Audit Evidence: Analytical Procedures - Lesson 4 - YouTube

Activity, receivable turnover, here we go, accounts receivable turnover measures liquidity

of receivables. Inventory, measures liquidity of inventory because it tells me, are these

receivables liquid? Whether they're going to turn into receivables, cash.

Inventory turnover, will the inventory turn into a sale? Because it's not obsolete. Asset

turnover, net sales over average total assets measures how efficiently assets are used to

generate sales. Number of days' supply and average inventory, 360 over inventory turnover.

So this is important. Number of days� supply in average inventory

and number of day�s sales in average receivables. So if we were to come back here and let's

say our AR turnover and what we said was it is credit sales over average AR. Now what

did that equal? 6.0 That tells me receivables turnover six times a year or 360 over six

is 60 days. It tells us they turnover about every 60 days and you can do the same thing

for both receivables and inventory. Inventory turns over same thing. That means

if inventory's over 60 days old. And we did that in our head, we said if it turns over

six time a year, six times a year means every two month, two months is 60 days. But the

way to calculate it is just 360 over this gives your number of days. So what do they

define that as? They define that as number of days� supply in inventory measures the

number of days required to sell inventory. Receivables, measures the number of days required

to collect receivables. Profitability, profit margin on sales also called your gross margin.

Your gross margin, that is net income over net sales, measures net income generated by

each dollar of sale. So what is the income, net over sales?

Another one, rate of return on assets, measures overall profitability. Rate of return on common

stock, measures profitability of owner's investment. EPS, Earnings per Share. We'll talk a lot

about-- We'll have to calculate simple and diluted. We'll calculate those in financial

accounting. Measure net income earned on each share of

common stock. It doesn't mean how much money you're actually going to earn, it's not your

dividend. Earnings per share just says how much per share did each person, would each

person have earned based on the company's earnings. It doesn't mean how much you�re

getting as a dividend but again, we'll do those calculations in the financial accounting

exam. But that's important. Because most people think earning per share means how much you're

getting as a dividend, it's not. Price earnings, market price over EPS measures

the ratio of the market price per share, two earnings per share. Payout ratio measures

percentage of earnings distributed in the form of dividends, that's payout. Other ratios

coverage, debt to equity, shows creditors the corporation's ability to sustain losses

because it's your total debt over your stockholder's equity. Debt to total assets, measures the

percentage of total assets provided by creditor�s time�s interest earned, measures the ability

to meet interest payments as they come due. Cash debt to coverage, measures the ability

to repay its total liabilities. And book value per share, measures the amount each share

would receive if the company were liquidated at the amounts reported on the balance sheet.

So it's basically your common stockholder's equity over the common shares outstanding.

That's called your book value per share or book value per common. Because we have book

value per common that's after the preferred get paid out. Again, we'll talk more about

that in where? In your financial accounting exam which I know you just can't wait for

because it gets better and better. What is this talking about? Analytical procedures

so what does that mean again. What it says is to keep it in perspective, these are the

audit procedures, and these are the substantive tests. We've talked about ICURRIIA, there's

your A. Analytical procedures, study of data comparisons and relationships.

This is one of your different tests. You've got test of details of account transactions,

balances and disclosures and analytical procedures study of data comparisons and relationships.

It's important that you understand all of these. It's important that you also see how

they all tie together which we'll talk about in just a moment.