Introduction to Financial Analysis
Financial Analysis
Finance
Lesson Plan
Performance Objective
Students analyze accounting systems to examine their contribution to the fiscal stability of businesses.
Specific Objective
 Describe the nature and scope of accounting.
 Analyze data when interpreting operational documents.
 Review terms related to accounting.
Terms
 Accounting ‐ planning, recording, analyzing, and interpreting financial information
 Accounting system ‐ a planned process for providing financial information that will be useful to
management
 Proprietorship ‐ a business owned by one person
 Partnership ‐ a business in which two or more persons combine their assets and skills
 Corporation ‐ an organization with the legal rights of a person and which may be owned by many
persons
 Service Business ‐ a business that performs an activity for a fee
 Merchandising Business ‐ a business that purchases and sells goods
 Manufacturing Business ‐ a business which produces goods for use or sale using labor, machines, and
tools
 Asset ‐ anything of value that is owned
 Liability ‐ an amount owed by a business
 Owner’s Equity ‐ the amount remaining after the value of all liabilities is subtracted from the value of
all assets
 Revenue ‐ an increase in owner’s equity resulting from the operation of the business
 Expense ‐ a decrease in owner’s equity resulting from the operation of the business
 Balance Sheet ‐ a financial statement that reports assets, liabilities, and owner’s equity on a specific
date
 Long‐term Liabilities ‐ liabilities owed for more than one year
 Withdrawal ‐ an asset taken out of a business for the owner’s personal use
 Income Statement ‐ a financial statement showing the revenue and expenses for a fiscal period
 Component Percentage ‐ the percentage relationship between one financial statement item and the
total that includes that item
 Cost of Merchandise Sold ‐ the total original price of all merchandise sold during a fiscal period
 Gross Profit on Sales ‐ the revenue remaining after cost of merchandise sold has been deducted
Copyright © Texas Education Agency, 2013. All rights reserved.
1
Time
When taught as written, this lesson should take approximately 7 days to teach.
Preparation
TEKS Correlations:
This lesson, as published, correlates to the following TEKS. Any changes/alterations to the activities may result
in the elimination of any or all of the TEKS listed.
130.168. (c) Knowledge and Skills
(1) The student analyzes accounting systems to examine their contribution to the fiscal stability of
businesses. The student is expected to:
(a) describe the nature and scope of accounting
(3)The student demonstrates mathematical knowledge and skills required to pursue the full range of
post‐secondary education and career opportunities. The student is expected to:
(f) analyze data when interpreting operational documents.
Interdisciplinary Correlations:
English‐English I
 110.31(b)(1). Reading/Vocabulary Development. Students understand new vocabulary and use it
when reading and writing.
 110.3(b)(11). Reading/Comprehension of informational text/procedural texts. Students understand
how to glean and use information in procedural texts and documents.
Math‐Mathematical Models with Applications
 111.36(c)(1)(A) Knowledge and Skills. …compare and analyze various methods for solving a real‐life
problem.
 111.36(c)(1)(C) Knowledge and Skills…select a method to solve a problem, defend the method, and
justify the reasonableness of the results.
Occupational Correlation (O*Net – www.onetonline.org/):
Job Title: Financial Analysts
O*Net Number: 13‐2051.00
Reported Job Titles:
Financial Quantitative Analysts, Personal Financial Advisors, Financial Examiners, Credit Analysts
Tasks: Draw charts and graphs, using computer spreadsheets, to illustrate technical data
Inform investment decisions by analyzing financial information to forecast business, industry, or
economic conditions
Interpret data on price, yield, stability, future investment‐risk trends, economic influences, and other
factors affecting investment programs.
Skills:
Active Listening, Critical Thinking
Copyright © Texas Education Agency, 2013. All rights reserved.
2
Accommodations for Learning Differences
It is important that lessons accommodate the needs of every learner. These lessons may be modified to
accommodate your students with learning differences by referring to the files found on the Special
Populations page of this website.
Preparation
 Review and familiarize yourself with the terminology in outlines, presentations, and handouts.
 Locate and evaluate various resources and websites.
 Prepare materials and websites prior to the start of the lesson.
References
http://www.thirteen.org/edonline/lessons/fe_start/b.html
“Could You Start a Business?”
This lesson plan will teach high school students the importance of financial management for a small business.
It will help students learn the concepts of business costs, positive cash flow, credit, and proper financial
management in running a business. Students will learn the tools for basic financial analysis, and will
investigate why the business in the video segments was not successful. As an extension activity, they can
brainstorm ideas for a model new business given what they have learned about the financial needs of a new
business.
http://www.sec.gov/investor/pubs/begfinstmtguide.htm
Beginner’s Guide to Financial Statements produced by the U.S. Securities and Exchange Commission
Accounting: Real World Applications & Connections. (4th ed.). (2000). New York City, NY: Glencoe
McGraw‐Hill
Gilbert, Claudia B. & Lehman, Mark W. (2008). Accounting: Century 21. Stamford, CT: Cengage Learning.
http://www.edu04.org/Accounting/1c.html
Accounting Tutorial
Instructional Aids
1. Websites for assignments
2. Class discussion
3. Assignment Worksheets
4. Textbooks
Introduction
The main purpose of this lesson is to help students understand:


The nature and scope of accounting
How to analyze data in income statements and balance sheets
Ask students if they recall the three types of businesses and three types of ownership.
Ask students if they recall which types of accounts are included in an income statement and which are
included in a balance sheet.
Copyright © Texas Education Agency, 2013. All rights reserved.
3
Ask students if they can state the accounting equation.
Outline
I.
Review Accounting Vocabulary
II.
Review three types of ownership
and three types of businesses
III.
A.
Ownership: Proprietorship,
Partnership, Corporation
B.
Types: Service, Merchandising,
Manufacturing
See Assignment 1.2
Use Presentation 1.1
Review Accounting Equation
A.
IV.
Use Presentation 1.1
Administer Pretest
See Assignment 1.1
Assets = Liabilities + Owner’s
Equity
Review Balance Sheet and Income
Statement
A.
Balance Sheet: Financial
statement reporting assets,
liabilities, and owner’s equity
on a specific date
B.
Income Statement: Financial
statement reporting revenue
and expenses over a period of
time
See Assignment 1.3
Multiple Intelligences Guide
Kinesthetic/
Logical/
Copyright © Texas Education Agency, 2013. All rights reserved.
4
Existentialist
Interpersonal
Intrapersonal
Bodily
Mathematical
Musical/Rhythmic
V.
Discuss Vertical Analysis and
Horizontal Analysis of a Balance Sheet
A.
Vertical: all items are divided
by total assets
B.
Horizontal:
1.
Change = current year –
prior year
2.
Percent = change divided
by prior year
VI. Discuss Vertical Analysis and
Horizontal Analysis of an Income
Statement
A.
B.
Naturalist
Verbal/Linguistic
See Presentation 1.1
See Assignment 1.4
See Presentation 1.1
See Assignment 1.5
Vertical: all items are divided
by net sales
Horizontal/Comparative:
1.
Change = current year –
prior year
2.
Percent = change divided
by prior year
Visual/Spatial
Copyright © Texas Education Agency, 2013. All rights reserved.
5
Application
Guided Practice



Search the internet to find reasons for financial planning.
Search the internet to find examples of balance sheets and income statements.
See Assignments.
Independent Practice

See Assignments.
Summary
Review
Explain why businesses complete financial statements.
Explain the reason for vertical and horizontal analysis of balance sheets and income statements.
Evaluation
Informal Assessment
Any and all of the following can be used as informal assessments :
 Check vocabulary definitions
 Pre‐test vocabulary
 Research online for balance sheets and income statements
Formal Assessment
The following can be considered a formal evaluation in order to keep students engaged during both the pre‐test(s) and
post‐test(s) :
 Evaluation of completed assignments
 PostTest
Enrichment
Extension
Students contact local businesses and request copies of their balance sheets and income statements to
analyze as a class.
Copyright © Texas Education Agency, 2013. All rights reserved.
6
Financial Planning
Student Assignment 1.1
Research the internet to find and record definitions for the following terms:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Accounting
Accounting System
Proprietorship
Partnership
Corporation
Service Business
Merchandising Business
Manufacturing Business
Asset
Liability
Owner’s Equity
Revenue
Expense
Balance Sheet
Long‐term Liabilities
Withdrawal (Drawing)
Income Statement
Component Percentage
Cost of Merchandise Sold
Gross Profit on Sales
Copyright © Texas Education Agency, 2013. All rights reserved.
7
Financial Planning
Student Assignment 1.2
MATCHING:
a.
b.
c.
Sole Proprietorship
Partnership
Corporation
_____1.
_____2.
_____3.
_____4.
_____5.
_____6.
_____7.
_____8.
_____9.
____10.
____11.
____12.
____13.
____14.
d.
e.
f.
Recognized by law to have a life of its own
Success or failure depends heavily on the efforts of the owner
Owned by a single individual
Owners share in the risks and the profits
Simplest to begin
Usually formed when the need for capital is greater than one person can invest
Shares of stock represent an individual’s percentage of ownership
Usually requires more regulations and higher taxes
Must have a charter to operate as an organization
Should enter into a written legal agreement before operating the business
Has at least two owners
Complex to organize
Losses limited to investment
Hard to raise money
Service Business
Merchandising Business
Manufacturing Business
____15.
____16.
____17.
A business that transforms raw material into products
A business that buys finished products and then sells them
A business organized to operate by providing professional services for a fee
Copyright © Texas Education Agency, 2013. All rights reserved.
8
Financial Planning
Student Assignment 1.2 KEY
1. c
2. a
3. a
4. b
5. a
6. b
7. c
8. c
9. c
10. b
11. b
12. c
13. c
14. a
15. f
16. e
17. d
Copyright © Texas Education Agency, 2013. All rights reserved.
9
Financial Planning
Student Assignment 1.3
MATCHING:
a.
b.
c.
d.
e.
f.
Assets
Liabilities
Withdrawal (Drawing)
Revenue
Expense
Capital
_____1.
_____2.
_____3.
_____4.
_____5.
_____6.
_____7.
_____8.
_____9.
____10.
____11.
Accounts Payable
Cash
Office Equipment
Accounts Receivable
Costs for advertising, rent, utilities
When the owner takes out merchandise or cash
When the owner invests merchandise or cash in the business
Sales Tax Payable
Supplies
Fees
Rental Sales
FILL IN THE BLANK:
12. Which financial statement covers the progress of the business over a period of
time?________________________________
13. Which financial statement covers the condition of the business on a specific
date?____________________________________
Copyright © Texas Education Agency, 2013. All rights reserved.
10
14. What does a balance sheet report?
a.__________________
b.__________________
c.__________________
15. What does an income statement report?
a. __________________
b. __________________
c. ___________________
Copyright © Texas Education Agency, 2013. All rights reserved.
11
Financial Planning
Student Assignment 1.3 KEY
1.b
2.a
3.a
4.a
5.e
6.c
7.f
8.b
9.a
10.d
11.d
12.Income Statement
13.Balance Sheet
14.assets, liabilities, owner’s equity
15.revenue, expenses, net income or net loss
Copyright © Texas Education Agency, 2013. All rights reserved.
12
Financial Analysis, Inc.
Balance Sheet
December 31, 2012
Assets
Cash
Accounts Receivable‐‐Student 1
Accounts Receivable‐‐Student 2
Office Supplies
Office Equipment
Store Equipment
Total Assets
Liabilities
Accounts Payable‐‐Student 3
Accounts Payable‐‐Student 4
Sales Tax Payable
Total Liabilities
Owner's Equity
Owner, Capital
Total Liabilities and Owner's Equity
2012
$ 5,500.00
$ 915.00
$ 450.00
$ 950.00
$ 4,500.00
$ 6,250.00
$ 18,565.00
2011
$ CHANGE % CHANGE
$ 5,000.00
$ 875.00
$ 525.00
$ 1,010.00
$ 4,555.00
$ 5,250.00
$ 17,215.00
$ 2,320.00 $ 1,955.00
$ 1,110.00 $ 1,150.00
$ 2,500.00 $ 3,000.00
$ 5,930.00 $ 6,105.00
$ 12,635.00 $ 11,110.00
$ 18,565.00 $ 17,215.00
Copyright © Texas Education Agency, 2013. All rights reserved.
13
Financial Analysis, Inc.
Income Statement
December 31, 2012
Revenue
Pool Service Revenue
Pool Store Revenue
Total Revenue
Expenses
Advertising Expense
Equipment Repair Expense
Maintenance Expense
Rent Expense
Utilities Expense
Total Expenses
Net Income
VERTICAL
$ 15,000.00
$ 9,000.00
$ 24,000.00
$ 1,500.00
$ 1,950.00
$ 4,100.00
$ 1,185.00
$ 3,400.00
$ 12,135.00
$ 11,865.00
Copyright © Texas Education Agency, 2013. All rights reserved.
14
Complete a horizontal analysis for the following income statement:
Financial Analysis, Inc.
Income Statement
December 31, 2012
Revenue
Pool Service Revenue
Pool Store Revenue
Total Revenue
Expenses
Advertising Expense
Equipment Repair Expense
Maintenance Expense
Rent Expense
Utilities Expense
Total Expenses
Net Income
2012
2011 $ CHANGE
$ 15,000.00 $ 14,000.00
$ 9,000.00 $ 10,100.00
$ 24,000.00 $ 24,100.00
$ 1,500.00
$ 1,950.00
$ 4,100.00
$ 1,185.00
$ 3,400.00
$ 12,135.00
$ 11,865.00
% CHANGE
$ 2,000.00
$ 1,540.00
$ 4,050.00
$ 1,150.00
$ 3,600.00
$ 12,340.00
$ 11,760.00
Copyright © Texas Education Agency, 2013. All rights reserved.
15
Financial Analysis, Inc.
Income Statement
December 31, 2012
Revenue
Pool Service Revenue
Pool Store Revenue
Total Revenue
Expenses
Advertising Expense
Equipment Repair Expense
Maintenance Expense
Rent Expense
Utilities Expense
Total Expenses
Net Income
VERTICAL
$ 15,000.00
62.5%
$ 9,000.00
37.5%
$ 24,000.00
100.0%
$ 1,500.00
$ 1,950.00
$ 4,100.00
$ 1,185.00
$ 3,400.00
$ 12,135.00
$ 11,865.00
6.3%
8.1%
17.1%
4.9%
14.2%
50.6%
49.4%
Financial Analysis, Inc.
Income Statement
December 31, 2012
Revenue
Pool Service Revenue
Pool Store Revenue
Total Revenue
Expenses
Advertising Expense
Equipment Repair Expense
Maintenance Expense
Rent Expense
Utilities Expense
Total Expenses
Net Income
2012
2011 $ CHANGE % CHANGE
$ 15,000.00 $ 14,000.00 $ 1,000.00
7.1%
$ 9,000.00 $ 10,100.00 $ (1,100.00)
‐10.9%
$ 24,000.00 $ 24,100.00 $ (100.00)
‐0.4%
$
‐
$ 1,500.00 $ 2,000.00 $ (500.00)
‐25.0%
$ 1,950.00 $ 1,540.00 $ 410.00
26.6%
$ 4,100.00 $ 4,050.00 $
50.00
1.2%
35.00
3.0%
$ 1,185.00 $ 1,150.00 $
$ 3,400.00 $ 3,600.00 $ (200.00)
‐5.6%
$ 12,135.00 $ 12,340.00 $ (205.00)
‐1.7%
$ 11,865.00 $ 11,760.00 $ 105.00
0.9%
Copyright © Texas Education Agency, 2013. All rights reserved.
16