financial statements demystified. p 24 summary of the three financial statements cash flow statement...

financial statements demystified

financial statements demystifiedp 24

Summary of the Three Financial Statements

Cash Flow Statement

Formula P = R - E

where: R is revenue E is expenses

Formula Cash: In (Out)

History of revenueless expenses over

a year

Snapshot atbalance

sheet date

History of cash inless cash out over

a year

Formula L + E = Aor E = A - Lwhere: A is assets L is liabilities E is equity

IncomeStatement

Balance Sheet


The Accounting Information Flow

Source documents

Journals

General ledger

Trial balance

Y/e adjustments

Reports

Subsidiaryledgers


Reporting Principles

Top down

Less is more

Eg – A4 overview,

summary level financial statements

Exception reporting,

eg – current ratio reported when under 1.2

(have to trust system)



Top down

A4 overview includes:

info from 3 financial statements

crucial KPIs



Top down

Performance dashboard is an automated version

Limit info to key performance elements updated daily

Automate – link to robust, reliable, integrated systems



Future and Past

Reporting enhanced when:

In context of strategy

5 year corporate plan

Annual financial budget

Actual YTD (& month) IS – also CF forecast, BS, ratios, KPIs

5 year review IS, CF, BS & ratios

Same format for budgets & historic reporting



Future and Past

Why five years:

Analysts recommend 5 years, 3 minimum

We think better in context

Review budgets in context:

Consider having 3 prior years instead of just last year’s actual

Obtaining more comprehensive reporting:

Add historic YTD cash flow statement reporting

Add views generated through Excel spreadsheets

Obtain assurance



Clustering (of expenses)

University College Member Association

Building Association

Staff Board/council

Office & administration Office

Student services Member services

Student education & support Member benefits


NFP Example

Annual Budget Regular Reporting

2 pages --- overall explanation / recommendations

3 pages of financial statements --- IS, BS & CF

1 page --- income statement

same format -----

3 pages --- specific commentary on actual variances to budget

11 pages --- explanation of each revenue & expense line

2 pages --- membership generation, surplus history and ratios (graphical form)


Analysing Financial Statements

Stages of analysis:

1 Review annual report

2 Enter numbers in spreadsheet

3 Analyse performance over time


Analyse Performance Over Time

Profit performance:

Trend in sales

Nature of unusual items

Trend in profit

Segment performance

Likely future sales and profit


Smith Family - Income StatementYears 2008

$m2009$m

2010$m

2011$m

2012$m

Revenue

Sales 32 29 15 15 16

Government grants 9 9 12 17 17

Fund raising 38 36 37 43 44

Other 7 7 6 7 7

Total revenue 86 81 70 82 84

Expenses

Community programs (37) (38) (41) (51) (54)

Commercial (30) (28) (12) (13) (16)

Fund raising (8) (7) (8) (9) (10)

Positioning (3) (3) (2) (2) (3)

Other (7) (8) (7) (7) (6)

Total expenses (85) (84) (70) (82) (89)

Surplus 1 (3) - - (5)



Cash flow performance:

Strength of net operating cash flows

Evidence of self generation: op CF pays for dividends and fixed assets

Financing of expansions and acquisitions

Extent of borrowings and their repayment

Likely future operating cash inflows, self-generation, borrowings and/or cash change


Smith Family – Cash Flow StatementYears 2008

$m2009$m

2010$m

2011$m

2012$m

Operating activities - (1) 4 6 6

Investing activities

Payments for PP&E (1) (1) (1) (2) (1)

Proceeds PP&E 1 2

Net investments (7) 1

Net investing (7) (1) 1 (2) -

Financing activities

Repayment borrowings (2) (1) (1) (1) (1)

Net financing (2) (1) (1) (1) (1)

Net change cash (9) (3) 4 3 5

Cash at beginning 21 12 9 13 16

Cash at end 12 9 13 16 21



Balance sheet performance:

Trend in total assets - which assets cause it?

Trend in total liabilities - which liabilities cause it?

Trend in level and elements of equity


Smith Family – Balance Sheet

Years 2008$m

2009$m

2010$m

2011$m

2012$m

Assets

Current 23 18 23 26 24

Non-current 23 22 24 19 20

Total assets 46 40 47 45 44

Liabilities

Current 13 12 17 20 23

Non-current 3 2 1 1 1

Total liabilities 16 14 18 21 24

Net assets 30 26 29 24 20

Equity 30 26 29 24 20



Analysis of ratios - trends in:

Liquidity

Management efficiency

Financing

Profitability


Liquidity Ratio

p 234 & 235

current assetscurrent liabilities

Purpose ability to pay debts when due

Where to find figures balance sheet;overdraft in borrowings note

Current ratio =

Rulesof thumb

≥1.5


Liquidity Ratios - Smith Family

Years 2008 2009 2010 2011 2012

Current ratio 1.7 1.5 1.4 1.3 1.0

Years 2008 2009 2010 2011 2012

Current ratio 1.7 1.5 1.4 1.3 1.0

Ruleof thumb

≥1.5


Management Efficiency Ratio

p 237, 239, 241, 243

Purpose revenue from assets

Where to find figures balance sheet or notes, and income statement or notes

Asset utilisation =revenueassets

Ruleof thumb

2 for retailer1 for manufacturer


Management Efficiency - Smith Family

Ruleof thumb

2 - retailer1 - manuf.

Years 2008 2009 2010 2011 2012

Asset utilisn 1.9 2.0 1.5 1.8 1.9

Years 2008 2009 2010 2011 2012

Asset utilisn 1.9 2.0 1.5 1.8 1.9


Financing Ratios

p 244, 247, 248

Interest cover =EBIT

interest expense

Purpose profit to interest, proportions of funding

Where to find figures balance sheet or notes, and income statement or notes

Debt to equity =total liabilities

equity

Interest-bearing debt to equity

interest bearing debtsequity

=

Rulesof thumb

≥3

≤1

≤0.5


Financing Ratios – Smith Family

Rulesof thumb

≥3.0

≤1.0

≤0.5

Years 2008 2009 2010 2011 2012

Int cover NM NM NM NM NM

Debt/equity 0.5 0.6 0.6 0.8 1.3

Int bear debt 0.1 0.1 0.1 0.0 0.0

Years 2008 2009 2010 2011 2012

Int cover NM NM NM NM NM

Debt/equity 0.5 0.6 0.6 0.8 1.3

Int bear debt 0.1 0.1 0.1 0.0 0.0


Profitability Ratios

p 252, 253, 256, 258

Purpose surplus from revenue, assets and equity

Where to find figures income stmt or notes - numerator,income stmt or balance sheet - denominator

EBIT margin =EBITsales

x 100

EBITtotal assets

ROA = x 100

ROE =Surp b unus

equityx 100


Profitability Ratios - Smith Family

Years 2008 2009 2010 2011 2012

EBIT mgn 1.1% -3.1% 1.1% -0.2% -5.7%

ROA 2.1% -6.2% 1.6% -0.3% -11.0%

ROE 2.4% -10.7% 1.9% -1.1% -25.0%

Years 2008 2009 2010 2011 2012

EBIT mgn 1.1% -3.1% 1.1% -0.2% -5.7%

ROA 2.1% -6.2% 1.6% -0.3% -11.0%

ROE 2.4% -10.7% 1.9% -1.1% -25.0%


Size Ratios - Smith Family

Years 2008 2009 2010 2011 2012

Revenue change -5.1% -13.7% 16.2% 3.2%

Assets change -13.1% 18.2% -4.5% -3.2%

Years 2008 2009 2010 2011 2012

Revenue change -5.1% -13.7% 16.2% 3.2%

Assets change -13.1% 18.2% -4.5% -3.2%

financial statements demystifiedp 24

Summary of the Three Financial Statements

Cash Flow Statement

Formula P = R - E

where: R is revenue E is expenses

Formula Cash: In (Out)

History of revenueless expenses over

a year

Snapshot atbalance

sheet date

History of cash inless cash out over

a year

Formula L + E = Aor E = A - Lwhere: A is assets L is liabilities E is equity

IncomeStatement

Balance Sheet

financial statements demystified. p 24 summary of the three financial statements cash flow statement...

Documents

pages of financial statements

profit slide

time slide

assurance slide

system slide

reporting principles

past reporting

comprehensive reporting