Summary of the three financial statements
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Summary of the Three Financial Statements. Income Statement. Cash Flow Statement. Balance Sheet. Snapshot at balance sheet date. History of revenue less expenses over a year. History of cash in less cash out over a year. Formula L + E = A or E = A - L where:

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Summary of the Three Financial Statements

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Summary of the three financial statements

Summary of the Three Financial Statements

Income

Statement

Cash Flow Statement

Balance Sheet

Snapshot at

balance

sheet date

History of revenue

less expenses over

a year

History of cash in

less cash out over

a year

Formula

L + E = A

or E = A - L

where:

A is assets

L is liabilities

E is equity

Formula

P = R - E

where:

R is revenue

E is expenses

Formula

Cash:

In

(Out)

p 24


The accounting information flow

The Accounting Information Flow

Source documents

Journals

General ledger

Trial balance

Y/e adjustments

Reports

Subsidiaryledgers


Reporting principles

Reporting Principles

Top downLess is more

Eg – A4 overview, summary level financial statements

Exception reporting,eg – current ratio reported when under 1.2(have to trust system)


Reporting principles1

Reporting Principles

Top down

A4 overview includes:info from 3 financial statementscrucial KPIs


Reporting principles2

Reporting Principles

Top down

Performance dashboard is an automated version

Limit info to key performance elements updated daily

Automate – link to robust, reliable, integrated systems


Reporting principles3

Reporting Principles

Future and Past

  • Reporting enhanced when:

  • In context of strategy

  • 5 year corporate plan

  • Annual financial budget

  • Actual YTD (& month) IS – also CF forecast, BS, ratios, KPIs

  • 5 year review IS, CF, BS & ratios

  • Same format for budgets & historic reporting


Reporting principles4

Reporting Principles

Future and Past

Why five years:

Analysts recommend 5 years, 3 minimum

We think better in context

Review budgets in context:

Consider having 3 prior years instead of just last year’s actual

Obtaining more comprehensive reporting:

Add historic YTD cash flow statement reporting

Add views generated through Excel spreadsheets

Obtain assurance


Reporting principles5

Reporting Principles

Clustering (of expenses)


Nfp example

NFP Example


Analysing financial statements

Analysing Financial Statements

Stages of analysis:

1Review annual report

2Enter numbers in spreadsheet

3Analyse performance over time


Analyse performance over time

Analyse Performance Over Time

Profit performance:

nTrend in sales

nNature of unusual items

nTrend in profit

nSegment performance

nLikely future sales and profit


Smith family income statement

Smith Family - Income Statement


Analyse performance over time1

Analyse Performance Over Time

Cash flow performance:

nStrength of net operating cash flows

nEvidence of self generation: op CF pays for dividends and fixed assets

nFinancing of expansions and acquisitions

nExtent of borrowings and their repayment

nLikely future operating cash inflows, self-generation, borrowings and/or cash change


Smith family cash flow statement

Smith Family – Cash Flow Statement


Analyse performance over time2

Analyse Performance Over Time

Balance sheet performance:

nTrend in total assets - which assets cause it?

nTrend in total liabilities - which liabilities cause it?

nTrend in level and elements of equity


Smith family balance sheet

Smith Family – Balance Sheet


Analyse performance over time3

Analyse Performance Over Time

Analysis of ratios - trends in:

nLiquidity

nManagement efficiency

nFinancing

nProfitability


Liquidity ratio

Liquidity Ratio

Rulesof thumb

≥1.5

current assetscurrent liabilities

Current ratio=

Where to find figuresbalance sheet;overdraft in borrowings note

Purposeability to pay debts when due

p 234 & 235


Liquidity ratios smith family

Liquidity Ratios - Smith Family

Years20082009201020112012

Current ratio1.71.51.41.31.0

Ruleof thumb≥1.5


Management efficiency ratio

Management Efficiency Ratio

Ruleof thumb

2 for retailer1 for manufacturer

revenueassets

Asset utilisation=

Where to find figuresbalance sheet or notes, and income statement or notes

Purposerevenue from assets

p 237, 239, 241, 243


Management efficiency smith family

Management Efficiency - Smith Family

Years20082009201020112012

Asset utilisn1.92.01.51.81.9

Ruleof thumb2 - retailer1 - manuf.


Financing ratios

Financing Ratios

Rulesof thumb≥3

≤1

≤0.5

EBITinterest expense

Interest cover=

total liabilitiesequity

Debt to equity=

Interest-bearing debt to equity

interest bearing debtsequity

=

Where to find figures balance sheet or notes, and income statement or notes

Purposeprofit to interest, proportions of funding

p 244, 247, 248


Financing ratios smith family

Financing Ratios – Smith Family

Years20082009201020112012

Int coverNMNMNMNMNM

Debt/equity0.50.60.60.81.3Int bear debt0.10.10.10.00.0

Rulesof thumb≥3.0≤1.0≤0.5


Profitability ratios

Profitability Ratios

EBITsales

EBIT margin=

x 100

EBITtotal assets

ROA=

x 100

Surp b unus equity

ROE=

x 100

Where to find figures income stmt or notes - numerator,income stmt or balance sheet - denominator

Purposesurplus from revenue, assets and equity

p 252, 253, 256, 258


Profitability ratios smith family

Profitability Ratios - Smith Family

Years20082009201020112012

EBIT mgn1.1%-3.1%1.1%-0.2%-5.7%ROA2.1%-6.2%1.6%-0.3%-11.0%ROE2.4%-10.7%1.9%-1.1%-25.0%


Size ratios smith family

Size Ratios - Smith Family

Years20082009201020112012

Revenue change-5.1%-13.7%16.2%3.2%Assets change-13.1%18.2%-4.5%-3.2%


Summary of the three financial statements1

Summary of the Three Financial Statements

Income

Statement

Cash Flow Statement

Balance Sheet

Snapshot at

balance

sheet date

History of revenue

less expenses over

a year

History of cash in

less cash out over

a year

Formula

L + E = A

or E = A - L

where:

A is assets

L is liabilities

E is equity

Formula

P = R - E

where:

R is revenue

E is expenses

Formula

Cash:

In

(Out)

p 24


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