impacting the financial statementsclass

8/13/2019 Impacting the Financial Statementsclass

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Financial statementsprepared a t the end of a period (typically a year) toshow the performance and position of the

business to meet the needs of various externaluser groups.

Financial accounts are geared towards externalusers of accounting information to answer theirneeds, as a whole in order for users to answerquestions such as:

- "Should I invest my money in this company?"- "Should I lend money to this business?"

-"What are the profits on which this company

- must pay tax ?"


2/23

Company Law Requirements for Financial Accounts Every company registered under the Companies Act isrequired to prepare a set of accounts that give a true

and fair view of its profit or loss for the year and of itsstate of affairs at the year end.Annual accounts for Companies Act purposes include: - A directors report

- An audit report - A profit and loss account - A balance sheet - A statement of total recognised gains and losses - A cash flow statement - Notes to the accounts

Generally this is the practice in most countries. Youshould research for circumstances in your own countries for

exception of omission or additions


3/23

The purposes of each report are: : Profit and Loss Account Describing the trading performance of the business overthe accounting period. Balance Sheet Statement of assets and liabilities at the end of theaccounting period (a "snapshot") of the business. Cash Flow Statement Describing the cash inflows and outflows during theaccounting period. Notes to the Accounts

Additional details that have to be disclosed to complywith Accounting Standards and the Companies Act. Directors' Report Description by the Directors of the performance of thebusiness + various additional disclosures, particularly inrelation to directors' shareholdings, remuneration etc.


4/23

Comparative figures should be given for mostitems and analysis given with financial statements

Exceptions are given individually. For example, there is norequirement to give comparative figures for the notes detailing themovements in the year on fixed asset or reserves balances.


5/23

Company Law Requirements for Financial Accounts

If the company is a "parent company",(i.e it other companies or subsidiaries)

then"consolidated accounts"

must be prepared


6/23

Relationships among theFinancial Statements

Profit and Loss Statement Statement of owners equity Balance Sheet Cash Flow Statement


7/23

Ms JonesProfit and Loss Statement

Month Ended 30 June, 2001

RevenuesFees Earned $1,800

ExpensesWages Expense $ 600

Utilities And Telephone Expense 300Equipment Rental Expense 200Office Maintenance Expense 100 -1,200

Net Profit $ 600


8/23

Ms JonesStatement Of Owners Equity Month Ended 30 June, 2001

J. Jones, Capital, 1 June, 2001 $ 0

Contribution Of Capital 95,000

Net Income 600

Cash Distributions - 500

J. Jones, Capital, 30 June, 2001 $95,100


9/23

Ms JonesBalance Sheet

as at 30 June, 2001

Assets

Cash $34,500

Accounts Receivable 200Supplies 600

Land 60,000

Total Assets $95,300

Note: The cash balance on the balance sheet = ending cash balancein the cash flow statement.

Liabilities

Accounts Payable $ 200

Owners Equity J. Jones, Capital 95,100

Total Liabilities andOwners Equity $95,300


10/23

Ms JonesBalance Sheet

as at 30 June, 2001

Assets

Cash $34,500Accounts Receivable 200

Supplies 600

Land 60,000

Total Assets $95,300

Note: The cash balance on the balance sheet = ending cash balancein the cash flow statement.

Liabilities

Accounts Payable $ 200

Owners Equity Contribution Of Capital 95,000Net Income 600Cash Distributions - 500J. Jones, Capital 95,100

Total Liabilities andOwners Equity $95,300


11/23

Why Managers Analyze FinancialStatements

1. To control operations.2. To asses the financial stability of vendors,

customers and partners.3. To assess how their companies appear to

investors and creditors.


12/23

Assess and Control Earnings

1. Has that plan been effective?No! Gross margins are still about 30%.Gross margins should not be lower from oneperiod to the next if goods were obtained at alower price.

2 P ressed for discounts from suppliers.

3. ?????


13/23

Assess Vendors, Customers andBusiness Partners

1. Management applies the same analyses to vendor,customer and other strategic partner financialstatements as they do to their own.

2. Financial statement analysis used to find, qualifyand monitor potential partners.


14/23

Stability of Vendors, Customers, andBusiness Partners

1. Example : A consideration to outsourcingthe IT function to Cosmos Solutions, Inc.

What steps should the company take toinvestigate this potential partner?

Financial analysis of Cosmos,Media financial report, etc


15/23

Assess Appearance to Investorsand Creditors

1. Accrual income vs. cash flow.2. Notes to financial statements.

3. What additional information can the companygive to investors, creditors, analysts?

4. What questions should be anticipated by the

company given the current financial analysis?Days sales in inventory is more than 120 days. The company should prepare to give answers.


16/23

Financial Analyses

Financial analyses help managers determinewhether or not plans and decisions have been

successful.a) Comparative figures Horizontal analysis. Vertical analysis.

b)Ratio analysisThe numbers help tell the story examples Profitability ratios. Turnover ratios. Debt related ratios

C i fi b fi i l i d


17/23

Comparative figures between financial periodsimprove control and review of corporatedecision


18/23

Horizontal and Vertical Analysis

1. Horizontal Analysis :a. Analysis of dollar value and percentage changes.b. Over time (left to right).c. Sometimes called trend analysis.

2. Vertical Analysis :a. Analysis of dollar value amounts relative to a common

base.b. Top to bottom.c. Sometimes called Common Size Statement Analysis.
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19/23

The Balance Sheet

1. Snapshot at a given point in time.2. Three categories:

a. Assets

b. Liabilitiesc. Equity

3. Basic equation: Assets = Liabilities + Shareholder Equity

4. Differentiate between current and noncurrent: 1-yearthreshold


20/23

Analysis of The Balance Sheet

1. Horizontal Analysis: how have assets, liabilities andequities changed over time?

2. Vertical Analysis: express all other accounts relativeto total assets.


21/23

The Income Statement

1. Statement of operations or a statement of (accrual)performance over a given period of time.

2. Revenues, expenses, gains and losses.3. Basic relationship:

Sales COGS Operating Expenses Non-operating Income (Expense) Income Tax

= Net Earnings


22/23

Analyzing the Income Statement

1. Horizontal Analysis: how have sales, expenses,COGS changed over time?

2. Vertical Analysis: express all other accounts relativeto sales.


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The Statement of Cash Flows

1. Explanation of the change in cash from the beginningto the end of an accounting time period.

2. Categories include:a. Operating (activities)b. Investing (activities)

c. Financing (activities)

The Need to Compare Earnings and Cash-Flow Information

impacting the financial statementsclass

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