Evaluating Financial PerformanceIn this section, we will learn a.docx

Evaluating Financial Performance
In this section, we will learn about one of the primary analytical
tools commonly used to evaluate the financial performance of
the firm—financial ratio analysis. Its use provides a financially
sound, analytically powerful, and widely accepted approach for
evaluating many critical aspects of a firm's financial
performance.
Over the years, many standard financial ratio formulas have
been developed and employed to evaluate various and specific
aspects of a firm's financial performance. The art of this
technique now rests in organizing these ratios for effective
implementation, properly applying them in practice, and
knowing the limitation of this technique. Because most
textbooks cover this subject in detail and adequately develop
the theory behind each financial ratio, in this section we will
concentrate on two supplemental topics: (1) organizing the key
financial ratios according to their application and (2) providing
some additional perspectives regarding the uses and limitations
of these techniques.
Organizing Financial Ratios by Application
The purpose of a financial ratio is to define a theoretically
meaningful relationship between selected activities of the firm's
financial statements that can provide insight into the firm's
financial performance. Different practitioners and textbooks
sometimes group the financial ratios differently. There are at
least 15–20 standard financial ratios plus variations of some of
them. Therefore, it is easy to lose sight of the forest for the
trees.
Also, different practitioners and textbooks often group the
financial ratios differently. One of the more logical and useful
ways to group these ratios is by their ability to answer the
following four key questions related to financial performance
evaluation.
1. How liquid is the firm?

2. How effective is the firm in generating profits on its assets?
3. How is the firm financing its assets?
4. Are the shareholder returns adequate?
Using these four questions, the financial ratios can be grouped
by category and be readily available to analyze a firm according
to four different perspectives. Here is a detailed chart that
organizes 10 key standard financial ratio formulas by the above
four perspectives.
The Uses and Limitations of Financial Ratios
Who Uses Financial Ratio Analysis?
In addition to the management of the firm, a wide variety of
individuals and organizations, for a variety of purposes, use
financial ratios to evaluate the financial statements of publicly
traded firms. The following is a list of some of the major users
of financial ratios and their general purposes for doing so.
1. Investors and investment brokers use analysis to
· evaluate alternative investments' risks versus returns
· identify trends as indicators of a firm's future performance
· identify opportunities and risks in future investment
1. Banks use analysis to
· evaluate loans to firms
· evaluate loans to individuals (personal financial statements)
· establish interest rates (higher risk equals higher interest rate)
· manage clients' investment portfolios
3. Government regulatory agencies use analysis to
· evaluate new public stock issues [Securities and Exchange
Commission (SEC)]
· conduct government audits [General Accounting Office
(GAO)]
· establish rates for government contracting [the Defense
Contract Auditing Agency (DCAA)]
4. The firm uses analysis for
· management planning
· financial planning
· credit management (who to give trade credit and on what
terms)

· shareholder reporting
· evaluating potential mergers and acquisitions
· evaluating competitors
· identifying operational problems
· assuring compliance with loan covenants (normal with bank
loans)
The Use of Financial Ratio Analysis
The reliability and value of the information gained from
financial ratio analysis can vary significantly, depending on
how it was conducted and on the quality and comparability of
the financial statements, which provide the financial data. By
itself, a ratio is just a number and not inherently meaningful.
Stand-alone financial ratios are like stand-alone numbers. They
have limited value unless associated with other references. For
an obvious example, 3 by itself means little unless associated
with some base, such as 3 degrees on the centigrade temperature
scale.
The two basic approaches for meaningfully associating financial
ratios are trend analysis and comparative analysis. In fact, it is
the careful integration of trend analysis with ratio analysis that
provides the single most powerful technique for evaluating
financial performance. Normally, trend analysis is performed on
annual or quarterly data because public companies have to
report this information to the stockholders.
Of the two sources of data, the annual data are generally
considered to be the more significant because of the annual
audit requirement. The two approaches can also be used
together to provide a more comprehensive picture of financial
performance, such as "a comparative analysis of a firm's
performance against the industry average over a three-year
period."
The reliability of comparative financial ratio analysis is
primarily a function of the accuracy and comparability of the
two sets of source financial data. The analyst must be aware of
the following factors.
1. Different companies may use differing, but GAAP-

acceptable, accounting treatments, which can distort comparison
of the financial statements and the ratios based on them.
2. Industry standards, although useful, combine many variations
in accounting treatments and may also contain inaccurate or
incomplete input information from industry members.
3. It should be obvious that comparing significantly differing
firms over differing time periods will likely add such distortion
as to render any analysis highly questionable.
In summary, the more comparable the financial statements and
the more comparable the firms, the more meaningful will be the
results of the financial ratio analysis—and vice versa.
Financial Ratio Limitations and Cautions
Remember that financial ratios, although important, are only
one piece of the financial performance picture and are best used
in conjunction with all other available financial information. In
employing financial ratio analysis, it is important to be aware of
their implicit weaknesses and limitations, as well as their
explicit strengths. Be particularly aware of the following points
in using financial ratio analysis.
1. A financial ratio is only as reliable as the accuracy of the
financial data.
2. GAAP accounting allows significant variation between
companies.
3. Accounting data are historical and therefore may not project
current performance.
4. Industry averages can contain significant dispersion and
approximations.
5. Industry classifications have problems with multi-product-
line companies.
6. Many firms have pronounced seasonal and cyclical variations
that can affect ratios.
7. Different fiscal year endings can affect comparability.
8. Any financial ratio evaluation is relative, not absolute.
9. Firms, to the extent possible, try to look their best at
reporting time.
Arnold S. Grundvig, Jr.http://www.a-

systems.net/accounting.htm
Florida International University - Chaplin School of
Hospitality & Tourism Management
HFT 3791 Social Event Management
Design Element Assignment: 50 points
Utilizing the PowerPoints, Discussions, textbook reading, and
knowledge you have acquired in other classes, please complete
the following assignment:
Lynda Solheim has just hired you to plan her wedding to Nate
Balint. Lynda is Jewish and wants to have a Jewish ceremony,
but also include some aspects that Nate will enjoy being a
Catholic.
The guests of the wedding will be made up of about 50% female
and 50% males between the ages of 25 – 32. They are all
college graduates, working in fields like education, banking,
and nursing. Most of the guests don’t get paid a ton of money
and they work odd hours, but love their job. Most guests live in
Dothan, Alabama, which is where the wedding will take place.
Lynda’s sister got married last year in a hotel ballroom with a
Broadway theme. Although it was fun, Lynda and Nate, along
with their friends, didn’t love it. The theme wasn’t something
they were taken with and have told you that they would prefer
something more casual as compared to the dressy wedding
Lynda’s sister had w/the Broadway theme.
The couple has a total budget of $50,000 for their wedding. This
includes the invitations, her dress, hair, make up, his tuxedo,
transportation etc. There will be 200 guests total. For this
project, you are only focused on the design elements of the
wedding. You must feed everyone a full meal & F&B as part of
the design should be factored in. It can be a lunch or dinner, as
they are happy to get married late morning or early evening.
The theme you have helped them choose is: The Wild, Wild
West.
For this assignment you will:
· List and describe all of the design elements you will

incorporate to make this a memorable experience for the bride.
groom, their families and friends.
· For each bullet pointed item, tell why you are using it and how
it fits w/the overall theme and event goals/objectives. In other
words, what are you trying to accomplish?
· Be sure the elements can be incorporated within budgetary
constraints. For each element, you should provide a budget.
Do not call places of business for pricing. You can get prices
with an Internet search. The focus is not the budget, but you do
need to do pricing of items, including F&B, to get a feel for
what your design would cost!
Example of budget item:
Will rent chairs that look like a horse saddle: 200 chairs @ $10
each including tax = $200
*It might be easier to do the budget aspect in Excel. A grading
rubric is provided in Canvas.
This week we look at how cash is used within the company, how
financial statements can be used to forecast future financing
needs and how financial ratios can be used to evaluate a
company’s financial condition. This type of analysis is useful
to managers, investors and lenders.
Please respond to each part of this multi-part discussion topic.
Also, respond to at least two of your peers/students. See full
instructions in a previous forum, the syllabus and the grading
rubric in the syllabus.
Financial Planning
The percent of sales model uses historical information to
develop certain ratios such as sales to inventory or finished
products, sales to debtors/receivables, and sales to cash. Sales
are then forecasted based on the ratios. The percent of sales
model is a financial planning model that assumes that most
income statement and balance sheet accounts vary
proportionally with sales. This model has a weakness related
to working capital. What is this weakness and how does it
affect financial planning?

Must 250+ words, APA format, intext citations, must have 2-3
legitimate verifiable sources. Due by June 2, 2019 @ 10:00 AM
EST 19 hours. No later.
My Post:
Must 150+ words, APA format, intext citations, must have 2-3
legitimate verifiable sources. Due by June 2, 2019 @ 10:00 AM
EST 19 hours. No later.
POST TO RESPOND TO
Post 1
Percent of Sales model is defined as the art of estimating the
requirements of cash or liquid holdings a company has by
looking at revenues and expenses as part of sales then using that
to create a pro forma income statement, these estimates are then
compared and analyzed with projected sales. Basically the job is
to historically look at past sales and create a future sales
outlook then continue to compare it to what is actual data to
then create another estimate for another week, month, quarter or
year.
A weakness in the percent of sales model is that it doesn't show
the growth of a company so the estimates dont look at certain
variables that might not be looked at or considered unless it hits

a point of 'critical mass' and this gives the ultimate impression
that the company might not be gaining or growing, this is called
the flatness principal (Latham, 2016)
Financial planning needs to look at the whole picture including
areas where one big push can cause it to be highly influential in
the financial forecast for the company. Example is I work for a
landscape company and during the winter we get a lot of
maintenance contracts being signed with large amounts of
money coming in and spring summer we get a lot of contracts
and work which brings in a lot of money for the company but
during the winter months if the company doesn't look at the
snow removal aspect or winter readiness needs of our customers
in our percent of sales model then we are missing out on a
significant chunk of planning and financial understanding of
how our business does throughout the year.
References:
Latham, A. (2016, October 26). The Strengths & Weaknesses of
the Percentage of Sales Model. Retrieved May 29, 2019, from
https://smallbusiness.chron.com/strengths-weaknesses-
percentage-sales-model-14562.html
Post 2
Every business requires direction for their business and the
must plan the most effective use of their capital. The most
common and best way to prepare these plans is using Financial
Planning which has multiple models. These models were
developed by executives to determine which course of action
would provide the best data to determine their business is on
course for success. The models use ratios these are the
cornerstone of financial analysis which allows executives and
managers to determine the health of their organization. From

this analysis organizations can provide a financial plan. There
are weaknesses in this method and they need to be accounted
for.
In one model, percent of sales model is a
comparative look at historical sales percentages, an example is
the cost of a product made 35% of sales for one quarter that
percentage is used to project the same percentage of sales for a
future quarter. This data comes from the businesses financial
statements particularly the Income Statement which should
showcase what revenue was brought in based on sales. The
downside, “The reliability and value of the information gained
from financial ratio analysis can vary significantly, depending
on how it was conducted and, on the quality, and comparability
of the financial statements, which provide the financial data.”
(FINC 331 Commentary, n.d.)
There is also a weakness of working capital, which is
a ratio of current assets – current liabilities. “Current assets and
current liabilities include three accounts which are of special
importance. These accounts represent the areas of the business
where managers have the most direct impact: accounts
receivable (current asset), inventories (current assets), and
accounts payable (current liability).” (FINC 331 Commentary,
n.d.) Working Capital is important to the health of an
organization as it is a definitive measure of quickly the
organization can access cash. The majority of this working
capital is gained from revenue or the accounts receivable.
Ultimately, financial planning is correctly guessing how much
money the business will receive.
That guessing can become very tricky especially
when there are outside factors to consider. A business can
successfully determine numerous quarter earnings but one
market fluctuation can completely alter any revenue previously
earned. This is the greatest weakness with financial planning
specifically with percent sales models the planning of earned
income through sales.

[FINC 331 Commentary] (n.d.) Evaluating Financial
Performance Module. Retrieved from.
https://learn.umuc.edu/d2l/le/content/384552/viewContent/1521
2403/View
Working Capital (2017) Chapter 2 Financial Statements Taxes
and Cash Flows. FINC 331 – Finance for Non-Finance.
Retrieved from.
https://learn.umuc.edu/d2l/le/content/384552/fullscreen/152123
95/View
Reply to Thread
FINC 331
Week 2 Homework Hints
Overview
This week the homework is rather more difficult than last week.
What is different this week from last week is that most
questions require a calculation or the understanding of the
formula. That said most of the questions are straight forward.
There are a few tricky ones though!
These questions deal with:
Days receivable
Fixed Asset Turnover ratio
P/E ratio, EPS and Stock price computation
Alternative Financing Needed (AFN)
Contribution margin

Days receivable ratio
(aka Days Sales Outstanding)
This ratio considers the frequency with which the company
collects on its outstanding Credit Sales in terms of number of
days. There are two parts to this calculation: Accounts
Receivable (A/R) Turnover, and then the Days Receivable.
Step 1:
A/R Turnover = Credit Sales ÷ Average A/R
A/R turnover represents the number of times the A/R is
collected in a year.
Step 2:
Days Sales = 365 days ÷ A/R turnover
Days Sales Outstanding takes the A/R turnover and restates it
into the number of days.
Fixed Asset Turnover ratio
This ratio helps analysts determine how efficiently a company
uses its fixed assets to generate income.
Fixed assets are things like buildings, equipment, land, etc.
They are long-term assets that benefit the company for more
than one year. Fixed assets re sometimes called PP&E which
stands for property, plant and equipment.
Fixed Asset TO = Net sales ÷ Net PP&E
The “Net” is important in the denominator because it means that
the total value of the PP&E must be adjusted for depreciation.
P/E ratio and stock price
(questions #12 & 13)
The Price to Earnings ratio tells us the ratio of a company’s
stock price to its per share of earnings (EPS).
EPS is the portion of Net Income that is available for each share
of outstanding common stock.
EPS = (Net Income – Dividends) ÷ # of shares outstanding
and

P/E ratio = stock price / EPS
If we know the P/E ratio and the EPS, we can determine the
stock price:
Stock price = P/E ratio x EPS
Additional Funds Needed (AFN)
question #14
When a company is forecasting its revenue and needs into the
future, it usually creates Pro Forma financial statements. These
statements take the goals and expectations that the company has
and turns them into dollar amounts on financial statements. If a
company expects to grow at a certain rate, and have costs that
are a certain amount, it must be able to predict if it can pay for
all of its needs. In many cases it cannot and it must seek
external financing. We can compute how much external
financing is need by simply making sure that the Balance Sheet
balances. Remember, Assets = Liabilities + Equity.
So, if we know the net income, the projected increase in assets
and projected liabilities plus the retention ratio, we can compute
the amount of Additional Funds Needed. The retention ratio is
the ratio of the net income that the company keeps and does not
pay out as a dividend.
AFN = [(Projected Increase in Assets/Last years sales) x
Change in sales] – [(Projected increase in Liabilities/last years
Sales) x change in sales] - (retention ratio x net income)
I know this looks like a crazy formula, but just plug the
numbers in.
Contribution Margin per unit
(question #17
Contribution margin represents the difference between the
Revenue and the variable costs associated with generating that
revenue.
CM = Revenue – Variable costs

or CM per unit = price per unit – variable costs
However, the question is not this straight forward. You must
first compute the variable costs, and to do this you must know
the order of items on a Contribution Margin Income statement.
Revenue
- Variable Costs
= Contribution Margin
- Fixed Costs
= Net Income
See next slide…
Contribution Margin continued
By plugging in the numbers given in the problem, you can
compute the total variable costs.
Then, taking the price per unit information we can compute the
number of units sold
# of units = Revenue ÷ $sales price/unit
Once you know the total variable costs and the number of units,
you can compute the variable cost per unit.
Total Variable costs ÷ #units sold = VC per unit
Finally we can compute the Contribution margin per unit.
Price per unit – VC per unit = CM per unit

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