FINANCIAL REPORTING AND ANALYSIS
Financial Reporting & Analysis
Income Statement, Balance Sheet & Ratios
Carlos B. Steinblock · carlos.steinblock@euruni.edu
Agenda
● Hand shaking · introduce to each other ● What is accountable? Who is the Accounting for? ● Accounting Equation & Dual Aspect Principle ● On your tracks · Open logbook
Financial Statements
Let’s collect some words or tags you connect with Accounting!
Financial Statements
★ Sales
★ Balance Sheet
★ Revenue
★ Equity
★ Expenses
★ Shareholder
★ Assets
★ P&L
★ Inventories
★ Liabilities
★ Tax
★ EBIT ★ Cash ★ Margin
★ EPS
★ Income
★ Accruals
Why do we need Accounting and FS?
● Why do we conduct business in the first place? ● How long should it last? ● Who do we do accounting for? ● What is Materiality? ● What are the GAAP? ● What is ‘creative accounting’?
Financial Statements are designed for Analysis
● A standard, but technical language is established to protect the interests mainly of investors and creditors
● The goal of accounting information is to assist economic decision makers with insight on key relationships and trends
… but who are these decision makers and what do FS tell them and what not?
Financial Statements are designed for Analysis
Financial Statements are within the Annual Report
● Let’s take a look before we get started with the basic stuff.
Home Depot Annual Report
Question · take your time and discuss ● Your successful company has been growing organically for several years. Your
partners and Board of Directors believe that a merger or an acquisition could benefit faster growth and market dominance with new products and services easy to fit into your portfolio. There are 3 smaller competitors that would be up for sale for a decent price. Who would you engage to take the first shot at their financials (before engaging in Due Diligence)?
○ A senior auditor from Big Four ○ A senior accounting & tax expert ○ A senior financial analyst / controller with industry insight
The Dual Aspect Principle
● Things of Value ○ Checking Account: € 5.500,- ○ Savings Account: € 15.000,- ○ Stock (curr. val.): € 29.500,- ○ Total: € 50.000,-
● Amounts Owed ○ Personal loan: € 20.000,-
○ Total debt: € 20.000,-
We are the new lucky owners of a home for 130.000,- EUR
The Dual Aspect Principle
● Things of Value ○ Checking Account: € 5.500,- ○ Stock (curr. val.): € 14.500,- ○ House: €130.000,- ○ Total: €150.000,-
● Amounts Owed ○ Personal loan: € 20.000,- ○ Mortgage: €100.000,-
○ Total debt: €120.000,-
Let’s introduce the terms ASSETS, LIABILITIES & EQUITY What is our Equity? In other words, what cannot be claimed from us?
The Dual Aspect Principle
● ASSETS ○ Checking Account: € 5.500,- ○ Stock (curr. val.): € 14.500,- ○ House: €130.000,- ○ Total Assets: €150.000,-
● LIABILITIES ○ Personal loan: € 20.000,- ○ Mortgage: €100.000,- ○ Owner’s Equity: € 30.000,-
Total Equities: €150.000,-
● ASSETS ○ Checking Account: € 5.500,- ○ Savings Account: € 15.000,- ○ Stock (curr. val.): € 29.500,- ○ Total Assets: € 50.000,-
● LIABILITIES ○ Personal loan: € 20.000,-
○ Owner’s Equity: € 30.000,- ○ Total Equities: € 50.000,-
before
after
The Dual Aspect Principle
● ASSETS ○ Checking Account: € 5.500,- ○ Stock (curr. val.): € 14.500,- ○ House: €130.000,- ○ Total Assets: €150.000,-
● LIABILITIES ○ Personal loan: € 20.000,- ○ Mortgage: €100.000,- ○ Owner’s Equity: € 30.000,-
Total Equities: €150.000,-
● ASSETS ○ Checking Account: € 5.500,- ○ Savings Account: € 15.000,- ○ Stock (curr. val.): € 29.500,- ○ Total Assets: € 50.000,-
● LIABILITIES ○ Personal loan: € 20.000,-
○ Owner’s Equity: € 30.000,- ○ Total Equities: € 50.000,-
before
after
We just discovered the Balance Sheet!
The Dual Aspect Principle
● What have we learnt? (your observations)
The Dual Aspect Principle
● What have we learnt? ○ even though a substantial change in assets / liabilities we are not
wealthier → owner’s equity is still 30k€ ○ Neither creditors or owners can have claims in excess of total assets
value: €150.000,- = €120.000,- + € 30.000,- → BALANCE!
The fact that ASSETS equal EQUITIES is the basic principle of all accounting theory and practice. It is often referred to as the basic accounting equation or the Dual Aspect Principle. All business transactions are recorded in terms of their dual effect on assets and equities.
● Clients · Purpose ● Reports · Layout types ● Standards ● Editor ● Area of Business ● Time Lapse
Sourcing
● Let’s understand the differences between Management & Financial or Statutory Accounting?
● Clients · Purpose ● Reports · Layout types ● Standards ● Editor ● Area of Business ● Time Lapse
Sourcing
● Let’s understand the differences between Management & Financial or Statutory Accounting?
● Street (public) ● P&L, BS, CF, etc ● GAAP ● CAO, Inv Rel ● Legal entity, Corp ● yearly, quarterly
● Management ● customized ● Internal Handbook ● Controller ● Division ● monthly, quarterly
Sourcing
● What information repositories does a company have?
The higher the quality of the source data, the more reliable accounting will be
● Contracts: MSA, SLA, CL, OL, etc ● Purchase Orders ● Invoices (Inbound - Outbound) ● Inventories - scrap ● Operations reports (production) ● QA reports (rejects, reworks)
Sourcing
● What information repositories does a company have?
● Benchmarks (suppliers, competitors) ● Make or Buy comparatives ● Sales reports ● Accruals, Provisions, Reserves ● Capitalization, CapEx ● Tax, Interest Rate, Leverage, ...
PAST PRESENT FUTURE
Business size matters
Business size matters
https://ir.homedepot.com/~/media/Files/H/HomeDepot-IR/2019_Proxy_Updates/HDAnnualReport2018.pdf
Business size matters
Business size matters
● Are we talking … ○ Family Business (1-4 employees)? ○ Start Up (5-15 employees, Seed Capital, Massive Growth)? ○ SME (3-1000 employees)? ○ Big LLC? ○ Public or listed Company?
● What information repositories (or MIS) do we have? ● How many areas of responsibility do we have?
○ Lines of Business ○ Cost Centers ○ Cost Bearer ○ Cost Types ○ Key Accounts
Cultural differences and locations matter
● Are we talking … ‘Management Accounting’, ‘Kosten und Leistungsrechnung’ o ‘contabilidad analítica’? What needs to be disclosed in the Financial Statements?
● Let’s discuss some examples
Checking your knowledge!
● Explain the nature and general purpose of financial statements ● Explain how GAAP are important for an understanding of financial
statements ● Demonstrate how certain business transactions affect the elements
of the accounting equation: Assets = Liabilities + Owners ’ Equity ● Explain how the statement of financial position, often referred to as
the balance sheet, is an expansion of the basic accounting equation