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MANAGING PROJECTS

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Projects represent nonroutine business activities that often have long-term strategic ramifications for a firm. In this chapter, we examined how projects differ from routine business activities and discussed the major phases of projects. We noted how environmental changes have resulted in increased attention being paid to projects and project management over the past decade. In the second half of the chapter, we introduced some basic tools that businesses can use when planning for and controlling projects. Both Gantt charts and network diagrams give managers a visual picture of how a project is going. Network diagrams have the added advantage of showing the precedence between activities, as well as the critical path(s). We wrapped up the chapter by showing how these concepts are embedded in inexpensive yet powerful software packages such as Microsoft Project. If you want to learn more about project management, we encourage you to take a look at the Web site for the Proj...
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Analysis of Financial Statements

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CONCEPTUAL
The purpose of financial statement analysis is to help users make better business decisions. Internal users want information to improve company efficiency and effectiveness in providing products and services. External users want information to make better and more informed decisions in pursuing their goals. The common goals of all users are to evaluate a company’s (1) past and current performance, (2) current financial position, and (3) future performance and risk. Finansial statement analysis focuses on four “building blocks” of analysis: (1) liquidity and efficiency—ability to meet short-term obligations and efficiently generate revenues; (2) solvency—ability to generate future revenues and meet long-term obligations; (3) profitability—ability to provide financial rewards sufficient to attract and retain financing; and (4) market prospects—ability to generate positive market expectations.
Standards for comparisons include (1) intracompany— prior performance and relations between financial items for the company under analysis; (2) competitor—one or more direct competitors of the company; (3) industry—industry statistics; and (4) guidelines (rules of thumb)—general standards developed from past experiences and personal judgments.
ANALYTICAL
A finansial statement analysis report is often organized around the building blocks of analysis. A good report separates interpretations and conclusions of analysis from the information underlying them. An analysis report often consists of six sections: (1) executive summary, (2) analysis overview, (3) evidential matter, (4) assumptions, (5) key factors, and (6) inferences.
An income statement has four potential sections: (1) continuing operations, (2) discontinued segments, (3) extraordinary items, and (4) earnings per share.
PROCEDURAL
Horizontal analysis is a tool to evaluate changes in data across time. Two important tools of horizontal analysis are comparative statements and trend analysis. Comparative statements show amounts for two or more successive periods, often with changes disclosed in both absolute and percent terms. Tren analysis is used to reveal important changes occurring from one period to the next.
Vertical analysis is a tool to evaluate each financial statement item or group of items in terms of a base amount. Two tools of vertical analysis are common-size statements and graphical analyses. Each item in common-size statements is expressed as a percent of a base amount. For the balance sheet, the base amount is usually total assets, and for the income statement, it is usually sales.
Ratio analysis provides clues to and symptoms of underlying conditions. Ratios, properly interpreted, identify areas requiring further investigation. A ratio expresses a mathematical relation between two quantities such as a percent, rate, or proportion. Ratios can be organized into the building blocks of analysis: (1) liquidity and efficiency, (2) solvency, (3) profitability, and (4) market prospects.
Guidance Answers to Decision Maker
Auditor
The joint relation referred to is the combined increase in sales and the decrease in expenses yielding more than a 5% increase in income. Both individual accounts (sales and expenses) yield percent changes within the ±5% acceptable range. However, a joint analysis suggests a different picture. For example, consider a joint analysis using the profit margin ratio. The client’s profit margin is 11.46% ($206,000 - $182,400/$206,000) for the current year compared with 5.0% ($200,000 - $190,000/$200,000) for the prior year—yielding a 129% increase in profit margin! This is what concerns the partner, and it suggests expanding audit tests to verify or refute the client’s figures.
Banker
Your decision on the loan application is positive for at least two reasons. First, the current ratio suggests a strong ability to meet short-term obligations. Second, current assets of $160,000 and a current ratio of 4:1 imply current liabilities of $40,000 (onefourth of current assets) and a working capital excess of $120,000. This working capital excess is 60% of the loan amount. However, if the application is for a 10-year loan, our decision is less optimistic. The current ratio and working capital suggest a good safety margin, but indications of inefficiency in operations exist. In particular, a 4:1 current ratio is more than double its key competitors’ ratio. This is characteristic of inefficient asset use.
Small Business Owner
The frost loss is probably not extraordinary. Jacksonville experiences enough recurring frost damage to make it difficult to argue this event is both unusual and infrequent. Still, you want to highlight the frost loss and hope the bank views this uncommon event separately from continuing operations.

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