ACC 3301 CSU Accounting Question

Your final journal submission will consist of two parts. Reflect on what you have learned in the previous units and then answer the following questions.

Part I

After reading more about capital investment decisions in this course, you decide to apply one of the methods, such as the payback method, to a recent investment you made. Walk through the inputs and the end result. What information would must be known? What would you base those assumptions on? Would the investment meet your standards? Explain.

Part II

After reading about financial analysis in this course, you decide to put your newfound knowledge to work and consider investing in a few manufacturing firms. What industry would you look at first? What ratios would stand out as the most significant for your research? What would your final choices depend on? Would they depend on product, price, or probability? Explain your response.

Your journal should be at least two pages in length. Adhere to APA Style when creating citations and references for this assignment. APA formatting, however, is not necessary.

UNIT VIII STUDY GUIDE
Financial Analysis
Course Learning Outcomes for Unit VIII
Upon completion of this unit, students should be able to:
7. Analyze problems in managerial decision-making regarding cost planning and control.
7.1 Describe how the concepts of sustainable income and quality of earnings play a role in
managerial decision-making.
7.2 Explain how ratio analysis, horizontal analysis, and vertical analysis impact managerial
decision-making.
Required Unit Resources
Chapter 14: Financial Analysis: The Big Picture—Read the following sections:
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Sustainable Income and Quality of Earnings
Horizontal Analysis and Vertical Analysis
Ratio Analysis
In order to access the following resources, click the links below.
Chapter 14 PowerPoint Presentation
PDF of Chapter 14 Presentation
Unit Lesson
Introduction
In Unit VII, we examined cash flows and the use of capital budgeting techniques to determine the best project
and opportunity for a firm. In Unit VIII, we will dive into financial analysis and how it assists managers in
decision-making.
Making Comparisons
Comparisons between companies can provide helpful clues about the financial health of an organization.
Unfortunately, differences in accounting methods between companies sometimes make it difficult to compare
their financial data. For instance, if a firm uses the Last In, First Out (LIFO) method to value its inventory while
another firm uses the First In, First Out (FIFO) method, then comparisons of their financial data, such as cost
of goods sold or inventory balances and totals, would be misleading.
Managers should not use ratios as an end but rather as a beginning point in analysis. Ratios raise many
questions and point to opportunities for further analysis; however, they rarely answer any questions by
themselves. In addition to ratios, the manager should evaluate industry trends, economic factors,
technological changes, internal changes within the firm, and shifts in consumer trends.
Financial ratios are classified into three distinct groups, as shown in Chapter 14 of the textbook. From the
graphic below, we can identify these categories as the following.
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UNIT x STUDY GUIDE
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View the following interactive tutorial by accessing the Unit VIII Additional Unit Resources folder in the unit.
For more information about how a company’s performance can be determined using ratio analysis, please
view the Interactive Tutorial: Learning Objective 14.3. Each statement captures a small part of a firm’s
operations and represents its performance. For more information about how a company’s performance can be
determined using ratio analysis, please view the interactive tutorial below. Closed-captioning is available at
the bottom of the screen
Quality of Earnings
While profits are the lifeblood of a business, no company can survive for long and accomplish its other goals
unless it is profitable. Continuous losses drain assets from the business and leave the company at the mercy
of its creditors. In assessing the prospects of a company, managers are interested not only in the total amount
of earnings but also in the rate of earnings on sales, total assets, and owners’ equity. Further, managers must
look at the stability and source of those earnings. An inconsistent earnings performance over a period of
years, for instance, is less desirable than a steady level of earnings. A history of increasing earnings is
preferable to a flat earnings record.
A breakdown of sales and earnings by major product lines may be beneficial in evaluating the future
performance of a firm. Publicly owned companies include a supplementary schedule with their financial
statements that shows sales and profits by product line and by geographical area. These schedules assist
managers in forecasting the effect of changes in consumer demand for specific types of products.
Managers often express the opinion that the earnings of one company are higher quality than the earnings of
other similar companies. This concept arises because each company’s management can choose from a
variety of accounting principles and methods, all of which are considered generally acceptable. A company’s
management often is under heavy pressure to report rising earnings, and accounting policies may be tailored
toward this goal. In evaluating the quality of earnings, the manager should consider whether the accounting
principles and methods used will lead to a conservative measurement of earnings or tend to inflate reported
earnings.
Company Performance
Comparing financial information for a current period with similar information for prior years provides some
basis for judging whether the condition of the business is improving or worsening. This comparison of data
over time is called horizontal analysis. It expresses the idea of reviewing data for a number of consecutive
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periods. It is different from vertical analysis, which refers to the review of the financial
information
within a
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single accounting period.
Title
In addition to determining whether the situation is improving or becoming worse, horizontal analysis may aid
in making estimates of future prospects. Since changes may reverse their direction at any time, projecting
past trends into future ones always involves a level of risk. A weakness of horizontal analysis is that
comparison with the past does not lead to any basis for evaluation in absolute terms. The fact that net income
was 4% of sales last year and 5% of sales this year indicates improvement. However, if there is evidence that
net income should be 8% of sales, the record for both years is considered unfavorable.
Suggested Unit Resources
View the following video by accessing the Unit VIII Additional Unit Resources folder in the unit.
The Applied Skills Video: How to Prepare Horizontal and Vertical Analyses video will explain how to use
specific tools (horizonal analysis and vertical analysis) to evaluate the significance of financial statement data,
including income statements. Once you click on the link, closed-captioning can be accessed by clicking the
“CC” button on the bottom right of the video window, and a transcript can be accessed by clicking the “T”
button next to the “CC” button.
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