Accounting and Financial Analysis:

An Owner-Manager Perspective
Dennis E. Beard, CPA, MBA
Tim C. Hoerr, CPA, CMA
Serra Ventures, Inc.

Agenda
Introduction
Goals
Basic Financial Statements
Accrual Basis vs. Cash Basis
Accountants Reports
Financial Analysis
Q & A

About Serra Ventures, Inc.

Offers Professional Advisory Services in:
Business strategy
Capital formation
Transitional executive leadership
Organization development

Specializes in high technology enterprises

Founded by Tim Hoerr, CEO.

Goals
What You Need To Know:
1. To understand the structure and analytical uses
of the basic financial statements.
2. To understand accrual-basis financial
statements and how they differ from cashbasis statements.
3. To be able to prepare a Balance Sheet and
Income Statement from basic, unorganized
financial information

Goals, cont.
4. Understand a Statement of Cash Flows.
5. To be able to compute estimated break-even
sales from an income statement.
6. To be able to prepare an initial and/or pro
forma balance sheet that will incorporate a
variety of financial/capital structures.
7. To understand the levels of assurance services
provided by CPA firms.

Why Todays Seminar?

Accounting is the language of business

Basic Financial Statements

Balance Sheet
Why prepare a balance sheet?
What is shown?
What is an asset?
What is a liability?
What is equity?
What are its shortcomings?

Basic Financial Statements

Income Statement
Why prepare one?
What is revenue?
When is revenue recorded?
What is an expense?
When is expense recorded?
What are shortcomings?

Basic Financial Statements

Statement of Cash Flows
What is a statement of cash flows?
Why prepare one?
What is shown?
What are its shortcomings?

Accrual v. Cash Basis Accounting

The Concept
Why accrual basis is important
Why cash basis is important
Matching Principle
Accounting period

Accrual v. Cash Basis Accounting

Depreciation & Amortization
Method of spreading the recognized cost of a
long-lived asset over an estimated useful life
of the asset.
Depreciation for tangible assets and
amortization for intangible assets.

Depreciation Example
Truck purchased
Cost = $20,000
Useful Life = 5 years
Est. residual value @ end of life = 0
Straight-line method of depreciation: recognize
$4,000 of expense per year for 5 years.

Accrual v. Cash Basis Accounting

Working Capital = current assets minus
current liabilities
Cash & short term investments
Accounts Receivable
Inventory
Accounts Payable

Accrual v. Cash Basis Accounting

Accounts Receivable
Credit
Sales

Accounts
Receivable

Cash
Collections

Accrual v. Cash Basis Accounting

Inventory
Materials
Purchases

Inventory

Cost of
Goods Sold

Accrual v. Cash Basis Accounting

Accounts Payable
Purchases
& expenses
incurred

Accounts
Payable

Cash
Disbursemen
ts

External Reporting
Independent Accounts Reports
Sometimes requested or required by lenders,
investors or regulators

External Reporting, cont.

Compilations
Accountants compile or assemble financial
statements from data provided by
management. No assurance provided by
accountant that statements are accurate.
This is the least costly of the services

External Reporting, cont.

Reviews
Accountants provide some assurance testing
of managements financial statements through
selective testing and analysis of data.
This costs more than a compilation but less
than an audit.

External Reporting, cont.

Audits
Significant level of work by accountants
Verification
Confirmation
Analysis
Representation of Management
Controls

External Reporting, cont.

Audits
Types of Opinions offered:
Unqualified Opinion
Qualified Opinion
Adverse Opinion

Internal Reporting
The Key to Good Management Decisions
In-house vs. Outside Accountants
Frequency
Software
Special Reports
Flash Reports
Key Measures

Financial Analysis, cont.

Common-sized Statements
Expressing balance sheets line item amounts as a %
of total assets
Expressing income statement line item amounts as a
% of total revenues (sales)

Analysis of Financial Data

Assets

Co 1

Co 4

Co 5

Cash

15.1%

17.5%

10.5%

A/C Rec

6.0

5.6

4.3

Inventory

56.2

7.6

1.4

Oth Cur

3.2

5.7

3.9

PP & E

12.6

41.3

52.3

Other

6.9

22.3

27.6

100.0%

100.0%

100.0%

A/C Pay

20.2%

10.2%

3.5%

ST Note

4.9

3.4

2.4

Oth Cur

9.4

17.3

11.1

LT Note

12.8

24.5

44.6

Equity

52.7

44.6

38.4

100.0%

100.0%

100.0%

Sales

304.4

411.5

76.4

GR Pft %

36.0%

52.5%

64.8%

Nt Pft %

4.1

3.2

6.8

Liab/Eq

Financial Analysis, cont.

Ratio Analysis
Liquidity ratios
Leverage ratios
Activity ratios
Profitability ratios

Common Ratios
Liquidity Ratios
Current ratio = current assets/current liabilities
Quick ratio = (cash + marketable securities +
accounts receivable) / current liabilities

Common Ratios, cont.

Activity Ratios

Accounts receivable turnover = sales/accounts receivable

Average collection period = (365 x accounts receivable)/sales
Inventory turnover = costs of goods sold/inventory
Average inventory holding period = (365 x inventory)/cost
of sales
Accounts payable turnover = (cost of goods sold + operating
expenses)/accounts payable
Average purchases credit period = (365 x accounts payable) /
(costs of goods sold + operating expenses)
Asset turnover = sales/assets

Common Ratios, cont.

Leverage Ratios
Debt-to assets ratio = debt/assets
Debt-to-equity ratio = debt/equity
Times interest earned ratio = EBIT/interest
Return on equity = net income/equity
Gross ROA = EBIT/assets
Net ROA = EBIT(1-t)/assets
Earnings per share = net income/number of shares

Financial Analysis, cont.

Trend Analysis
$s
%s
Ratios

Financial Analysis, cont.

Comparables/Industry
Analysis
e.g. Risk Management
Association Annual
Financial Statement
Surveys

Break-Even Analysis

Breakeven

Total

Variable Costs

Fixed Cost

BE = Fixed Costs/ (1- Variable Costs / Sales)

ABC Company, LLC

Example of Sales Breakeven Analysis
Based upon Projections for year ended 12/31/20XX

Total
Sales

760,000

Cost of Sales

415,000

Management
Salaries

85,000

Sales Commissions

Fixed

$
$

112,000

112,000

30,000

30,000

Advertising

27,500

27,500

Utilities

14,400

14,400

Payroll Taxes

16,000

16,000

Supplies

9,000

9,000

Insurance

5,000

5,000

Depreciation

6,000

6,000

Professional Fees

2,500

2,500

Interest

10,000

10,000

732,400

415,000

85,000

Rent

total

Variable

205,400

527,000

205,400

Projected
Breakeven:
Fixed Costs
divided by (1 - Variable cost /
Sales)
= estimated breakeven sales for the
year

30.66%
$

669,974

Questions???

Contact Us
Tim Hoerr

tim@serraventures.com
217.819.5201

Dennis Beard

dennis@serraventures.com
217.819.5202

Alyssa Hoerr

alyssa@serraventures.com
217.819.5203