's equity, which is the network off the company. It is listed under gullibility. The owner's equity arises either for bait in capital or written income. 4. Balance sheet ratio analysis: the financial statement ratio analyses is away a business to see its success. Sailor and progress. It is the base of the successful financial management. The financial statement ratio on mattresses are also business. To compare its performance with the performance of similar businesses are with its performance in progress periods. On this basis, the business makes right decisions. The balance sheet racial Atlantis is is a part of the whole process of financial analysis. It helps a company toe assess its short term liquidity and long term solvency. A company with good short term liquidity can meet its current payments as they become you. A company with good long term solvency can generate enough cash toe repay its long term that on time. 5. Current ratio: current ratio equals current efforts divided by car uncle abilities. It shows if a business has ability to pay all its current obligations full and on time, a current racial back warm is accepted to be satisfactory and save. It means that current efforts are more land current liabilities and to the company has ability to meet its current liabilities. A current racial below warm is not safe because current liabilities are more than current assets. This may indicate a liquidity problems. The many year is the hard the current ratio is, the more assurance the short term creditors have. Let's compute the current ratio a company A and Company B and compare the liquidity of both companies we see to balance sheets. The left one is a company A and the right is a company B. The information we need to calculate the current ratios of both companies include the total amount of current assets and current liabilities for each company. The DATO current efforts of Company A are $47,000. The total current liabilities are $30,750. When you buy the amount of growth assets by the amount of current liabilities and get the result of 1.5. The current ratio is more than one, and this result shows that company A has ability to pay its current liabilities on time. The total current assets of Company B are 13 9000 doors. The total current liabilities are $41,000. We divide the amount of current assets by the amount of current liabilities, and we get the result off 0.9. The current ratio is less than one, and this result shows that the company may have some liquidity problems. 6. Quick ratio: quick racial composed only those current assets that can be quickly and easily turned into cash with the current liabilities. It is calculated by dividing the liquid current assets by the total current liabilities and shows if the liquid current efforts can meet the Karanka applications. Liquid current off its include cash on hand and at the bank, marketable securities, which are investments that can be easily converted into cash and receivables. It is obvious that the liquid current assets are part of the total current assets, so it is reasonable the quick ratio to be lower than the current racial. The quick racial shows how much doors off liquid assets has a business available toe cover one door off its current liabilities. The high quick ratio, the more liquid current position, a quick ratio off one and above it's safe. Ah, safe, quick racial indicates that the company has enough instantly liquid assets to pay off its current liabilities. A company that has a quick ratio of less than 1 may not be able to fully pay off. It can try abilities in short term, based on the figures that appear on the balance sheets from the previous example we will calculate the quick ratio for both companies. The amount off liquid current assets off Company A is 23,000 doors and the thought of current liabilities are $30,750. Would you fight the amount of liquid current assets by the amount of current liabilities, and we get the result off is you don't 0.8. The quick ratio is 11 1 and this result shows that the company has left on one door off liquid current assets available to cover one door off its current liabilities. The amount of liquid current assets of Company B is 21,000 doors. The total current liabilities are 41,000 doors. We divide the amount of liquid current assets by the amount of current liabilities, and we get the result off 0.5. The quick ratio is less than one on this residential's that the company has a less than $1 off liquid current assets available toe cover one door off its current liabilities. The quick ratios of both companies aren't enough to cover the current liabilities, although Company A has about the position compared to a company B 7. Working capital: working capital is the third measure of liquidity for business. It equals the total current assets minus the total current liabilities. The working capital can be positive or negative when the current assets are more than the current liabilities. The working capital is positive and Charles good liquidity off the business. In this case, the business should have the potential toe fully pay back creditors and grow. But when the current assets are less than the current liabilities, the working capital is negative and it shows bad liquidity of the business. And of course, it can have trouble growing or paying back creditors. Let's take a look at the balance sheets from the previous videos and use the figures to calculate the working capital off both companies. We already know that the total current assets of Company A are $47,000. The total current liabilities are $30,750. The difference between these two figures is $60,250. So the working capital of Company A is positive. This company can think about expanding the total current assets of Company B. If 39,000 doors, the total current liabilities are $41,000. The difference between them is mines $2000. The working capital off Company B is negative, and the company may have some trouble if it tries to expand. 8. Debt to equity ratio: that the equity aeration is a metric that we calculate but surviving total liabilities by capital. We can say that this ratio expresses the relation between the portion off off its financed by third parties and the portion of AF it's financed by stockholders. A ratio equals toe. One shows that 50% of assets are funded by creditors and 50% are funded by stockholders. A ratio less than one indicate that more off its are funded by stockholders and unless are funded by creditors, a business with a low that toe equity ratio is low risky. That's why creditors usually like a loaded toe equity oration. Our issue greater than one indicate that more efforts are funded by creditors and less are funded by stockholders, A business that has high that equity Racial seems to be high, risky and poorly managed. Using the figures on world balances from the previous videos, we will copulate the debt to equity ratio of Company A and Company B. The total liabilities of Company A are $306,000 and the capital is $600,000. We divide the amount of total liabilities by the amount of capital and we get a result off 0.5. The debt to equity ratio is less than one, and this result shows that company A is glow risky. The total liabilities of Company B UH, $473,000 and the capital is $183,000. We divide the amount of total liabilities by the amount of capital, and we get a result off 2.6. The debt to equity ratio is more than one, and these rays of Charles that Company B is high, risky. 9. Total debt ratio: total. That ratio represents the financial leverage of a business. It shows liabilities off a business as a percentage of total aphids. Simple said. Dissed Racial shows How many off It's off the total officer for business cover all off its liabilities. We can calculate this ratio as we divide the total liabilities by the knuckle assets. Creditors find attractive businesses with total debt ratio under 60 or 70%. A total desperation off one means that the total liabilities equals the total off. Its if the company covers its liabilities with, oh, its assets, not in what remain. This means that this ratio is high, risky and the business is not stable. Looking at both balance sheets from the previous videos, we can calculate the debt ratio off Company A and Company B, the daughter of liabilities of Company A are $306,000 and the total assets are $906,000. We divide the amount of total liabilities by the amount of total assets, and to get a result off 0.33 The debt ratio is less than warm and less done 60 or 70%. That's why this result shows that company A is well, risky and attractive for creditors. The total liabilities of Company B R $473,000 the total assets are $650,000. We divided the amount off total liabilities by the amount of total assets, and we get a result off zero point 77 The debt ratio is less than one, but more than 70%. And that's why this result shows that Company B is high, risky and not attractive for creditors. 10. Income Statement - explanation: income statement is one of the three key financial statements off a business. This financial statement shows over the financial results for the period is by taking over revenues and subtracting operating and non operating expenses. There are two types of income statement, single step income statement and multiple step income statement. Firstly, we will clarify the single step income statement. The single Step income statement has three main sections that the wherever news, total expenses and net income, or net loss on the top are all revenues that the business has earned two during the period . These are sales revenue, rent, revenue, interest revenue and other revenues below the group off. All revenues are all expenses that are incurred during the period, no matter if they're part of the cost of goods sold, operating expenses or non operating expenses. After subtracting our expenses from all revenues on the bottom reveals the financial result . It can be either that income our net loss. Now we will take a look at the multiple step income statement and understand how it differs from the single step income State month on the top of the Moody Step Income statement is shown only the sales revenue. On the second position appears the cost of good salt. It includes our expenses related to the process of producing the product salt. These are labour expenses, Oro material expenses and so on. The sales revenue is deducted by the cost of goods salt, and on the third position appears the resolute cope gross profit. Next, we see a list of all operating expenses selling expenses, administrative expenses on general expenses. They're subtracted from the growth profit on the result is called operating income. Other revenues, for example, current revenue and interest revenue increase the operating income at the same time. Other expenses. For example, Interest expenses decreases the operating income. The result is called net income before taxes. On the next roll, we see the income taxes expense. It is subtracted from the net income before taxes on. The result is either net income our net lost. This is the bottom line. When we compare the Single step income statement with the multiple step income statement, we can conclude that the multiple step income statement shows more detailed information. It separates the operating revenues and operating expenses from the normal operating revenues and no operating expenses. The multiple step income statement shows not only the net income or loss, but also the gross profit, the operating income and the net income before taxes. 11. Profitability ratios: income statement shows information which is used for evaluating a business profitability. Profitability is the business capability of generating Correval. News from its expanses are generating profits from its operations. We will explain the most common profitability ratios. We can summarize this profitability ratios into two groups. The 1st 1 shows business ability to turn cells into a profit and uses only information from the income statement. Such ratios are gross profit margin, operating margin and net profit margin. The second group shows how well our business generates our Ritter for its shareholders and you this information from both the income statement and the balance sheet. This group in courts return on stockholdersequity earning sports share and price earnings ratio. Gross profit margin is defined as gross profit, divided by sales. It is the percentage of sales revenue available for profit or reinvestment after the cost of goods sold is deducted. If the gross profit margin off a business A is better than its competitors. It confirms that business A is operating better than average efficiency. If the gross profit of business A is less than its competitors, it's a warning that business A should make some changes. Gross profit depends on industry service Companies have high gross profit because their main expenses are sales and marketing expenses, research and development expenses and administrative expenses. On the other hand, manufacturing companies are retailers have low gross profit because product costs are their main expenses. Operating margin is different as operating income, our earnings before interest and taxes divided by sales. It indicates how much revenue is left over after pink operating expenses, or how much revenue is the left toe cover. Non operating costs. Net profit margin is defined off a net income after taxes. Divided by sales. It shows the profit per sale after our expenses are deducted. It measures how many profit is generated for each door off sale and what percentage of sales revenue is left over to pay shareholders or re invest in the company. Ritter off the holders equity can be calculated by dividing net income after taxes by weighted average equity. It shows the returns to shareholders in relation to the amount they have invested. Return on equity is a ratio that provides inside in tow how efficiently our businesses managing the money that shareholders have contributed to it. The higher the return on stockholders equity, the more efficiently the businesses generating growth from its equity financing. Our export shell is calculated by dividing net income after taxes by weighted average number of shares outstanding. Our Expo Shia indicates how much money a company makes for each share off its stock. Ah, high earnings per share means more value, as investors are more likely to pay for a company that has higher profit price earnings ratio equals market price. Appreciate of common stock divided by earnings per share. It those investors how much they need to invest in a company in order to receive one door off that company's earnings, It gives an idea of what the market will pay for the business earnings. Ah, high price earnings ratio usually indicates that the market will pay more talked and the business earnings because it believes that business has ability toe increase its earnings. A low price earnings ratio indicates that the market has less confidence that the business earnings will increase 12. Profitability ratios - examples: Now we will calculate all the ratios we were talking about in the previous video. Here is a multiple step income statement off company Hicks. There's some additional information related to the equity of the company at the beginning and at the end of the financial period at the beginning of the period, the equity is $450,000 and at the end of the period the equity is $550,800. At the beginning of the period, 250,000 shares were outstanding, and in June, 56,000 additional shares were issued. The market price per share is one door and 80 cents. The first ratio we will calculate is the gross profit margin. We take the gross profit off $245,000 divided by the sales revenue off $365,000. We attend the result off a 0.67. The results showed that the gross profit is 67% from sales revenue. The business has 67% of its sales revenue toe cover, all operating and not operating expenses and generate a profit. The next ratio we will coca let is the operating margin. We take the operating income off $110,000 divided by the sales revenue off $365,000. We obtained the result off 0.30. The rate shows us that the business has 30% off its sales revenue. Tow cover its non operating expenses. Let's go forward and attend the net profit margin. The net income after taxes is 85,680 doors, and we divide it by the sales revenue off 365,000 doors. The net profit margin is Europe on 23. This means that the business that income is 23% off the sales revenue. We have calculated the trim in profitability rations, which are related to business ability to turn itself into a profit. Now it's timeto Coakley the Truman Ratios related toe. However, business generates a return for its shareholders. Don't obtain the returns to holders equity. We need the net income after taxes and the weighted average equity. It is obvious that we can find the net income after taxes on the income statement to calculate the weighted average equity we should from the equity at the beginning and the equity at the end of the period and divided ism by two. The average equity is 500,400 doors. Now we have all figures toe compute the return on shareholder's equity. We divide 85,680 doors a net income after taxes by 500,400 doors. Average equity. The return on stockholders equity is 0.17 and show that the investors receive 17% returns in relation to the amount they have invested. Another men rate, we have already explained is the earnings per share. Eight. To calculate it, we need to find the weighted average number of shares outstanding during the period. We have information that at the beginning of the period, 450,000 shares were outstanding and 56,000 shares were issued in June. The weighted average number of shares is based on the number of months that the shares were outstanding during the period. This can be calculated in the following quay. We have 250,000 shares which were outstanding, the old 12 months and 50,600 shares, which were outstanding on the six months of the period from July to December, with some 250,000 shares and 25,300 chairs, and calculate the weighted average number of shares outstanding during the period. The result is 275,300 shares. Now we can divide 85,680 doors. Net income after taxes by 275,300 weighted average number of shares outstanding. The earnings per share is 0.31. This rituals that the business makes 31 cents for each share of stock. The price earnings ratio equals $1.80 market price per share divided by 31 cents earnings per share. The business has a price earnings ratio off 5.8. 13. Statement of cash flows - explanation: the third very important and key financial statement is the statement of cash flow. It is the least off all cash receipts and cash payments and shows where the money came from and where the money went during a particular period. The case full statement measures how well the company generates cash to pay its obligations on front it's operating expenses. It shows which activities increase the cash and twitch activities. Decrease the cash during the period. All these activities are grouped into three main sections. Operating activities, investing activities and financing activities. Note that the case on the statement of cash flow is not the same as the net income on the income Statement, which doesn't include on aren't revenues and prepaid expenses and balance sheet which in courts sell some credit and purchases on credit. The section operating activities includes okay activities, related toe purchases, sales and production off goods and services. These are collections from clients by a month to suppliers, payments to employees, payments for items such as rent, taxes and interest. All these transactions affect the income statement. The section investing activities consists of activities that are intended to generate income and cash falls in future. This includes cash flows off, acquiring or sending a long term assets such as plant property and equipment, lending money in the form off loans and collecting money on this alone's. The section financing activities include transaction with stockholders and creditors. Here appear cash, false related toe assurance of share capital purchase, off Treasury stock, payments of dividends, borrowing and repaying bank loans and other debts. 14. Methods of preparing statement of cash flows : There are two main methods of presenting the statement of cash flows there admitted and indirect method. We find the key difference between their admitted and indirect method Onley in the operating section. When a business prepares its cash for steak month According to the indirect method, the section operating activities begins with the business net income. This net income should be reconciled toe cash flows from operating activities using a just month. This is necessary because off the grow accounting basic ah, lot of expenses and revenues are recorded for the current period, but they don't lead toe cash in force and out falls in this period. The most common just month are the following adding depreciation on long term profits. Deducting off accounts receivable. Did that thing off prepaid expenses? I think of accounts payable, adding off accrued expenses such as a crude wages, expenses or accrued interest expenses and adding off unearned revenues. Depreciation on long term efforts affect the net income but doesn't affect the cash flow. Accounts receivable affect the net income but don't affect the case for because the business hasn't still received payments. Prepared expenses don't decrease the net income, but they decrease the cash flow for the current period. Accounts Babo affect the net income but don't affect the case for because the business hasn't still made a payment. Accrued expenses decreased the income but don't affect the cash flow. And unearned revenues don't increase the income but increase the case for when a business prepares its case. Full statement. According to the direct method, the net income is not the starting point. Instead, the section operating activities lists vacation months received and paid by the business. These are cash from customers, cash fate to employs, cash pay to suppliers and cash paid for interest.