FINANCIAL ANALYSIS

1. Financial analysis is the selection, evaluation and interpretation of

financial data, along with other pertinent information, to assist in
investment and financial decision – making.
2. There are two main sources of data: primary source and secondary source.
3. Primary source is data provided by the company itself in its financial
statements and annual reports such as income statements, balance sheets
and cash flow statements. ( 3.1)
4. Secondary sources include market data, economic data and events. (3.2)
5. Market data such as prices of the company’s shares, products and so on
can be found in the financial press or electronic media.
6. Economic data helps analysts to understand the economic environment in
which the company operates such as GDP, CPI, the competition in the
industry and so on.
7. Events help explain the company’s present condition and may have a
bearing on its future prospects. They also show what is happening
currently such as acquiring another company and developing new
products, etc…
8. There are different groups of users that need financial analysis for their
own purposes.
9. The top management needs financial analysis to make any managerial
decisions of the company for allocating resources, improving quality and
expanding the business.
10. Potential investors need financial analysis to make decisions on whether to
invest their money in the company or not.
11. Creditors need financial analysis to make decisions on whether to lend
money to the company or not. They need to determine the company’s
credit ratings, credit worthiness.
12.Other interested people include tax offices, auditors and functional
agencies.
13.Tax offices need financial analysis to determine tax liabilities.
14.Auditors need financial analysis to review and evaluate the financial data.
15. Functional agencies need financial analysis to judge the company
financial position and performance of the company.
16.There are 2 main types of analysis we will perform: vertical analysis and
horizontal analysis.
17.Vertical analysis refers to looking up and down the income statements to
see how every line item compares to revenue as percentage.
18.Horizontal analysis means to look across the income statements at the
year-over-year change in each line item.
19.The balance sheet analysis can be divided into some categories to analyze
the liquidity, leverage and operational efficiency.
20.The main liquidity ratios for a business are quick ratio, current ratio and
net working capital.
21.The main leverage ratios for a business are debts to equity, debt to capital,
debt to EBITDA, interest coverage and fixed charge coverage ratio.
22.The main operational efficiencies are inventory turnover, AR days, AP
days, total asset turnover and net asset turnover.

ACCOUNTING
1. Accounting is the process of identifying, measuring, recording,
classifying, summarizing, analyzing, interpreting and communicating
the financial transactions and events.
2. Source documents represent all documents in business which contain
financial records and act as evidence of the transactions which have
taken place.
3. Books of original or Journals are books used in recording transactions
for the first time. For example, purchase day book, cash book, sales day
book,…
4. A ledger is a book which contains all accounts of a business and used to
record the transactions for the period.
5. A trial balance contains the totals from various ledger accounts and acts
as preliminary check on account before producing final accounts.
6. Final accounts or financial statements are produced to show the
financial performance and financial position of business entities.
7. In daily, transactions are recorded in a journal daily. The first step in the
accounting process is recording.
8. Periodically, data is transferred in a ledger. The second step is
classifying.
9. Trial balance acts as preliminary check on accounts before producing
final accounts. This step is called “ summarizing”.
10.At the end of the fiscal year, financial statements ( or final accounts) are
prepared. This step is called interpreting.
11.Financial statements are balance sheets, income statements and cash
flow statements.
12. Balance sheets provide information about the financial position of a
business on a specific date.
13.Income statements provide information about financial operations of a
business during a certain accounting period. IS lists revenue, costs and
incomes.
14.Cash Flow statements provide information about financial operations of
a business during a certain accounting period. Cash flow lists inflows
and outflows of cash during the period.
15.Single-entry systems record cash flow events only, with a single journal
entry.
16.Double entry bookkeeping means that each transaction is recorded in at
least 2 accounts.
17.The double entry system of the accounting work can be established
through trial balance. Besides, during a period, the profit earned from
loss suffered can be ascertained together with details. Hence, the
financial position of the firm or the institution can be ascertained at the
end of each period. Moreover, this system permits accounts to be kept
in as much detail as necessary, thus, affords a lot of information for the
purposes of control. Therefore, results of one year may be compared
with those of previous years and reasons the change may be
ascertained.

TAXATION
1. Taxation is one of two major tools of a fiscal policy that raises
revenue for the government spending.
There are 3 types of taxes. Firstly, based on what imposed taxes:
2. Corporate Tax is the tax imposed on the profit of a business.
3. Personal income tax is the tax imposed on personal income.
4. Customs duty is the tax imposed on imports.
5. Excise tax is imposed on specific goods and services.
6. Payroll tax taxes are the taxes computed based on payrolls such as
social insurance and health insurance.
7. Inheritance tax ( or capital transfer tax ) is the tax levied on
individuals who inherit the estate of a deceased person.
8. Capital gain tax is the tax liable to profits made from the sale of
assets.
9. VAT ( Value Added Tax ) is the tax collected at each stage of
production, excluding the already-taxed costs from previous stages.
Secondly, based on tax rates:
10.Progressive tax is the tax levied at a higher tax rate on higher
incomes.
11.Regressive tax is the tax taking a larger percentage of income from
low-income earners than from high-come earners.
Thirdly, based on paying tax manner:
12.Direct taxes are taxes in which the taxpayers have to contribute tax
bills directly to the tax offices.
13.Indirect taxes are taxes in which the last consumers have to incur,
but producers contribute tax bills to the tax offices.
14.The primary function of taxation is to raise money for government
spending.
15.The functions of income taxes are to redistribute income and
encourage capital investment.
16.The function of excise tax is to restrict the consumption of some
special G and S.
17.The function of customs duty is to protect the domestic production
and ensure jobs for local people.
18.The function of payroll tax is to ensure security and medicare.
19.Tax avoidance means reducing the amount of tax you pay to a legal
minimum.
20.Employees can receive perks known as loopholes in the tax law to
avoid paying taxes.
21.Loopholes in the tax law
22.Another way for individuals to avoid paying taxes is to invest a part
of their income on pension plans, insurance policies or other
investments to delay paying taxes.
23.It is called tax shelters.
24.Or individuals can do charity to delay paying taxes.
25. Tax deductibles
26.Tax avoidance by companies is to reduce the tax bills to a legal
minimum. For example, bringing forward the capital expenditure or
applying the LIFO method to compute COGS, so the cost will
increase.
27.Tax evasion means making false or no declarations to tax
authorities.
28.Individuals usually do tax evasion when having a part time jobs
because no one can know exactly how much they earn and they
needn't to pay taxes.
29.Firms do tax evasion by making false declarations in taxable
incomes.