Financial Analysis and Decision Making

                        Financial Analysis and Decision Making

Introduction        

1. Accounting is about professional judgement; to make judgement within the scope of         regulations and practices of accounting to correctly describe a company.
2. We could make different statements based on different accounting policies according to         different situations
3. Foundation of decision making for all sectors is financial data.
4. The course discusses the value mgmt. of the whole company, its resource allocation,         strategic positioning and strategy implementation and so on

        Financial Statements

1. 3 types viz. Balance Sheet, Income Sheet and Cash Flow Statement.
2. Need: to describe the economic activities of a company.

1. Financial: firm needs money-borrow money from bank-pay its dues-accept investments
2. Investment: open new branch, enter new biz., develop new product line
3. Operation: mf. Product- Sale of products- Collect Receivables

1. Starting pt. of all companies is a sum of invested funds.
2. All companies can be abstracted to a continuous repeating cycle: Starts with invested cash and ends with received sales proceeds in cash
3. The purpose of balance sheet is to know the standings of the principle of your initial investment

        Assets Items

[pic 1]
A typical example of a balance sheet

Balance Sheet Components:

1. Current Assets: These are liquid assets that can be converted into cash in a single cycle. They are ranked in the order of how fast they can be turned into cash. It is further divided into:

1. Cash and Cash equivalents: It simply is money (deposited in bank or retained by company)
2. Accounts Receivable: The right to receive a payment (an agreement between buyer and seller) for a product sold within/on a stipulated time.
3. Other Receivable: Receivable obtained without the selling of a product (someone owing; not an investment or loan). It is a temporary working capital with no return. This kind of receivable is a Chinese characteristic.
4. Prepayments: Receive all money in advance from a vendor. It is also a right and hence an asset.
5. Inventory: Raw materials, Work in Progress, Finished Products.
6. Deferred Expenses: Any cash outlay which appears to be asset initially, but becomes an expense gradually during normal biz. Operations.
   Ex: stationery, advance rent payment, prepaid advertising costs.
   Long term deferred expenses: Deferred expenses that are consumed during a relatively long period of time. Ex: Start-up costs used for the establishment of an enterprise.

1. Non-Current Assets: These are assets that take many cycles to be converted into cash.

1. Fixed Asset: Has to be of a substantial value and never a durable. It depreciates over time (All except land)
   Ex: Cars, Computers, Properties
2. Intangible Asset: copyrights, land rights, goodwill, patents, proprietary technologies, land usage(In China only, no ownership of land- only the right to use a piece)
3. Long term Investments: Hold any investment for long term (Equity/Debt investment)
   Ex: Ownership of a subsidiary, holding of Govt. Bonds, % shares in a company.

        [pic 2]

        Figure showing outline of a business framework

Liability Items

1. Short Term Borrowings: Bank loans to be paid < 1year
2. Account Payable: The right to receive money that a customer has signed to the vendor.
3. Other payable: Same as Other receivable from the borrower’s POV
4. Advances from customers: The liability that a good’s provider has to the customer after a customer has made the prepayments  (an upfront deposit)
5. Current liabilities: Accrued payroll (wages to employees for the period in which financial statements is to be made but not paid), Taxes Payable (tax payable for the month in which the financial statement is to be made but not paid).
6. Non-Current Liabilities: due for a period > 1 year.

1. Bonds Payable (not in China: can be done iff biz. is capable of issuing bonds)
2. Long term Payable: related to some specific kind of transactions. Ex. Lease

1. Operating Lease: When we pa
2. y rentals for something we do not own. It has a relatively shorter term and relatively less sum of money
3. Financial Lease: Paying off a loan in term of rentals for an asset.

Share-holders Equity: this is never paid, since share-holders never leave the company.

2 ways to invest money into a firm: Exogenous (Equity and Cap. Reserve) & Endogenous (Surplus Reserve and Retained Earnings).

1. Equity and Capital Resere: Relates to the organizational form of the firm. For incorporated firms: Equity. For limited liability firm: Paid in capital.
   Aside from China, Actual money= reg. capital + Capital reserve
   Listed companies which sell out shares must have capital surplus. Equity/Capital stock is a measure of the firm’s legal liability and a reflection of the division of interest between the company’s shareholders (not in proportion of their capital contributions but in proportion of their equity holdings).
2. Retained Earnings and Surplus Reserve: SR: Profit that cannot be distributed by the law. Retained Earnings: Profit a company doesn’t want to distribute (for further investment purposes).
3. Profit= SR(a minimum amt. required by the law)+ Resource allocation by shareholders (money spent) + RE