Financial Analysis

OF FINANCIAL ANALYSIS

OF1 Understand the fundamental principles of money needed to make financial exchanges

OF2 Analyze financial needs and goals to determine financial requirements

OF3 Manage personal finances to achieve financial goals

OF4 Understand the use of financial service providers to aid in financial goal achievement

OF5 Use investment strategies to ensure financial well-being

OF6 Use risk management products to protect a business’s financial well-being

OF7 Acquire a foundational knowledge of accounting to understand its nature and scope

OF8 Implement accounting procedures to track money flow and to determine financial status

OF9 Acquire a foundational knowledge of finance to understand its nature and scope

OF10 Manage financial resources to ensure solvency

Understand the fundamental principles of money needed to make financial exchanges.

• Cash - money in the form of coins or bills

• Credit - The ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future.

• Debit - A sum withdrawn or subtracted from an account

• Electronic funds transfer - transfer of money from one bank to another by computer

Identify types of currency 

• Banknotes - Paper money issued by banks

• Government bonds - certificate of debt promising to repay the principal (loan) along with interest on maturity date

• Treasury notes - Certificates issued by the US Treasury in exchange for minimum amounts of $1,000 and maturing in 1 to 10 years

• Treasury bills, notes and bonds are all marketable securities sold by the U.S. government to pay off debts and to raise cash. The differences between them involve the interest they pay and the length of time each is held. T-bills are usually issued with a term of a year or less. They pay no interest before maturity, and instead, are sold at a discount from their face value. The holder receives the difference between the purchase price and the face price at maturity, or the price paid if it's sold prior to maturity. Treasury notes and bonds have a stated interest that's paid semi-annually until maturity. Notes are issued in 2-, 3-, 5- and 10-year terms. Bonds have terms that are longer than 10 years.

Describe functions of money 

(medium of exchange, unit of measure, store of value)

• Medium of exchange -Money's most important function is as a medium of exchange to facilitate transactions. Without money, all transactions would have to be conducted by barter, which involves direct exchange of one good or service for another. The difficulty with a barter system is that in order to obtain a particular good or service from a supplier, one has to possess a good or service of equal value, which the supplier also desires. In other words, in a barter system, exchange can take place only if there is a double coincidence of wants between two transacting parties. The likelihood of a double coincidence of wants, however, is small and makes the exchange of goods and services rather difficult. Money effectively eliminates the double coincidence of wants problem by serving as a medium of exchange that is accepted in all transactions, by all parties, regardless of whether they desire each others' goods and services.

• Store of value - money must hold its value over time; If money could not be stored for some period of time and still remain valuable in exchange, it would not solve the double coincidence of wants problem and therefore would not be adopted as a medium of exchange. As a store of value, money is not unique; many other stores of value exist, such as land, works of art, and even baseball cards and stamps. Money may not even be the best store of value because it depreciates with inflation. However, money is more liquid than most other stores of value because as a medium of exchange, it is readily accepted everywhere. Furthermore, money is an easily transported store of value that is available in a number of convenient denominations.

• Unit of account - providing a common measure of the value of goods and services being exchanged. Knowing the value or price of a good, in terms of money, enables both the supplier and the purchaser of the good to make decisions about how much of the good to supply and how much of the good to purchase.

Describe sources of income 

(wages/salaries, interest, rent, dividends, transfer payments, etc.)

• Wages - a fixed regular payment, typically paid on a daily or weekly basis, made by an employer to an employee, especially to a manual or unskilled worker.

• Interest Income - is the amount of interest that has been earned during a specific time period. It is earned from investments that pay interest, such as in a savings account or certificate of deposit.

• Rent - the revenue earned from leasing out properties, such as commercial spaces, to third parties.

• Dividend - is a payment to shareholders of a portion of a corporation's earnings. The amount to be paid is decided by the organization's board of directors. The payment is usually in cash, but can also take the form of property or additional shares of stock. typically paid on a recurring quarterly or annual basis

• Transfer Payment - a one-way payment to a person for which no money, good, or service is given or exchanged. Transfer payments are made to individuals by the federal government through various social benefit programs. A transfer payment is a process used by governments as a way to redistribute money through programs such as old age or disability pensions, student grants and unemployment compensation.

• Capital gains - from the sale of investments

• Royalties - from products you sell or license

Explain the time value of money 

• The time value of money (TVM) is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.

• The value of money changes over time due to fluctuations in the foreign exchange market and domestic business cycles.

Picture this scenario: Given a CPI of 10%, a bank offers you three options:

a) Receive $100 now

b) Receive $109 in a year

c) Receive $120 in two years

Which choice yields the greatest return?

A. In one year, $100 is worth $110, and in two years, it is worth $121, trumping both of the other choices by a dollar.

Explain the purposes and importance of credit 

• Useful for large purchases, eg home

• Credit enables possession utility - temporary use of someone else's money

• Measure of financial trustworthiness -Credit score

• Lenders eg banks use it to evaluate potential risk when loaning, also to determine who qualifies for a loan, at what interest rate and at what credit limit. Also used by mobile phone companies, insurance companies, landlords and government departments

Explain legal responsibilities associated with financial exchanges 

• Business owners have many different kinds of responsibilities under the federal, state, and local laws.

• Licenses, permits, and registration

• Taxes

• Human Resources - labor-related laws,

• Premises Liability - All business owners have a duty to keep their premises free from potentially dangerous conditions in order to keep customers and visitors safe.

• Product Safety - safe for their intended use.

Analyze financial needs and goals to determine financial requirements.

• These things below are the things that are most needed; A needs analysis is carried out by a qualified financial planner to determine the current state of your finances and your future financial needs; protects you from being sold products you don't need and possibly cannot afford to pay for.

• College - variables that go into it: type of college, scholarships, grades

• Retirement - save 10% to 15% of your income for retirement, starting in your 20s; so that you don't have to dramatically change your lifestyle when you stop working.

• Will - average cost is $375; If you want more than just a will, such as a power of attorney and other estate planning documents, the cost can rise to $1,000 if you're single or $1,500 if you're married and requesting joint documents; Determine where the money goes

• Insurance - Disability insurance, Auto insurance, Homeowners insurance, Liability insurance (Protecting your assets), Life insurance, Health insurance, Long-term care insurance

Explain the nature of tax liabilities 

• A tax liability is the total amount of tax debt owed by an individual, corporation or other entity to a taxing authority like the Internal Revenue Service (IRS). It is the total amount of tax you're responsible for paying to the taxman. Tax liabilities are incurred due to earning income, a gain on the sale of an asset or other taxable events factors in any and all years that the entity may owe taxes.

Interpret a pay stub 

• Gross pay, net pay, Bonus, Commission, Tips, Overtime,

• Personal info, with full name, address, and social security number

• Pay period, the length of time for which the wages are calculated, normally weekly, bi weekly, twice a month or monthly

• Gross pay, total amount before deductions

• Netpay, amount left after all deductions have been withheld from the gross pay

• Deductions, the amount of money subtracted from the gross pay for taxes, medical benefits and or retirement benefits, other deductions

• Year to date, Total of all of the deductions which have been withheld from an individual's paycheck from January 1 to the last day of the pay period indicated on the paycheck stub

• Prepare bank account documents (e.g., checks, deposit/withdrawal slips, endorsements, etc.) (PQ)

• Check - Date, Payee, Amount (words and numbers), Memo, signature, Check number and Account number

Maintain financial records 

• Financial records maintained by most businesses include a statement of retained earnings and cash flow, income statements and the company's balance sheet and tax returns.

Read and reconcile bank statements 

• Bank reconciliation: form of internal control explaining difference between book/bank balances

• Used to prove accuracy of both records (reconciliation - time aspect)

• on bank statement balance: add deposits in transit; deduct outstanding checks

• on book balance: add note collections, interest earned; deduct NSF fees, service charges

Demonstrate the wise use of credit 

• costs of credit: annual fees, cash advances, late fee, interest on overdue; overdraft protection

• character, capacity, capital, collateral and conditions determine the how likely a lender will agree.

• Character: Lenders need to know the borrower and guarantors are honest and have integrity. Additionally, the lender needs to be confident the applicant has the background, education, industry knowledge and experience required to successfully operate the business. Lending institutions may require a certain amount of management and/or ownership experience. They will also ask about your licensing and whether or not you have a criminal record.

• As history is the best predictor of the future, a lender will examine the personal credit of all borrowers and guarantors involved in the loan. Sound business and personal credits are a must. Check both reports before calling your lender; if there are any delinquencies, be prepared to explain. The lender may be able to make exceptions for low credit scores.

• Capacity (Cash flow): The lender wants to know that your business is able to repay the loan. The business should have sufficient cash flow to support its business expenses and debts comfortably while also providing principals’ salaries sufficient to support personal expenses and debts. Examining the payment history of current loans and expenses is an indicator of the borrower’s reliability to make loan payments.

• Condition: The lender will need to understand the condition of the business, the industry, and the economy, which is why it is important to work with a lender who understands the WCB industry. The lender will want to know if the current conditions of the business will continue, improve or deteriorate. Furthermore, the lender will want to know how the loan proceeds will be used- working capital, renovations, additional equipment, etc.

• Capital: Your lender will ask what personal investment you plan to make in the business. Not only does injecting capital decrease the chance of default, but contributing personal assets also indicates that you are willing to take a personal risk for the sake of your business; it shows that you have ‘skin in the game.’

• Collateral: A lender will consider the value of the business’ assets and the personal assets of the guarantors as a secondary source of repayment. Collateral is an important consideration, but its significance varies depending on the type of loan. A lender will be able to explain the types of collateral needed for your loan.

• The five components that make up a credit analysis help the lender understand the owner and the business and determine credit worthiness. By knowing each of the “5 Cs,” you will have a better understanding of what is needed and how to prepare for the loan application process.

• Truth in Lending Act - requiring disclosures about credit's terms and cost

• Equal Credit Opportunity Act - makes it unlawful for any creditor to discriminate against any applicant

• Fair Credit Reporting Act - regulates the collection of credit information and the access to credit reports

• CARD Credit Accountability Responsibility and Disclosure Act, 2009 - protects credit card users from abusive lending practices by card issuers.

Protect against identity theft 

• digital security (passwords, phishing), don't carry around SSN, shred paper records, contact authorities, limit shared info, watch for stolen mail, Check your credit reports frequently, Monitor your financial statements

Prepare personal income tax forms (i.e., 1040 EZ form) 

• Thorough documentation and organized records will reduce the time, Gather the appropriate documents. Take your time

• Form 1040 - US Individual Income Tax Return

• Annual income tax return filed by citizens or residents of the United States.

• individual tax return is a form the individual submits to a federal, state or local taxing agency to report income, calculate and pay taxes.

Describe types of financial-services providers

• 1. Bank

• 2. Insurance company

• 3. Burial societies - provide voluntary subscriptions for the funeral expenses of a deceased member

• 4. Rotating Credit and Savings Association (ROSCA)

• 5. Moneylender

• 6. Microlenders

• 7. Employers

• 8. Retailers

• 9. Your mattress

• 10. Pawn shops

• 11. Cooperative societies

• 12. NGO MFIs

• 13. Savings collectors

Discuss considerations in selecting a financial-services provider 

• Planner - Am I interested in developing a comprehensive overall and goal-oriented investment strategy?

• Do I need comprehensive financial, insurance and estate planning services?

• What level of involvement do I want in the decision-making process?

• How do I want to pay for these services: a fee, commission, a percentage of assets?

• Banking institution - Security of your funds, Fees, Ease of deposit, ATM fees, Interest rates, Online banking features, Minimum balance requirements, Branch availability, Customer service, Availability of funds

Explain types of investments 

• Mutual Funds - multiple investors pool in money

• Real Estate - property ownership

• Stocks - shares of corporations (part ownership)

• Municipal Bonds - government notes sold for different value

• Corporate Bonds - company borrows money

• Performance Element: Use risk management products to protect a business's financial well-being.

RISK AND RISK MANAGEMENT

• Risk Prevention and Control - training employees, safety plan, controlling employee theft, loss prevention plan, etc...

• Risk Transfer - Insurance and warranties

• Risk retentions - assuming the financial responsibility for the consequence of a loss

• Risk Avoidance - a business refuses to engage in a particular activity

• Risk Management - Identifying potential risks and making decisions so as to reduce the possibility and/or impact of the risks.

• Risk - The possibility of loss or injury.

• Economic loss - Occurs when something that has some financial value is lost or destroyed.

• Economic risk - The possibility of incurring a loss related to property liability and one's own personal well-being.

• Personal Risks - Risks associated with illness, disability, loss of income, unemployment, old age, and premature death.

• Property Risks - The risks of damage to or loss of property due to theft, wind, fire, flood, or some other hazard

• Insurance - The planned protection provided by sharing economic losses. These losses are the unforeseen, unexpected, and occur as a result of chance.

• Insurance company - Businesses that provide planned protection against economic loss.

• Policyholder - The person for whom the risk is assumed. Also called the insured.

• Policy - The contract issued to a policyholder that states the conditions to which the insurance company and the policyholder have agreed.

• Claim - A policyholder's request for payment for a loss that is covered by the insurance policy.

• Premium - The amount the policyholder must pay for insurance coverage.

• Insurance commission - The state agency that makes sure insurance premium rates and practices are fair. They also investigate insurance fraud.

• Loss - Any reduction in the quality, quantity, or value of something. Examples include death, bodily injury, and disease, lost income.

• Peril - The cause of a potential loss. Examples include accidents, explosions, fire, flood, negligence, and theft..

Describe the concept of insurance 

• Insurance is a promise of compensation for something that has the potential to be lost, so there is a payment made every so often in exchange for coverage (premium)

• Policy holder could be expected to pay for part of the loss (deductible)

• Lower the risk

• PremiuM - This is the actual cost of your insurance plan. Keep in mind that the higher the premium, the higher your coverage and thus, the less you will have to pay in medical bills throughout the year.

• Deductible - The Deductible is the amount that you must pay out of your own pocket before the insurance company will begin paying towards any covered expenses. The deductible affects how much money you will pay to the doctor or hospital, and is typically paid at the time of treatment.

• Beneficiary - This is the person who would receive any insurance benefits in case the policy holder was to pass away while on the insurance plan.

Describe the need for financial information 

• Financial information includes raw data, records, and reports. Consumers are essentially buying information when dealing with financial services providers; businesses rely on accurate financial information to make sound decisions.

• Financial services products are bought and sold based on information about costs, returns, and risks. Financial information is used to match company resources to its planned activities and to identify additional resources that may be needed or secured. Businesses use information to identify ways to reduce expenses and invest company assets. Also, information is used to forecast for future budgeting and growth, as well as to control and manage risk.

• Other pieces of information that are required include sales, inventory, operating systems, personnel costs, insurance expenses, tax liability, and profitability.

• In addition, information must be collected regarding external factors such as economic conditions, investment alternatives, and competition.

Explain the concept of accounting

• information system for an information about an organization's economic activities

• identifies, measures, records, communicates (accounting cycle)

• information must be understandable, relevant, reliable, comparable (characteristics)

• There are two basic types of accounting methods: cash and accrual. In the cash accounting method, income and expenses are recorded at the time the money changes hands. The accrual method of accounting records transactions at the time they occur even if no money changes hands at that time.

• VOCAB - Accounting records show changes and the current account balance of each asset, liability, and owners' equity account. The recording of debit and credit parts of a transaction is called double-entry accounting. A record summarizing the information relevant to a single item in the accounting equation is called an account. With every action, at least two accounts will change. A group of accounts is called a ledger. A form for recording transactions is called a journal.

Discuss the role of ethics in accounting 

• The AICPA Code of Professional Conduct outlines a number of rules regarding ethics in accounting. A company must keep an accurate, honest, and complete record of its accounting transactions. Company audits should be carried out by an independent party. Confidentiality must be maintained with regard to clients' personal information as well as company information. Efforts must be made to avoid conflicts of interest between employees and customers. Ethical accountants exercise due care in the performance of their professional services. They should also be educated about insider trading as an unethical practice. Accountants must refrain from misrepresenting the facts to achieve short-term goals that are contrary to a business' long-term objectives.

• Internal auditors work independently within a business to review and improve the company's operations. They use strict standards to ensure the business sticks to its agreements, to design plans to protect assets, and to make the best use of company resources.

Explain legal considerations for accounting 

• Sarbanes-Oxley Act of 2002. The act requires that CEOs, financial officers, accountants, and auditors comply with regulations and procedures designed to ensure accurate representation of companies' financial positions.

• Securities regulation ensures that purchasers can learn the true nature of the securities they buy by providing a way to uncover fraud and unfair practices

Describe the nature of cash flow statements 

• A cash flow statement is a monthly plan that tracks when you anticipate that cash will come into a business and when you expect to pay out cash. One purpose of a cash flow statement is to determine whether you will have enough money to pay your bills on time. Another purpose is to secure a business loan, as most lenders will request at least a first- year cash flow statement.

• A cash flow statement itemizes how much cash you started with, what your projected cash expenditures are, and how and when you plan to receive cash. It also shows when you will need to seek out additional funds or when you will have additional cash remaining.

Explain the nature of balance sheets 

• A balance sheet is a summary of a business' assets, liabilities, and owners' equity. Assets are anything of monetary value that you own and are classified as current or fixed. A current asset is cash or anything that can be converted into cash in a year. A fixed asset is something used over a period of time to operate your business, like property and equipment.

• Liabilities are the amounts that a business owes and are classified as current or long-term. A current liability is a debt the business must pay back during the upcoming year. A long-term liability is a debt that is due after 12 months' time, such as a long-term loan.

• Owners' equity (or net worth) is the amount of ownership interest in the business. The difference between assets and liabilities equals the owners' equity.

Describe the nature of income statements 

• An income statement is a summary of a business' income and expenses during a specific period of time. Often called a profit and loss statement, it is used to calculate revenue, costs and expenses, and profit/loss.

• Income statements have several major parts: total sales, net sales, cost of goods sold, gross profit, operating expenses, other income/expenses, net profit/loss before taxes, and net profit/loss after taxes. Some of these figures must be estimated or projected, such as total sales and business expenses.

Explain the role of finance in business 

• Help capital move from investors to business .

• Businesses need finance to assist with operations,

• Possible with financial markets and investment vehicles. (including loans/ short and long term financing)

• Also includes roles in business development and corporate governance.

• Managing your business' finances will include planning for profits by forecasting sales, evaluating profit potential, controlling costs, and budgeting. Business financing also requires managing taxes and credit.

Discuss the role of ethics in finance 

• Ethics are guidelines for good behavior, based on knowing the difference between right and wrong. Behaving ethically means being truthful, fair, open, and mindful of the law. Companies and their executives can now be held accountable for misinformation or improper recording of a company's financial situation. A company must keep an accurate, honest, and complete record of its accounting transactions. Finance professionals should be educated about insider trading and other unethical practices.

• They must refrain from misrepresenting the facts to achieve short-term goals. Confidentiality must be maintained with regard to clients' personal information as well as company information. Efforts must also be made to avoid conflicts of interest between employees and customers.

Explain legal considerations for finance 

• Financial services businesses are required to protect the privacy of the consumer information they collect. They must give consumers privacy notices that explain the company's information-sharing practices. Customers of a financial services business have the right to limit the sharing of their personal information. Additionally, information security is an important consideration in the finance industry, as companies are required to keep customer information secure.

Describe the nature of budgets 

• Forecast of a company's income and expenses for a specific amount of time.

• Allows entity to evaluate how to use funds in fixed/discretionary categories.

• Avoid debt