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FINANCIAL STATEMENT ANALYSIS

FINANCIAL STATEMENT ANALYSIS

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FINANCIAL STATEMENT ANALYSIS

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  1. FINANCIAL STATEMENT ANALYSIS LECTURER: DANG THI THU HANG EMAIL:hang.dangthithu@hoasen.edu.vn Đặng Thị Thu Hằng

  2. REFERENCES 1/ The Analysis and Use of Financial Statements (White Sondhi Fried) 2/ Analysis for financial management (Higgins) 3/ Financial Reporting Analysis (CFA program) Đặng Thị Thu Hằng

  3. GUIDLINE FOR TESTING Test in class + Presentation (20% total score) Mid test (30% total score) Final test (50% total score) Đặng Thị Thu Hằng

  4. RULES IN CLASS No talking No cell phone Discuss is priority On time Đặng Thị Thu Hằng

  5. CHAPTER 1FRAMEWORK FOR FINANCIAL STATEMENTS ANALYSIS Đặng Thị Thu Hằng

  6. QUESTIONS • Why are financial statements useful ? • Why we must study this course ? • What is the main purpose for studying the financial statements ? Đặng Thị Thu Hằng

  7. WHAT IS THE FINANCIAL REPORTING? “ The objective of financial statement is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions”. Đặng Thị Thu Hằng

  8. CLASSES OF USERS Đặng Thị Thu Hằng

  9. GENERAL PRINCIPLES AND MEASUREMENT RULES • Financial reporting system is based on data generated from accounting events. • The exchange of cash is not sufficient for the recognition of revenue and expense events. • Financial statements (FS) are prepared using a monetary unit to quantify the operations of the firm • Relies on the going concern assumption Đặng Thị Thu Hằng

  10. THE FINANCIAL REPORTING SYSTEM Đặng Thị Thu Hằng

  11. QUALITATIVE CHARACTERISTIC OF ACCOUNTING INFORMATION • Relevance • Timeliness • Reliability • Neutrality Đặng Thị Thu Hằng

  12. PRINCIPAL FINANCIAL STATEMENTS • Balance sheet • Income statement • The statement of cash flows • Footnotes • And other statements such as: the statement of stockholder’s equity, contingencies Đặng Thị Thu Hằng

  13. THE BALANCE SHEET • The balance sheet is a financial snapshot, reports the firm’s financial position at a point of time. Assets are a firm’s economic resources. • Assets = Liabilities + Shareholders’ Equity • What do these items measure? • What happens to the numbers in a balance sheet when a company borrows money from a bank? • What’s Worldwide Sports? Story in Table 1.1? Đặng Thị Thu Hằng

  14. TABLE 1-1 Worldwide Sports Financial Transactions 2008 ($ thousands) Đặng Thị Thu Hằng

  15. QUESTION ? • How much did WS sell? • What was the value of WS merchandise purchases? • How much did WS borrow, and what rate of interest did they pay? • Are assets equal to the sum of liabilities and shareholders’ equity? Đặng Thị Thu Hằng

  16. WHAT IS THE INCOME STATEMENT? • Reports on the financial performance of the firm over a period of time. Elements include such as revenues, expenses, gains and losses. Đặng Thị Thu Hằng

  17. INCOME STATEMENT FORM (VAS form) 1. Operating revenue 2. Sales deduction (discount, rebate, import export tax, payback goods) 3. Net operating revenue(1) – (2) 4. Cost of goods sold 5. Gross profit 6. Selling expense 7. Administrative expense Đặng Thị Thu Hằng

  18. 8. Operating income= (5) – (6) – (7) 9. Interest income 10. Interest expense 11. Equity income= (9) – (10) 12. Other income 13. Other cost 14. Other profit: (12) –(13) 15. EBT 16. EAT Đặng Thị Thu Hằng

  19. WHAT IS THE CASH FLOW? Reports the company’s cash receipts and payments. Include operating CF, investing CF and financing CF. Đặng Thị Thu Hằng

  20. THE CASH FLOW • Finance and operations are integrated. • Cash  Fixed Assets  Inventory  AR  Cash • Where is production (operations) in this cycle? • Where does the initial cash come from? • Where is the working capital cycle? • Where is investment in this cycle? Đặng Thị Thu Hằng

  21. Đặng Thị Thu Hằng

  22. MORE QUESTIONS FOR CASH FLOW • What is depreciation? • Did we miss AP? If so, where does it fit in? • Cash  Fixed Assets  Inventory  AR  Cash • Are profits and cash flow the same? • Does depreciation have anything to do with this question? Đặng Thị Thu Hằng

  23. FIGURE 1.2 Ties among Financial Statements Đặng Thị Thu Hằng

  24. TABLE 1-2 Scotts Miracle-Gro Co., Balance Sheets ($ millions) Đặng Thị Thu Hằng

  25. TABLE 1-3 Scotts Miracle-Gro Co., Income Statement ($ millions) Đặng Thị Thu Hằng

  26. CASH FLOW AND NET INCOME • Which is the better measure of performance? • Net income includes estimates, allocations, and approximations. • Cash flow from operations is actual cash. • Low or negative cash flow does not necessarily imply poor performance. Đặng Thị Thu Hằng

  27. WHAT IS THE FOOTNOTES (FS NOTES) • Provide further details about the information summarized in the financial statements. • Allow users improve their assessments of the amount, timing and uncertainty of the estimates reported in the FS. • Provide information about accounting methods, assumption and estimates used by management. Đặng Thị Thu Hằng

  28. THE STATEMENT OF COMPREHENSIVE INCOME • Report all changes in equity expect for shareholders transactions ( issuing stock, repurchasing stock, paying dividends) Đặng Thị Thu Hằng

  29. MD&A (MANAGEMENT’S DICUSSION AND ANALYSIS) • Effect of inflation and changing prices if material • Impact of off balance sheet obligations and contractual obligations such as purchase commitments • Accounting policies that require significant judgement by management • Forward- looking expenditures and divestitures Đặng Thị Thu Hằng

  30. AUDITS OF FINANCIAL STATEMENTS • Unqualified opinion: auditor believes the statements are free from material omissions and errors • Qualified opinion: make any exceptions to the accounting principles • Adverse opinion: statements are not presented fairly or are materially nonconforming with accounting standards Đặng Thị Thu Hằng

  31. THE FRAMEWORK FOR FINANCIAL ANALYSIS (6 STEPS) • State the objective of the analysis • Gather data • Process the data • Analyze and interpret the data • Report the conclusion or recommendations • Update the analysis Đặng Thị Thu Hằng

  32. QUESTIONS • Question 1: Explain the low or negative cash flow does not necessarily imply poor performance. Give an example • Question 2: During hard or challenging economic times, such as the past 2 years in Vietnam, explain how current assets can become a source of cash. • Question 3: Question Briefly explain how each of the following transactions would affect a company's balance sheet. balance sheet.a. Purchase a new $40 million building, financed 25 percent with cash and 75 percent with a bank loan.b. Purchase a new building for $40 million cash.c. A $10,00 payment to trade creditors.d. Sale of 100,000 of merchandise cash.e. Sale of 100,000 of merchandise credit. Đặng Thị Thu Hằng

  33. QUESTIONS • Each group prepared financial statement and classify accounts into the financial statement elements • Explain the need for accruals and named, give some examples ( unearned revenue, accrued revenue, prepaid expenses, accrued expenses) Đặng Thị Thu Hằng