FINANCIAL REPORTING AND ANALYSIS

Financial Statement Analysis

Overview, Techniques, Ratios and Limitations

Carlos B. Steinblock · [email protected]

Recap

● What is accountable? Who is the Accounting for? ● Accounting Equation & Dual Aspect Principle ● On your tracks · Open logbook

Agenda

● The Balance Sheet ○ Assessing Financial Condition ○ Assets

→ Current → Fixed → Depreciation

● Accounting Choices

Financial Condition

● Analogy to Sports - are we talking power athletes or endurance athletes?

● Sugar (carbohydrate) or Fat?

discuss

Financial Condition

● Analogy to Sports - are we talking power athletes or endurance athletes?

● Sugar (carbohydrate) or Fat? ● Short Term or Long Term Position? ● Liquidity or Solvency?

Asset · Definition

● an asset is any resource owned by the business, valuated in money terms. Anything tangible or intangible that can be owned or controlled to produce value and that is held by a company to produce positive economic value or to be enjoyed is an asset.

https://en.wikipedia.org/wiki/Asset

Liquidity · Definition

● Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market at a price reflecting its intrinsic value. In other words: the ease of converting it to cash.

https://www.investopedia.com/terms/l/liquidity.asp

Classifying Assets

...https://corporatefinanceinstitute.com/resources/knowledge/accounting/types-of-assets/

Exercise: Let’s pick randomly 3 mayor listed Corps

● Let’s take a look at their assets and classify them by type.

● Discuss and draw conclusions on their financial condition.

● What have we learnt?

Asset classification by liquidity

After having checked financial condition let’s look @ each type critically

Asset classification by liquidity

Quality ↯ Quality ↯

Quality ↯ What is this?

What is this? What is this?

___!

● If solvency stands for the possession of assets in excess of liabilities; ability to pay one's debts, why are we making a sound distinction? ○ liquidity gauges how quickly things can be turned into currency ○ solvency looks more to what degree equity and long term

liabilities back the fixed assets

Liquidity vs Solvency

Current assets

● We have already discussed their quality (obsolescence, storage conditions, security, …)

● Discuss good examples of ASSETS which are fixed for some, whilst current for other Biz by definition → what can we conclude?

● What are toxic assets and how can we detect them?

Accounts Receivable

● How can we extract good information to analyze the business’ financial condition?

● Which potential risks could hide behind this figure? ○ How to determine ageing? ○ Allowance for doubtful accounts?

Inventories

● Name a few companies whose business model make up for completely different inventories!

● How would the above value their inventories? What information should they disclose?

● Which Inventory Accounting methods do you know?

Fixed Assets · Digression

● Discuss Operating Assets vs Non Operating Assets

● Discuss Access over Ownership

● Market/Competition Strategy vs Financial Strategy

Depreciation & Amortization · Discuss

● Depreciation Methods

● Operations vs Accounting vs Tax Authorities

● Depreciation · Leasing · Renting · Leaseback · Refurbishment

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