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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
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)



Analysing financial statements
Analysing Financial Statements

Stages of analysis:

1 Review annual report

2 Enter numbers in spreadsheet

3 Analyse performance over time


Analyse performance over time
Analyse Performance Over Time

Profit performance:

n Trend in sales

n Nature of unusual items

n Trend in profit

n Segment performance

n Likely future sales and profit



Analyse performance over time1
Analyse Performance Over Time

Cash flow performance:

n Strength of net operating cash flows

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

n Financing of expansions and acquisitions

n Extent of borrowings and their repayment

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



Analyse performance over time2
Analyse Performance Over Time

Balance sheet performance:

n Trend in total assets - which assets cause it?

n Trend in total liabilities - which liabilities cause it?

n Trend in level and elements of equity



Analyse performance over time3
Analyse Performance Over Time

Analysis of ratios - trends in:

n Liquidity

n Management efficiency

n Financing

n Profitability


Liquidity ratio
Liquidity Ratio

Rulesof thumb

≥1.5

current assetscurrent liabilities

Current ratio=

Where to find figures balance sheet; overdraft in borrowings note

Purpose ability to pay debts when due

p 234 & 235


Liquidity ratios smith family
Liquidity Ratios - Smith Family

Years 2008 2009 2010 2011 2012

Current ratio 1.7 1.5 1.4 1.3 1.0

Ruleof thumb≥1.5


Management efficiency ratio
Management Efficiency Ratio

Ruleof thumb

2 for retailer1 for manufacturer

revenueassets

Asset utilisation=

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

Purpose revenue from assets

p 237, 239, 241, 243


Management efficiency smith family
Management Efficiency - Smith Family

Years 2008 2009 2010 2011 2012

Asset utilisn 1.9 2.0 1.5 1.8 1.9

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

Purpose profit to interest, proportions of funding

p 244, 247, 248


Financing ratios smith family
Financing Ratios – Smith Family

Years 2008 2009 2010 2011 2012

Int cover NM NM NM NM NM

Debt/equity 0.5 0.6 0.6 0.8 1.3Int bear debt 0.1 0.1 0.1 0.0 0.0

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

Purpose surplus from revenue, assets and equity

p 252, 253, 256, 258


Profitability ratios smith family
Profitability Ratios - Smith Family

Years 2008 2009 2010 2011 2012

EBIT mgn 1.1% -3.1% 1.1% -0.2% -5.7%ROA 2.1% -6.2% 1.6% -0.3% -11.0%ROE 2.4% -10.7% 1.9% -1.1% -25.0%


Size ratios smith family
Size Ratios - Smith Family

Years 2008 2009 2010 2011 2012

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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