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

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

Source documents

Journals

General ledger

Trial balance

Y/e adjustments

Reports

Subsidiaryledgers


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 Principles

Top down

A4 overview includes:info from 3 financial statementscrucial KPIs


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 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 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 Principles

Clustering (of expenses)


NFP Example


Analysing Financial Statements

Stages of analysis:

1Review annual report

2Enter numbers in spreadsheet

3Analyse 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


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


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


Analyse Performance Over Time

Analysis of ratios - trends in:

nLiquidity

nManagement efficiency

nFinancing

nProfitability


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

Years20082009201020112012

Current ratio1.71.51.41.31.0

Ruleof thumb≥1.5


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

Years20082009201020112012

Asset utilisn1.92.01.51.81.9

Ruleof thumb2 - retailer1 - manuf.


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

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

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

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

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 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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