FINANCIAL REPORTING AND ANALYSIS

Financial Reporting & Analysis

Overview, Techniques, Ratios and Limitations

Carlos B. Steinblock · [email protected]

● The Balance Sheet ○ Assessing Financial Condition ○ Assets

→ Current → Fixed → Depreciation

● Accounting Choices

Recap

Agenda

● The Balance Sheet ○ Liabilities

→ Current → Accrued Liabilities / Deferred Tax Liabilities → Long Term Debt

○ Equity

Re-assessing the Basic Accounting Equation

● What does the right side of the Balance Sheet stand for? ● What is the cheapest source of funds for a company? ● How is that different between commodities,

manufacturing, merchandising and services?

discuss

Classifying Liabilities

1. Current liabilities (short-term liabilities) are liabilities that are due and payable within one year.

2. Non-current liabilities (long-term liabilities) are liabilities that are due after a year or more.

3. Contingent liabilities are liabilities that may or may not arise, depending on a certain event.

Accounts Payable

● Arise from the credit extended by supplier for the purchase of goods and services.

● Increase or decrease depending on the credit policies available to the firm from its vendors and the business cycle itself. .

● What could a significant change mean?

Short Term Debt and Current Maturities of LT Debt

● usually called notes payable represent liabilities in form of promissory notes or renewable lines of credit.

● When longer term debt, like bonds, loans and mortgages have portions of the principal due in the upcoming year, these are reclassified into current from long term.

Accrued Liabilities

● Result from the recognition of expense prior to the actual payment.

● examples: semi-annual installment on loans, salaries, rent, insurance, taxes, etc.

● some special accounts are called also Reserve Accounts which are used for warranties, sales return or restructuring charges.

Unearned Revenue or Deferred Credits

● Unlike looking to pay in arrears as much as possible another form to get credit is a prepayment for future delivery or upcoming performance. Unless Revenue can be fully recognized any cash in excess of Revenue in the Income Statement needs to be recorded as a liability.

Deferred Taxes

● Accounting choices can lead to a ‘temporary difference’ between filed financial statements and tax filings.

● There are also permanent differences for expenses recorded for financial reporting, but not accepted as deducible by the IRS or Tax Authority.

Long Term Debt or Liabilities

● Notes payable (loans & mortgages) ● Debentures (unsecured debt backed by credit rating) ● Bonds Payable ● Convertible Debt ● Long Term Warranties (non-monetary → goods/services)

Capital Lease Obligations

● Ownership transferred to the lessee ● Contains bargain purchase option ● has a lease term ≥ 75% leased property’s economic life ● minimum lease payments with present value ≥ 90% of

property’s fair value.

Pensions & Post-Retirement Benefits

● Promises made by the employers to employees, due upon retirement.

Commitments & Contingencies

● Commitments refer to contractual arrangements that will have a significant financial impact on the company in the future.

● These section may appear with no value, but notes have to disclose the contractual agreement: example operating lease.

● Contingencies stand for potential liabilities. Probably no value can be determined, but in the notes the firm has to disclose a lawsuit for example.

Exercise: Let’s pick randomly 3 mayor listed Corps

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

● Discuss and draw conclusions on how they fund their business.

● What have we learnt?

HP Inc. and subsidiaries

After having classified liabilities let’s look @ each type critically

Stockholders’ Equity

● Common Stock · par value or stated value ● Additional Paid In Capital (delta market - par value) ● Retained Earnings ● Other Equity Accounts

○ Preferred Stock ○ accumulated other comprehensive income/(expense): 1.) unrealized G/L for

marketable securities 2.) Pensions 3.) Derivatives 4.) FX-rate

○ Treasury Stock

Liabilities · Digression

● Discuss Operating Leases vs Non Operating Leases

● Discuss Access over Ownership on the liabilities side

● Discuss Income Tax effect from Debt or Equity