5-1 Discussion: Finding Hints of Fraud Within Financial StatementsPrevious Next Review the case studies from the readings thus far in the course and examine them in terms of what information within t

5-1 Discussion: Finding Hints of Fraud Within Financial StatementsPrevious Next Review the case studies from the readings thus far in the course and examine them in terms of what information within t
Module Five: Financial Statements and Ratio Analysis This is the recommended plan for completing the reading assignments and activities within the module. Additional information can be found in the module Reading and Resources section and in the task list. Review the reading and resources and write an initial post in the discussion. Reading and Resources Required Resources Required Resources Textbook: Detecting Accounting Fraud: Analysis and Ethics, Chapter 5 This chapter focuses on WorldCom’s improper accounting, namely improper use of acquisition or merger reserves, improper asset valuation, and improper capitalization of expenses. As your read, consider these questions: What were the signals in the financial statements that could have alerted someone that the company may be understating its expenses? What were the major categories of gatekeepers that were identified as being responsible for the control of a company? Textbook: Detecting Accounting Fraud: Analysis and Ethics, Chapter 5This chapter focuses on WorldCom’s improper accounting, namely improper use of acquisition or merger reserves, improper asset valuation, and improper capitalization of expenses. As your read, consider these questions: What were the signals in the financial statements that could have alerted someone that the company may be understating its expenses? What were the major categories of gatekeepers that were identified as being responsible for the control of a company? Common Ratios Used in Analyzing Financial Statements PDF This document lists and describes the formulas for commonly used ratios in financial statement analysis. Additional Support (Optional) Financial Analysis Topics https://www.accountingtools.com/summary-financial-analysis This website provides links to a variety of topics within financial analysis, such as financial statement analysis, income statement analysis, and liquidity ratio analysis, among many others. Data Analytics Helps Auditors Gain Deep Insight https://www.journalofaccountancy.com/issues/2015/apr/data-analytics-for-auditors.html This article discusses how using technology offers auditors a different perspective by providing an opportunity to test full data sets rather than just samples.
5-1 Discussion: Finding Hints of Fraud Within Financial StatementsPrevious Next Review the case studies from the readings thus far in the course and examine them in terms of what information within t
Page 1 of 3 ACC 691 Common Ratios Used In Analyzing Financial Statements Liquidity Ratios Liquidity is a measure of the firm’s ability to pay its short -term liabilities. It is an estimate of the firm’s viability in the short run. Recall that current assets are those assets expected to pay current liabilities and that liabilities are not considered curre nt unless they are going to be paid with current assets. Therefore, liquidity analysis deals with looking at the relationships between current assets and current liabilities. Typically, the current ratio should be a little over 150% to 200%, the quick rati o should be around 100%, and the working capital should be positive. These ratios can be too large , in that a current ratio of 500% indicates that extra capital has not been invested as it should have been. Liquidity Ratios: Assessing Ability to Pay Short -Term Debts Current Ratio Current Ratio = Current Assets / Current Liabilities Quick Ratio or Acid -Test Ratio Quick Ratio = Current Assets – Inventories – Prepaid Assets / Current Liabilities Net Working Capital Ratio Net Working Capital Ratio = (Current Assets – Current Liabilities) / Total Assets Profitability Ratios Profitability ratios are intended to help measure the firm’s ability to produce profits by virtue of its investments and capital acquisition. Return on assets (ROA ) is as its na me implies —the percentage of earnings on the average assets held during the year. Return on equity (ROE) and return on common equity (ROCE) are intended to show the amount that the firm has earned on the average capital generated by sale of stock. Profit margin shows the ratio of net income to net sales , indicating how well the company generates income from sales. The normal percentages for each of these ratios differ from industry to industry. In analyzing companies’ financial statements, analyst s should familiarize themselves with the industry norms and best -in-industry ratios for comparison. Profitability Ratios: Assessing Ability to Generate Profits Return o n Assets (ROA) ROA = Net Income / Average Total Assets* *Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2 Return on Equity (ROE) ROE = Net Income / Average Total Equity* *Average Total Equity = (Beginning Total Equity + Ending Total Equity) / 2 ROE = Net Income / Average Total Equity* Page 2 of 3 Return on Common Equity (ROCE) ROCE = Net Income / Average Common Stockholders’ Equity *Average Common St. Equity = (Beginning Common St. Equity + Ending Common St. Equity) / 2 Profit Margin Profit Margin = Net Income / Net Sales Earnings per Share Net Income – Preferred Dividends/ Weighted Average # of Common Shares Outstanding Operating Analysis Ratios Operating analysis ratios are intended to help determine if the company is being managed effectively. The asset turnover ratio indicates how quickly sales are generated from the amount invested in average assets. The accounts receivable turnover ratio is a measure of how quickly credit sales are collected, while the inventory turnover ratio is a measure of how quickly the firm se lls its average inventory. The faster that accounts receivable are collected, the better for the company. Further, since the desire should be to keep inventory at absolute minimum, a higher inventory turnover is likely better than a lower one , in that a sm all inventory should turnover much faster than a larger one. Of course, this measure is not useful for companies using Just -in-Time inventories or virtual inventories. Operating Ratios: Assessing Effective Use of Resources Assets Turnover Ratio ATR = Sales / Average Total Assets* *Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2 Accounts Receivable Turnover Ratio ARTR = Net Credit Sales / Average Accounts Receivable* *Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2 Inventory Turnover Ratio ITR = Cost of Goods Sold / Average Inventory* *Average Inventory = (Beginning Inventory + Ending Inventory) / 2 Solvency Ratios Solvency deals with the company’s ability to survive in the long run. Solvency ratios are intended to help the analyst assess the company’s viability in the long run —its going -concern potential. The debt -to- equality ratio indicates the percentage of the firm’s tot al financing (which includes both debt and equity financing) that is in the form of debt. Generally there is an optimal balance between debt and equity financing for certain industries; however, if a company is having trouble paying its debt, equity financ ing is likely always preferable. The interest coverage ratio (also called the times interest earned ratio) indicates the number of times that the interest expense is earned. Lenders are very interested in this ratio, as it helps them determine if the compa ny will be able to continue paying interest on its debt. Remember that often lenders are only interested in being paid interest each quarter and that the Page 3 of 3 borrower can hold the principal on the debt for a long time. However, the inability to cover interest charges indicates a serious problem. Minimum solvency ratio measures are common in debt covenants. Solvency Rati os: Assessing Long -Term Ability to Survive Debt to Equity Ratio DE Ratio = Total Debt / Total Equity Interest Coverage Ratio or Times Interest Earned Ratio ICR = Net income plus interest expense plus income tax expense / Interest Expense Marketability Ratios Marketability ratios are intended to measure how the wide stock market views the company. Dividend yield and dividend payouts are important to investors who are interested in receiving regular earnings from stock investments and comparing the relative dividends paid by different companies. These are important to institutional investors and senior citizens alike who want to avoid risk but want a reasonable return. The price -earnings ratio is another measure of yield on individual stock investments, measuring the earnings per share as a percentage of the market price of the stock. Those who are interested in purchasing entire compan ies often use the market -to-book ratio . This is a measure of the market price of the stock as compared to the book value of the stock. Companies often pay more than book value for the stock and sometimes pay more than market value. The market -to-book ratio helps them make better decisions about their purchase. Market Ratios: How the Market Views the Company Dividend Yield Dividend Yield = Annual Dividend per Common Share / Market Price per Common Share Market to Book Ratio Market to Book Ratio = Market Price of Common Share / Book Value of Common Share Price Earnings Ratio (PE) PE = Market Price of Common Stock per Share / Earnings per Share Dividend Payout Ratio (DPR) DPR = Cash Dividends / Net Income Information taken from Baker, P. (2014) Accounting essentials for managers (4th ed. ). Richardson, TX : Electec Press .
5-1 Discussion: Finding Hints of Fraud Within Financial StatementsPrevious Next Review the case studies from the readings thus far in the course and examine them in terms of what information within t
Graduate Discussion Rubric Overview Your active participation in the discussion s is essential to your overal l success this term. Discussion questions will help you make meaningful connections between the course content and the larger concepts of the course. These discussions give you a chance to express your own thoughts, ask questions, and gain insight from your peers and instructor . Directions For each di scussion, y ou must create one initial post and follow up with at least two response posts . For your initial post , do the following :  Write a post of 1 to 2 paragraphs .  In Module One, complete your initial post by Thursday at 11:59 p.m. Eastern.  In Modules Two through Ten, complete your initial post by Thursday at 11:59 p.m. of your local time zone.  Consider content from other parts of the course where appropriate. Use proper citation methods for your discipline when referencing scholarly or popular sources. For your response posts , do the following :  Reply to at least two classmates outside of your own initial post thread .  In Module One, complete your two response posts by Sunday at 11:59 p.m. Eastern.  In Modules Two through Ten, complete your two response posts by Sunday at 11:59 p.m. of your local time zone.  Demonstrate more depth and thought than saying things like “I agree ” or “You are wrong .” Guidance is provided for you in the discuss ion prompt . Rubric Critical Elements Exemplary Proficient Needs Improvement Not Evident Value Comprehension Develops an initial post with an organized, clear point of view or idea using rich and significant detail (100%) Develops an initial post with a point of view or idea using appropriate detail (90%) Develops an initial post with a point of view or idea but with some gaps in organization and detail (70%) Does not develop an initial post with an organized point of view or idea (0%) 20 Timeliness N/A Submits initial post on time (100%) Submits initial post one day late (70%) Submits initial post two or more days late (0%) 10 Engagement Provides relevant and meaningful response posts with clarifying explanation and detail (100%) Provides relevant response posts with some explanation and detail (90%) Provides somewhat relevant response posts with some explanation and detail (70%) Provides response posts that are generic with little explanation or detail (0%) 20 Critical Elements Exemplary Proficient Needs Improvement Not Evident Value Critical Thinking Draws insightful conclusions that are thoroughly defended with evidence and examples (100%) Draws informed conclusions that are justified with evidence (90%) Draws logical conclusions (70%) Does not draw logical conclusions (0%) 30 Writing (Mechanics) Ini tial post and responses are easily understood, clear, and concise using proper citation methods where applicable with no errors in citations (100%) Initial post and responses are easily understood using proper citation methods where applicable with few errors in citations (90%) Initial post and responses are understandable using proper citation methods where applicable with a number of errors in citations (70%) Initial post and responses are not understandable and do not use proper citation methods where applicable (0%) 20 Total 10 0%