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FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015 Session 19 Cash Flows, The Perfect Storm & Financial Statement Analysis
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FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
Session 19Cash Flows, The Perfect Storm &
Financial Statement Analysis
FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
Roots = Financing Activities
Trunk & Branches = Investing Activities
Fruit = Operating Activities
Businesses are like Fruit Trees
FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
Statement of Cash Flows
Operating Working capital, day-to-day
transactions Direct versus indirect methods
Investing Non-current assets—mainly PP&E and
marketable securities Financing
Debt, equity and dividends paid
Accounting’s Perfect Storm
IFRS Adoption Convergence Completion
Including Financial Statement Reformating
Private Company Financial Reporting PCC FRF
FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
Target Your Efforts
Solvency assurance
Wealth enhancement
Performance improvement
FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
Start with the 3 P’s
Planning
Processing
Presenting
FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
Include the Trifecta: Q-S-T
Q: Quantitative analysis
S: Strategic assessment
T: Tactical feasibility
FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
Tools for Financial Statement Analysis
Ratio analysis Trend analysis Common-size analysis Base period analysis Comparative analysis Horizontal and vertical analyses
FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
A Financial Statement Approach
Look for key relationships Focus on spending drivers Don’t overlook the Statement of
Cash Flows Remember to measure trends Tell a story
FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
Guidelines for a Presentation
Clarity Accuracy Simplicity Visually friendly Limit page content
FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
Cash Flow Red-Flags
Receivable and inventory growth rate exceeds sales growth rate
Payables growth rate exceeds inventory growth rate
Current liabilities grow faster than sales
Sustained operating losses (negative net income)
FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
Cash Flow Red-Flags (cont’d)
Negative operating cash flow Capital expenditures exceed operating
cash flow Sustained capital expenditures
reductions Sustained sales of marketable
securities in excess of purchases Substantial shift from long to short
term borrowing Dividend reduction or elimination
FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
Cash Sufficiency Ratio
Cash Flow From Operations + Interest + TaxesPPE + Debt Servicing + Taxes + Dividends
Should be greater than 1 Can easily disaggregate Different footprints for different
development stages FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
Cash Conversion Cycle
Cash conversion cycle Days in payables ≥ DSO + Days in
inventory
FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
Typical Common Ratios
Solvency & liquidity Earnings Performance
FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
Ratio Analysis
General guidelines: Be consistent Ascertain contents of numerator
and denominator Apply common sense…
FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
Trend Analysis
Static analysis is virtually useless
Trend direction is key Combine with other approaches
FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
Common-size Analysis
Helpful for size discrepancies Keyed to sales or total assets Helpful for industry comparisons
FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
Base Period Analysis
Combines trending and percentage analysis
Select representative base year and set the index at 100
Measure subsequent periods in terms of the base year
Helpful for industry comparisons Eliminates size bias
FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
Comparative Analysis Cautions
Timing variances GAAP variances Conservative vs. Aggressive GAAP Management attitude…”win at all
cost!” Size Geographic venues
FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
Horizontal and Vertical Analysis
The most basic…and most powerful analytical tool
Key element in fraud detection Keeps the organization under
control
FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
Horizontal Analysis
Period versus period changes Value changes Percentage changes
Look for irregularities
FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
Horizontal Analysis - Example
2009 2008 $ Change % Change
Current Assets $400 $300 $100 33%
Total Assets $2,500 $2,200 $300 14%
Current Liabilities $200 $150 $50 33%
Long-term Debt $1,600 $1,500 $100 7%
Equity $700 $550 $150 27%
Total Liabilities & Equity $2,500 $2,200 $300 14%
ABC CompanyPartial Balance Sheets
2008 and 2009
FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
Vertical Analysis
Relationships within the same period: Numerical relationships Percentage relationships
Look for irregularities
FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
Vertical Analysis - Example
$ % $ %
Current Assets $400 16% $300 14%
Total Assets $2,500 100% $2,200 100%
Current Liabilities $200 8% $150 7%
Long-term Debt $1,600 64% $1,500 68%
Equity $700 28% $550 25%
Total Liabilities & Equity $2,500 100% $2,200 100%
ABC CompanyPartial Balance Sheets
2008 and 2009
2009 2008
FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015
