Accounting #8 & 9 Financial Statement Analysis + Practical

[samvara]

It was a bad fortnight for my brain and then my neck and it feels like my biggest accomplishment was seeing 58 episodes of The Big Bang Theory.

Test #3 was a disconcerting 45% / 75% and Group exercise #3 was 71.7%. Lecturer is very good at getting results back quickly. We also got our peer evaluation results back but also got told we’d all done it wrong and would get to do another practice before we do it for reals – have kind of lost interest in what the second ‘fake’ results will yield.

We spent a fair amount of this seminar doing Test #3 and looking at the peer evaluation results so the lecture was a bit on the intense side for the second half.

Seminar 8 - Analysing Financial Statements: the art of studying past earnings to understanding performance and forecast profitability.

• Common Sized Statements: here you reduce the entire balance sheet to a % of, say, sales or total revenue so you can compare like companies.
• Trend Statements: here you pick a 'typical' year and express other years as a % of that year (baselining, you pretend 2005 was standard and compare all other years as a percentage of 2005)
• Ratio Analysis: here you compare the ratio of elements within the financial report - very popular.
  • Highlights anomalies in financial performance and position
  • Serves as an indicator or measurement tool in contracts
  • Limited when comparing across different accounting methods
  • Does not provide answers, provokes questions ('bad' ratio more informative than 'normal' ratio)
  • Only meaningful when compared to 'standard' (benchmark very important)

Types of Ratios

• Profitability
  • ROA: Rate of return on assets measures an entity's performance in using assets to generate earnings independent of the financing of those assets. (Net Profit + Interest) / Total Assets.
  • ROE: Rate of returns on shareholders equity measures an entity's ability to use and finance assets to generate earnings (Ordinary shareholders are primary interest group). (Net Profit - Preference Dividends) / Ordinary Shareholders Equity
  • Earnings per share measures the return to ordinary shareholders. (Net profit - Preference Dividends) / Weighted Average No. Ordinary Shares Issued
  • Price earnings ratio compares the market price per ordinary share with the earnings per share and indicates how much the market will pay for every dollar of earnings. Market Price per Ordinary Share / Earnings per Share
• Activity/Efficiency
• Leverage/Gearing/Solvency
  • Leverage Ratio measures the proportion of capital provided by Ordinary Shareholders and is contrasted with the proportion of capital provided by Lenders/Creditors and Preferred Shareholders. Total Assets / Ordinary Shareholders Equity.
• Liquidity
  • Current Ratio measures the entity's ability to meet its short term obligation. Current Assets / Current Liabilities
  • Quick ratio only covers those assets that can be quickly converted into cash. (Cash, Marketable Securities, Accounts Receivable) / Current Liabilities.
  • Debt to Equity measures portion of the entity's capital that is provided by creditors/lenders and shareholders. Total interest bearing liabilities / Total Equity
  • Interest coverage measures the ability of earnings to cover interest payments. Iti s an indicator of the protection that operating profitably provides to lenders and creditors. Profit before Interest and Income taxes / Interest Expenses
• Other

Seminar 9 - Practical: 5 mins of ‘here are your financial statements’ and 2.5 hours of analysing, discussing and writing up with my team. We used the previous week’s notes to work up our answers.

Comments

[zebra363.livejournal.com]

My biggest accomplishment of the week has been S2 Angel!

I could not have told you what Common Sized statements are.

[black-samvara.livejournal.com]

It's an accomplishment!