Company Analysis Lec3-Investment Managment And Portfolio-Lecture Notes, Study notes of Investment Management and Portfolio Theory

Download Company Analysis Lec3-Investment Managment And Portfolio-Lecture Notes and more Study notes Investment Management and Portfolio Theory in PDF only on Docsity! y g ( ) Lesson # 18 COMPANY ANALYSIS Contd… Financial statements (or financial reports) are formal records of business financial activities. These statements provide an overview of a business profitability and financial condition in both short and long term. There are four basic financial statements: 1. Balance sheet is also referred to as statement of financial position or condition, reports on a company's assets, liabilities and net equity as of a given point in time. 2. Income statement is also referred to as Profit or loss statement, reports on a company's results of operations over a period of time. 3. Statement of retained earnings explains the changes in a company's retained earnings over the reporting period. 4. Statement of cash flows are reports on a company's cash flow activities, particularly it’s operating, investing and financing activities. For large corporations, these statements are often complex and may include an extensive set of notes to the financial statements and management discussion and analysis. The notes typically describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statements are considered an integral part of the financial statements. Objective of Financial Statements: The objective of financial statements is to provide information about the financial strength, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities and equity are directly related to an organization's financial position. Reported income and expenses are directly related to an organization's financial performance. Financial statements are intended to be understandable by readers who have a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently. 1. Balance sheet: In financial accounting, a balance sheet or statement of financial position is a summary of the value of all assets, liabilities and owners' equity for an organization or individual on a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot" of a company's financial condition on a given date. Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time, instead of a period of time. A company balance sheet has three parts: assets, liabilities and shareholders' equity. The main categories of assets are usually listed first and are followed by the liabilities. The difference between the assets and the liabilities is known as the net assets or the net worth of the company. According to the accounting equation, net worth must equal assets minus liabilities. docsity.com y g ( )  Assets: Current assets: In accounting, a current asset is an asset on the balance sheet which is expected to be sold or otherwise used up in the near future, usually within one year, or one business cycle whichever is longer. Typical current assets include cash, cash equivalents, accounts receivable, inventory, the portion of prepaid accounts which will be used within a year, and short-term investments. On the balance sheet, assets will typically be classified into current assets and long-term assets. The current ratio is calculated by dividing total current assets by total current liabilities. It is frequently used as an indicator of a company's liquidity, its ability to meet short-term obligations. o Inventories: Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business. Inventory are held in order to manage and hide from the customer the fact that manufacture/supply delay is longer than delivery delay, and also to ease the effect of imperfections in the manufacturing process that lower production efficiencies if production capacity stands idle for lack of materials. o Accounts receivable: Accounts receivable is one of a series of accounting transactions dealing with the billing of customers who owe money to a person, company or organization for goods and services that have been provided to the customer. In most business entities this is typically done by generating an invoice and mailing or electronically delivering it to the customer which is to be paid within an established timeframe called credit or payment terms. On a company's balance sheet, accounts receivable is the amount that customers owe to that company. Sometimes called trade receivables, they are classified as current assets. To record a journal entry for a sale on account, one must debit a receivable and credit a revenue account. When the customer pays off their accounts, one debits cash and credits the receivable in the journal entry. The ending balance on the trial balance sheet for accounts receivable is always debit. o Cash and cash equivalents: Cash and cash equivalents are the most liquid assets found within the asset portion of a company's balance sheet. Cash equivalents are assets that are readily convertible into cash, such as money market holdings, short-term government bonds or Treasury bills, marketable securities and commercial paper. Cash equivalents are distinguished from other investments through their short-term existence; they mature within 3 months whereas short-term investments are 12 months or less, and long-term investments are any investments that mature in excess of 12 months. Long-term assets: Long-term assets or non-current assets are those assets usually in service over one year such as lands and buildings, plants and equipment, and long-term investments. These often docsity.com y g ( )  Operating section: o Revenue: Cash inflows or other enhancements of assets of an entity during a period from delivering or producing goods, rendering services, or other activities that constitute the entities on going major operations. Usually presented as sales minus sales discounts, returns, and allowances. o Expenses: Cash outflows or other using-up of assets or incurrence of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major operations. o General and administrative expenses (G & A): It represent expenses to manage the business (officer salaries, legal and professional fees, utilities, insurance, depreciation of office building and equipment, stationery, supplies). o Selling expenses: It represents expenses needed to sell products (e.g., sales salaries and commissions, advertising, freight, shipping, depreciation of sales equipment). o R & D expenses: It represents expenses included in research and development. o Depreciation: It is the charge for the year with respect to fixed assets that have been capitalized on the Balance Sheet.  Non-operating section: o Other revenues or gains: Revenues and gains from other than primary business activities (e.g. rent, patents). It also includes unusual gains and losses that are either unusual or infrequent, but not both (e.g. sale of securities or fixed assets). o Other expenses or losses: Expenses or losses not related to primary business operations.  Earnings before Interest & Tax (EBIT): An indicator of a company's profitability, calculated as revenue minus expenses, excluding tax and interest. EBIT is also referred to as "operating earnings", "operating profit" and "operating income", as you can re-arrange the formula to be calculated as follows: EBIT = Revenue - Operating Expenses docsity.com y g ( )  Net earnings: Gross sales minus taxes, interest, depreciation, and other expenses. Net earnings are one of the most important measures of a company's performance, since the pursuit of earnings is the primary reason companies exist. Sometimes net earnings include one-time and extraordinary items, and sometimes it does not also called net earnings or net income or bottom line.  Retained earnings: In accounting, retained earnings refer to the portion of net income which is retained by the corporation rather than distributed to its owners. Similarly, if the corporation makes a loss, then that loss is retained. Retained earnings are cumulative from year to year. Retained earnings are reported in the Shareholders' equity section of the balance sheet. A complete report of the retained earnings or retained losses is presented in the Statement of retained earnings or Statement of retained losses. When assets are greater than liabilities, you have a positive equity (positive book value). When liabilities are greater than assets, you have a negative stockholders' equity also sometimes called stockholders' deficit. Stockholders' deficit does not mean that stockholders owe money that they may safely go away from such a company. It just means that the value of the assets of the company will have to rise above its liabilities before the stockholders will reap any value (above zero) from owning the company's stock. docsity.com