Ratio analysis is the process of examining and comparing financial information by calculating meaningful financial statement figure percentages instead of comparing line items from each financial statement.Managers and investors use a number of different tools and comparisons to tell whether a company is doing well and whether it is worth investing in. The most common ways people analyze a company’s performance are horizontal analysis, vertical analysis , and ratio analysis. Horizontal and vertical analyzes compare a company’s performance over time and to a base or set of standard performance numbers.
Explanation :
Ratio analysis is much different. Ratio analysis compares relationships between financial statement accounts. This means that one income statement or balance sheet account is being compared to another. These relationships between financial statement accounts will not only give a manager or investor an idea of how healthy the business is on a whole, it will also give them keen insights into business operations.
In a nutshell :
- Ratio analysis compares line-item data from a company’s financial statements to reveal insights regarding profitability, liquidity, operational efficiency, and solvency.
- Ratio analysis can mark how a company is performing over time, while comparing a company to another within the same industry or sector.
- While ratios offer useful insight into a company, they should be paired with other metrics, to obtain a broader picture of a company’s financial health.
Quantitative analysis is a mathematical and statistical method of studying behavior and predicting outcomes that investors and management use in their decision-making process. Through the use of financial research and analysis, this form of analysis seeks to assess an investment opportunity or estimate a change in a macroeconomic value.
Explanation :
Using complex financial and statistical models, this analysis quantifies objective business data and determines the effects of a decision on the business operations. With respect to investing, this approach quantifies trends following patterns and strategies of high-frequency trading to identify the correlation between the variables and determine the worthiness of an
investment. The most commonly used forms of quantitative analysis in business are the cost benefit analysis, the break even , the statistical analysis, and the feasibility study.
In a nutshell :
- Quantitative analysis (QA) is a technique that uses mathematical and statistical modeling, measurement, and research to understand behavior.
- Quantitative presents reality in terms of a numerical value.
- Quantitative analysis is used for the evaluation of a financial instrument and predicting real-world events such as changes in GDP.
Paid in Capital is the amount of cash or other assets that owners put into a company for stock. Notice that paid in capital can exist with either a contribution of cash or assets. This is particularly important for new and start up corporations. A lot of time new companies don’t need cash as much as they need equipment. Investors can contribute equipment and receive stock in exchange.
Explanation :
In a nutshell :
- Paid-in capital is the full amount of cash or other assets that shareholders have given a company in exchange for stock, par value plus any amount paid in excess.
- Additional paid-in capital refers to only the amount in excess of a stock’s par value.
- Paid-in capital is reported in the shareholders’ equity section of the balance sheet.
- It is usually split into two different line items: common stock (par value) and additional paid-in capital.
- Paid-in capital can be a significant source of capital for projects and can help offset business losses.
Obsolescence refers to an asset’s life or lack thereof. When an asset becomes old and outdated, it is considered obsolete and useless. This is a big problem for both manufacturers and retailers. Obsolescence risk is the risk that a process, product, or technology used or produced by a company for profit will become obsolete, and thus no longer competitive in the marketplace. This would reduce the profitability of the company.
Explanation :
Manufacturers main concern with obsolescence is in their fixed
assets or plant assets. Manufacturers spend large amounts of their budgets on machinery and equipment to help produce products. What happens when their equipment is outdated and isn’t useful? The equipment becomes worthless and can’t be used anymore. A good example of machinery becoming obsolete is the manual drive press. No manufacturer uses a drill press that is operated by a person. It is far too slow for mass production. Instead, modern manufacturers use CNC or computer navigated machines to drive and shape products. Once a manufacturer has a CNC machine, the stand-alone drill press is pretty useless.
In a nutshell :
- Obsolescence risk arises when a product or process is at risk of becoming obsolete, usually due to technological innovations.
- Reducing obsolescence risk means being ready and able to make capital expenditures and investments in new technology and processes.
- Technology-based companies or companies that rely on technological advantages are most vulnerable to obsolescence risk.
Net assets are more commonly referred to as equity. This is the amount of retained earnings that are left in the business. In other words, the retained earnings or profits made by the company are not distributed to the owners. The profits are left in the business to help it grow.
Explanation :
Net assets means the same thing as equity with a slight twist. Net
assets refers to equity as the amount of the business the owners actually own. It’s the owners’ claim to the assets of the company. The net asset value (NAV) represents the net value of an entity and is calculated as the total value of the entity’s assets minus the total value of its liabilities. Most commonly used in the context of a mutual fund or an exchange traded fund (ETF), the NAV represents the per share/unit price of the fund on a specific date or time. NAV is the price at which the shares/units of the funds registered with the U.S. securities and Exchange commission are traded (invested or redeemed).
In a nutshell :
- Net asset value, or NAV, is equal to a fund’s or company’s total assets less its liabilities.
- NAV, is commonly used as a per-share value calculated for a mutual fund, ETF, or closed-end fund.
- For an investment fund, NAV is calculated at the end of each trading day based on the closing market prices of the portfolio’s securities. For firms, NAV can be construed as close to its book value.
- A firm’s or fund’s shares may trade in the market at levels that deviate from its NAV.
MACRS depreciation or Modified Accelerated Cost Recovery System depreciation is an accounting procedure designed for tax purposes that depreciates a given asset in an accelerated manner. This is a technique established by the U.S. Government that allows businesses to depreciate assets rapidly during its first years.
Explanation :
The Modified Accelerated Cost Recovery System, also known as MACRS, was approved by the U.S. Congress through the Tax Reform Act of 1986 and it took the place of the previously established Accelerated Cost Recovery System (ACRS). This system allows the business or
asset owner to deduce a big portion of the asset’s value during the first years of its useful life. To calculate depreciation properly through MACRS there are three important steps to take: first, to figure out the class of the property, according to the classification established by the Internal Revenue Service (IRS).After that, the depreciation convention must be identified, depending on the treatment that should be given to the asset, according to the IRS. Finally, the depreciation method employed must be selected. There are three methods available for the MACRS, which are: 150% declining balance, 200% declining balance and the straight-line method. The Internal Revenue Service provides a full explanation on how depreciation charges should be calculated on its official website, which is a particularly useful tool for accountants and business owners.
In a nutshell :
- The modified accelerated cost recovery system (MACRS) allows a business to recover the cost basis of certain assets that deteriorate over time.
- The IRS provides guidelines on which assets are eligible for MACRS and what useful life figure should be used.
- MACRS allows for faster depreciation in the first years of an asset’s life and slows depreciation later on.
- From a tax perspective, MACRS depreciation is more beneficial compared to some other methods.
- There are two types of MACRS systems—the General Depreciation System (GDS) and the Alternative Depreciation System (ADS).
The labor force, also called workforce, is the population of able-bodied, willing people who are currently employed or looking for work. In other words, it’s a representation of the labor pool of a certain country or segment of the economy.
Explanation :
The concept of the labor force is mainly used by economists and financial professionals throughout the world to determine the health and status of an economy. Economists also study the population and aging trends to guide fiscal policy. For example, the retired populations are slowly outgrowing the current workforce in the US due to a decreased birth rate in recent generations. Thus, the baby boomers are slowly leaving the workplace and starting to collect social security. This is a growing problem that represents the importance of a growing national work force.
In a nutshell :
- The labor force participation rate is an estimate of an economy’s active workforce.
- The formula is the number of people ages 16 and older who are employed or actively seeking employment, divided by the total non-institutionalized, civilian working-age population.
- Labor force means the segment of a population who are employed or currently looking for employment.
Kaizen budgeting takes the concept of continual improvement and applies it to budgets and budget forecasting.
Explanation :
Kaizen refers to the Japanese philosophy of continuous improvement. This concept focuses more on improving slowly and continuously over time than gigantic changes and fast improvements. Kaizen stresses finding little areas that can be made better or improved. This concept is very useful in business. Companies like GM use the kaizen budget strategy to cut costs in product. Basically, they look for small areas in the production process that can either be eliminated or that can be done more efficiently. This idea forces GM to constantly rethink its approach to production.
In a nutshell :
- Kaizen is a Japanese business philosophy that focuses on gradually improving productivity by involving all employees and by making the work environment more efficient.
- Kaizen translates to “change for the better” or “continuous improvement.”
- The small changes used in kaizen can involve quality control, just-in-time delivery, standardized work, the use of efficient equipment, and the elimination of waste.
- Changes can come from any employee anytime and don’t have to happen slowly, although kaizen recognizes that small changes now can have big future impacts.
A job is simply the process of making a custom product. Each job will be different and have different requirements based on the custom product. Going back to our Fender example, each job will be slightly different. The guitars will be different colors, have different finishes, and have different specifications. These guitar jobs will all slightly differ, as do the products they produce.
Explanation :
In a job order production system, a company produces custom products for individual customers. In other words, each product is made to order. No product is mass produced. A great example of this is the Fender Guitar Custom Shop.Each guitar that leaves the Fender Custom Shop is a one of a kind guitar. These guitars are custom ordered by individual guitarists and companies. No two guitars are alike and no two guitars have the same production requirements.
In a nutshell :
- Employers search for employees and employees search for jobs in the job market.
- The job market grows or shrinks based on demand for labor and the number of workers in the economy.
- The job market is directly related to the unemployment rate—a measure of the percentage of people who aren’t employed but actively seeking work.
The International Accounting Standards Board, typically abbreviated IASB, is the organization that establishes international financial reporting standards or IFRS that are accepted throughout the world. You can think of the IASB as the international FASB that creates accounting principles and standards like GAAP on an international level.
Explanation :
The IASB consists of 14 members from various countries with different backgrounds in accounting,
finance, and auditing. Each time the members meet, the meeting is broadcast live over a webcast, so the public can see where the future of international accounting standards is heading.
In a nutshell :
- The IASB allows you to review financial documents from foreign companies that you may want to invest in or at least establish relations with because you are all working under the same set of accounting principles.
- IASB’s Objective to develop, in the public interest, a single set of high quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles.
- Also to promote the use and rigorous application of those standards.
