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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:

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Summary of the Three Financial Statements

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  1. 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

  2. The Accounting Information Flow Source documents Journals General ledger Trial balance Y/e adjustments Reports Subsidiaryledgers

  3. 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)

  4. Reporting Principles Top down A4 overview includes:info from 3 financial statementscrucial KPIs

  5. 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

  6. 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

  7. 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

  8. Reporting Principles Clustering (of expenses)

  9. NFP Example

  10. Analysing Financial Statements Stages of analysis: 1 Review annual report 2 Enter numbers in spreadsheet 3 Analyse performance over time

  11. 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

  12. Smith Family - Income Statement

  13. 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

  14. Smith Family – Cash Flow Statement

  15. 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

  16. Smith Family – Balance Sheet

  17. Analyse Performance Over Time Analysis of ratios - trends in: n Liquidity n Management efficiency n Financing n Profitability

  18. 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

  19. 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

  20. 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

  21. 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.

  22. 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

  23. 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

  24. 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

  25. 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%

  26. 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%

  27. 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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