1. Business Activities

2. Reformulated balance sheet
Published balance sheets list assets and liabilities, usually classified into current and long-term categories
This division is useful for credit analysis
For equity analysis, it is more useful to reformulate the balance sheet into operating and financial assets and operating and financial liabilities
Operating assets and liabilities : assets and liabilities used in the business of selling to customers; involves customers and suppliers
Financing assets and liabilities : assets and liabilities used in the financing of the business; involves trading in capital markets

3. Reformulated Balance Sheet
Assets
Liabilities and Equity
Operating assets OA
Operating liabilities OL
Financial assets FA
Financial obligations FO
Common stockholders’ equity
CSE
Total assets
OA+FA
Total claims
OL+FO+ CSE
Reformulated Balance Sheet
Operating Assets
Financial Obligations and Owners’ Equity
Operating assets OA
Financial obligations FO
Operating liabilities
(OL)
Financial assets
(FA)
Net financial obligations
NFO
Common stockholders’ equity
CSE
Net operating assets
NOA
Total claims
NFO+ CSE

4. Reformulated Balance Sheet
Assets
Liabilities and Stockholders’ Equity
Financial assets:
Financial liabilities:
Cash equivalents
Short-term borrowings
Short-term investments
Current maturities of long-term debt
Short-term notes receivable
Short-term notes payable
Long-term debt investments
Long-term borrowing (bank loans, bonds payable, notes payable)
Lease obligations
Preferred stock
Operating assets:
Operating liabilities:
All else
Minority (noncontroling) interest
Common equity

5. Net operating assets (NOA) = OA – OL
NOA also sometimes referred to as enterprise assets
If FA > FO:
Net financial assets (NFA) = FA – FO
Common shareholders’ equity (CSE) = NOA + NFA
Usually FA < FO:
Net financial obligations(NFO) = – NFA
Common shareholders’ equity (CSE) = NOA – NFO
NFA/NFO also sometimes referred to as net debt

6. Reformulated income statement
The income statement reports profits and losses that NOA and NFA have produced over a given period
The reformulated statement groups these items into operating and financing categories
Includes dirty-surplus items from the statement of shareholders’ equity

7. Reformulated Income Statement
Operating revenue OR
Operating expense
(OE)
Operating income OI
Financial expense XX
Financial income
(XX)
(NFE)
Comprehensive income CI

8. Reformulated Comprehensive Income Statement
Net sales
- Expenses to generate sales
Operating income from sales (before tax)
- Tax on operating income from sales
(4)
Operating income from sales after tax
+/- Other operating income (expense) requiring tax allocation
(1)
- Tax on other operating income
+/- After-tax operating items
(3)
Operating income (after tax)
- Net financial expenses after tax
(2)
- Minority interest
= Comprehensive income to common shareholders

9. (1) Other operating income (expense) requiring tax allocation
Restructuring charges
Asset impairments
Merger expenses
Gains and losses on asset sales
Gains and losses on security transactions
Taxes have to be calculated on these items

10. (2) Net financial expenses after tax
+ Interest expense
- Interest revenue
+/- Realized gains and losses on financial assets
= Net taxable financial expense before tax
- Tax benefit from net financial expenses
= Net taxable financial expenses after tax
+/- Gains and losses on debt retirement
+/- Dirty-surplus financial items
+/- Hidden dirty-surplus financing items
Taxes have to be calculated on these items
Will come from reformulated shareholders’ equity

11. (3) After-tax operating items
Equity share in subsidiary income
Operating items in extraordinary income
Dirty-surplus operating items
Hidden dirty-surplus operating items
These items are already after-tax

12. (4) Tax on operating income from sales
+ Tax as reported
+ Tax benefit from net financial expenses
Will come from (2)
- Tax allocated to other operating income
Will come from (1)

13. Reformulated statement of shareholders’ equity
The statement of owners’ equity gives the reconciliation of beginning and ending owners’ equity
The reformulated statement groups these items into (1) transactions with shareholders and (2) comprehensive income

14. Reformulated Statement of Common Shareholders’ Equity
Beginning book value of common equity
+ Net effect of transactions with common shareholders
+ Capital contributions (share issues)
- Share repurchases
Dividends
= Net cash contribution (negative net dividends)
+ Effect of operations and non-equity financing
+ Net income (from income statement)
+ Other comprehensive income
- Preferred dividends
= Comprehensive income available to common shareholders
Closing book value of common equity

15. Beginning/Closing book value of common equity must be adjusted for:
(-) preferred stock, unless it is reported outside of shareholders’ equity, such as redeemable preferred stock
(-) noncontrolling (or minority) interests
(+) dividends payable

16. Comprehensive income = Net income + other comprehensive income
Other comprehensive income arises because of dirty surplus accounting
Dirty surplus accounting is the practice of reporting income items in the statement of shareholders’ equity rather than in the income statement.
Dirty surplus items are unrealized gains and losses in assets and/or liabilities due to changes in market prices
Unrealized gains and losses on securities available for sale
Foreign currency translation gains and losses
Gains and losses on derivative instruments
Changes in assets and liabilities due to pensions and postemployment benefits
All dirty surplus income items are reported on an after-tax basis

17. Dirty surplus items Operating income items
Changes in accounting for contingencies
Additional minimum pension liability
Tax benefits of loss carryforwards acquired
Tax benefits of dividends paid to ESOPs
Unrealized gains and losses on equity securities available for sale
Foreign currency translation gains and losses
Gains and losses on derivative instruments designated as cash flow hedges
Some adjustments of deferred tax valuation allowances
Change in funding status of pension plans
Restatement of prior years’ income due to a change in accounting principles
Financing income (or expense) items
Preferred dividends
Unrealized gains and losses on debt securities available for sale