Finance and Accounts Analysing Accounts Pr. Zoubida SAMLAL

ACCOUNTING AND FINANCE The Purpose of Accounts To provide information for stakeholders ◦ Shareholders – progress of their investment ◦ Government – tax liability ◦ Suppliers – credit worthiness ◦ Customers – long term future of the business ◦ Prospective Investors – decision making ◦ Potential bidders in acquisition activity ◦ Trade Unions – negotiations with the company ◦ Management – monitor performance of the business ◦ Employees – their position in the business (they may well also be shareholders!)

THE BASIC FINANCIAL STATEMENTS Balance Sheet (also known as a Statement of Financial Position, or a Statement of Financial Condition). Income Statement (Statement of Profit and Loss, Statement of Earnings, Statement of Operations). Cash Flow Statement. 1-3

BALANCE SHEET A Balance Sheet indicates the financial position of a business at one point in time; it shows what the business owns and owes. Assets – the things of value that the company owns. Liabilities – obligations to pay or provide goods or services at some later date. Equity – the amount of net assets (assets - liabilities) owing to the owners of the business. The Balance Sheet is named as such because the total of the assets must equal the total of the liabilities and equity. What a company owns equals what it owes to its creditors and owners.

INCOME STATEMENT Each business wants to know how well it is doing. Is it earning a profit? Is it losing money? Just how well is it doing compared to other firms? Is it likely to be able to earn a profit in the future? The Income Statement communicates the inflow of Revenues and the outflow of expenses, over a given period of time. Revenue is the inflow of assets (i.e. cash or accounts receivable) to a company in return for services performed, or goods sold. Expenses are the outflow or consumption of assets (i.e. cash, inventory, supplies), or obligations incurred (i.e. accounts payable, taxes payable) while generating revenue. The difference between these two is the Net Income.

CASH FLOW STATEMENT The Cash Flow Statement records inflows and outflows of cash during a period of time, and is divided into cash flow from operations, financing, and investing activities. Sources of CashUses of Cash New loans New stock issues or owner investment Sale of property, plant, or equipment Sale of other non-current asset Cash Dividends Repayment of loans Repurchase of stock Purchase of property, plant, or equipment Purchase of other non- current asset

RATIO ANALYSIS Profitability ratios - a measure of how much profit its activities generate Liquidity ratios – ability of a business to meet its debts Investment ratios – a measure of the performance of the business

Limitations of Ratio Analysis: ◦ Usefulness dependent on the accuracy of the figures – Enron, Parmalat? ◦ Only a part of the jig-saw – needs other information to make full judgement ◦ What has happened in the past is not necessarily a pointer to what will happen in the future! ◦ Statistics always have a limitation in that it depends when they are used and how they are used. ◦ No two businesses are fully comparable as the differences between them will always influence the performance of the business ◦ Ratios do not always reflect the degree of ‘intuition’/’genius’ that may influence the performance of a business RATIO ANALYSIS

BALANCE-SHEET MODEL OF THE FIRM Current Assets Fixed Assets 1 Tangible 2 Intangible Total Value of Assets: Shareholders’ Equity Current Liabilities Long-Term Debt Total Firm Value to Investors:

BALANCE-SHEET MODEL OF THE FIRM Current Assets Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity Current Liabilities Long-Term Debt What long-term investments should the firm engage in? The Capital Budgeting Decision (Investment Decision)

BALANCE-SHEET MODEL OF THE FIRM How can the firm raise the money for the required investments? The Capital Structure Decision (Financing Decision) Current Assets Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity Current Liabilities Long-Term Debt

BALANCE-SHEET MODEL OF THE FIRM How much short- term cash flow does a company need to pay its bills? The Net Working Capital Investment Decision (Financial Decision ) Net Working Capital Shareholders’ Equity Current Liabilities Long-Term Debt Current Assets Fixed Assets 1 Tangible 2 Intangible