CHAPTER 1 FRAMEWORK FOR FINANCIAL STATEMENTS ANALYSIS · PDF fileCHAPTER 1 FRAMEWORK FOR FINANCIAL STATEMENTS ANALYSIS ... Provide information about accounting methods, assumption

CHAPTER 1

FRAMEWORK FOR FINANCIAL

STATEMENTS ANALYSIS

1 Đặng Thị Thu Hằng

Why are financial statements useful ?

Why we must study this course ?

What is the main purpose for studying the

financial statements ?

2

QUESTIONS

Đặng Thị Thu Hằng

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”.


CLASSES OF USERS


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


THE FINANCIAL REPORTING

SYSTEM


QUALITATIVE CHARACTERISTIC

OF ACCOUNTING INFORMATION

Relevance

Timeliness

Reliability

Neutrality


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


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?


TABLE 1-1 Worldwide Sports Financial Transactions

2008 ($ thousands)


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?


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.


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


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


WHAT IS THE CASH FLOW?

Reports the company’s cash receipts and

payments. Include operating CF, investing

CF and financing CF.


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?



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?


FIGURE 1.2 Ties among Financial Statements


TABLE 1-2 Scotts Miracle-Gro Co., Balance Sheets ($ millions)


TABLE 1-3 Scotts Miracle-Gro Co., Income Statement ($ millions)


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.


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.


THE STATEMENT OF

COMPREHENSIVE INCOME Report all changes in equity expect for

shareholders transactions ( issuing stock,

repurchasing stock, paying dividends)


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


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


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


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.


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)


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CHAPTER 1 FRAMEWORK FOR FINANCIAL STATEMENTS ANALYSIS · PDF fileCHAPTER 1 FRAMEWORK FOR FINANCIAL STATEMENTS ANALYSIS ... Provide information about accounting methods, assumption