Finc3015 Accounting Guide

Financial statements can be used to establish a company’s profile, to get a view of their operations/financing. In particular cash flow analysis, to see how they plan their budget and to forecast their financial statement. All for DCF

You can use it to compare it to others, and see how M&A should be carried out.

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Assets are probable future economic benefits obtained or controlled by a firm from past transactions or events. Must be measurable benefits and must have been ‘realised’, while Liabilites are the same but they are probable sacrifices.

Ending Equity = Beginning Equity + Net Profit After Tax –                                                   Distributions to Equity Holders

Income statements measure the development of assets and liabilities,         and are a measure of economic performance, not full information.

Drivers of Revenue are price and volume: Prices drivers such as inflation, strategy and regulation, and volume drivers like market conditions and competition.

The objective is to match consumption of assets to the revenue produced.

• Making/Buying the Product = COGS/Gross Profit
• Supporting the Business = SGA / Operating Profit(EBIT)
• Financing the Business = Interest & Finance Costs / Profit Before Tax(PBT OR EBT)
• Paying the Government = Tax Cost / Profit After Tax (NPAT)

Normalised profit removes outliers from the income statement, and tell us about the core profitability.

Analyse businesses with depreciation in a separate category, as it is not a cash expense, and its tax shield effect is important. Get from CFS

CFS: This statement shows how cash is used by businesses, but we need to find our own FCF for our DCF analysis.

• Income from unspecified sources – holdings in other businesses that are not revealed or from special purpose entities.
• Income from asset sales or financial transactions.
• Sudden changes in standard expense items – a big drop in SG&A or R&D expense as a % of revenues.
• Frequent accounting restatements.
• Accrual earnings that run ahead of cash earnings consistently.

Big differences between tax income and reported income. 

Part 2.

There is a positive correlation between almost all accounts and sales.  This is an underlying assumption to the Sales driven model.