FINANCIAL STATEMENT ANALYSIS

FINANCIAL STATEMENT

ANALYSIS

LECTURER: DANG THI THU HANG

EMAIL:[email protected]

1Đặng Thị Thu Hằng

REFERENCES

1/ The Analysis and Use of Financial Statements (White Sondhi Fried)

2/ Analysis for financial management (Higgins)

3/ Financial Reporting Analysis (CFA program)


GUIDLINE FOR TESTING

Test in class + Presentation (20% total score) Mid test (30% total score) Final test (50% total score)


RULES IN CLASS

No talking No cell phone Discuss is priority On time


CHAPTER 1

FRAMEWORK FOR FINANCIAL STATEMENTS ANALYSIS


Why are financial statements useful ? Why we must study this course ? What is the main purpose for studying the

financial statements ?

6

QUESTIONS

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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)


Documents

FINANCIAL STATEMENT ANALYSIS