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IOAN BĂTRÂNCEA

FINANCIAL STATEMENT

ANALYSIS

CONTENTACOLO UNDE ANALIZA FINANCIARĂ NU E, NIMIC NU E!...................................ERROR! BOOKMARK NOT DEFINED.

CHAPTER 1 THEORETICAL-METHODOLOGICAL BASIS OF THE ECONOMICAL-FINANCIAL ANALYSIS...................71.1. Methods of scientific research of the objective reality....................................................71.2 Economic analysis – methodological approaches.............................................................81.3. Microeconomic analysis – content, necessity and objectives........................................12

1.3.1. Brief history concerning the evolution of the financial analysis............................121.3.2. Opinions regarding the content and the scope of the microeconomic analysis......131.3.3. The place of the economic analysis among sciences..............................................151.3.4. The necessity of the microeconomic analysis.........................................................171.3.5. The objectives of microeconomic analysis.............................................................181.3.6. The role of the microeconomic analysis in the management of the company........19

1.4. The system of the microeconomic analysis...................................................................211.4.1. The economic analysis system................................................................................231.4.2. Financial analysis system........................................................................................24

1.4.2.1. Financial management of the companies.........................................................241.4.2.2. Opinions regarding the content of financial analysis.......................................26

CHAPTER 2 THE METHODOLOGY OF ECONOMIC AND FINANCIAL ANALYSIS OF THE ENTERPRISE....................322.1 CONCEPTS OF PROCEEDING , TECHNIQUE AND METHOD..............................322.2.METHODOLOGY OF QUALITATIVE ANALYSIS OF THE COMPANY STATE. 332.3.THE METHODOLOGY OF QUANTITAYIVE ANALYSIS OF THE COMPANY STATE..................................................................................................................................33

CHAPTER 3 THE METHODOLOGY OF COMPETITION ANALYSIS.................................................................................363.1.Proceedings based on the dynamics of the financial performances criteria...................36

3.1.1. Method of Synthetic Indicator................................................................................363.1.2. Method of the Comparison Matrix.........................................................................373.1.3. Method of Distance or „The Model Company”......................................................383.1.4. Method of final score of the companies..................................................................38

CHAPTER 4 THE METHODOLOGY OF ANALYSIS OF THE INTERNAL STATE OF THE ENTITY..................................474.1 Analyzing the proceedings applicable in the case of deterministic relations.................48

4.1.1. Proceedings of evaluating the factor’s influence in absolute measures..................494.1.1.1. The proceeding of isolated determination of the factor’s influence................494.1.1.2. The proceeding of the connected substitutions:...............................................534.1.1.3. The procedure of the coefficients of distribution.............................................574.1.1.4. The areas method.............................................................................................614.1.1.5. The matrix method..........................................................................................664.1.1.6. The balance method.........................................................................................69

4.1.2. Methods of evaluating the facors’ influence in relative sizes.................................714.1.2.1. The method of relative linked substitutions.....................................................714.1.2.2. The indexes method.........................................................................................754.1.2.3. The relative balance method............................................................................794.1.2.4. The method of applying the logarithm to the indices......................................81

4.2. Procedures of the function of production specific to non determinist relations............87

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4.3. The Financial Analysis Functions..................................................................................904.4. Features and types of the financial analysis...................................................................914.5. The Informational System- condition and instrument needed in order for the financial analysis process to take place...............................................................................................934.6. Stages of the financial analysis process.........................................................................944.7. The Objectives of the financial statemets and the financial analysis repost..................964.8. The users of financial statements and financial analysis reports...................................98

CHAPTER 5 THE FINANCIAL ANALYSIS POSITION OF THE ENTERPRISE.................................................................1015.1. General aspects concerning the financial position of the enterprise............................1015.2 The Assets Analysis......................................................................................................106

5.2.1 Assets Vertical Analysis........................................................................................1065.2.2. The Assets Vertical Analysis................................................................................113

5.3. Liabilities and Equity Analysis....................................................................................1165.3.1. The Resources Evolution......................................................................................1165.3.2. The Passive Vertical Analysis..............................................................................120

5.4. Liquidity and Solvency Analysis.................................................................................1225.4.1. Liquidity Analysis.................................................................................................122

5.4.1.1. Aspects Regarding Liquidity.........................................................................1225.4.1.2. Liquidity Ratios.............................................................................................123

5.4.2. Solvency Analysis.................................................................................................1245.4.2.1. Aspects regarding the solvency.....................................................................1245.4.2.2. Solvency Ratios.............................................................................................125

CHAPTER 6. THE PERFORMANCE ANALYSIS..............................................................................................................1276.1. General aspects concerning the analysis of the financial performance of the company.............................................................................................................................................1276.2. The analysis of the performance according to the income statement..........................127

6.2.1. The general analysis of the performance on the basis of the income statement...1286.2.2. The Profitability Ratios.........................................................................................134

CHAPTER 7. THE TREASURY CASH FLOW ANALYSIS................................................................................................1417.1. The financial framework based on treasury cash flows...............................................1417.2. Short history of the treasury cash flows.......................................................................1417.3. The Concept of Treasury Flow....................................................................................1427.4. International Accounting Standard IAS – 7 regarding the cash flow statements.......143

7.4.1. The objective, appliance area and importance of cash flows................................1437.4.2. Cash Flow Structure..............................................................................................1447.4.3. Methods for evaluating and reporting cash flows.................................................145

7.4.3.1. Direct method for evaluating cash flows.......................................................1467.4.3.2. Indirect method of evaluating cash flows......................................................148

7.6. Internal and external utilization of the cash flow.........................................................1507.7. Funds flow...................................................................................................................1517.8. The sources and destinations of the funds...................................................................151

CHAPTER 8. BUSINESS RISK ANALYSIS.......................................................................................................................1558.1. Opinions regarding business risk.................................................................................1558.2. Methods for the analysis of the bankruptcy risk..........................................................157

8.2.1. The analysis of the bankruptcy risk through the patrimonial methods.................1578.2.2. Bankruptcy risk analysis by statistical methods...................................................158

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8.2.2.1. The Altman Model............................................................................................1588.2.2.2. Conan & Holder Model.....................................................................................1608.2.2.3. Robertson Model ...............................................................................................162

BIBLIOGRAPHY................................................................................................................................................................163

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Without financial analysis there’s nothing!

As we are actual or potential antrepreneours,each and every bookstand, the newspapers or the television they all teach us how to avoid pitfalls that our company could be subjected to and what are the "secrets" for success in business. However, the careful listener knows that „the pearls hide on the bottom of the ocean” and that in order to catch the fish, the net must be cast deeper, for only afterwards he can try finding the printed sources that teach him how to aquire all the necessary financial analysis tools. Only after he reached this point he will know how to permanently diagnose the "flu" state of the enterprise "patient", what are the mechanisms that determine the shareholder’s wealth evolution, how to evaluate business expansion opportunities, which are the risk prevention measures for exiting from a business venture and how to maintain the enterprises competitive on the market. Also at this stage he will understand that the enterprise financial analysis should be for each antrepreneur a permanent field of research, especially when the requirements imposed by the functional economic market are always bringing up new values.

I started my research for building this book, by browsing a large amount of up to date work that was published nationwide, through the prestigious university centers in Bucharest, Timisoara, Craiova, Iasi etc… but also by studying recent research in the analysis field, research published in London, New York, Philadelphia or Chicago. The study of the later was considerabily facilitated by our participation to numerous national and intenational conferences.

In our approach we relyed on the economic analysis methodology, presenting a toolbox that begins with the induction method and ends up with the sophisticated methods of bussines risk quantification.

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The recent metamorphosis in the Romanian enterprises, as consequences of applying the International Accounting Standards and International Financial Reporting Standards, open new leads for the researcher, doors that he could walk through with the help of „mycroscope” type methods, techniques and processes of scientific investigation that make the (micro)organism of the economic entity function properly. Therefore in the chapters that cover the financial investigation of the economic entity, I interpreted the new national regulations embodied in the Tax Code and the international regulations bundled in the by now veteran International Financial Reporting Standards.

The scientific researcher is also the diamond sander: he is sisiphean in his chiseling work and aware of its imperfections even when the diamond recieved sparkle. Our research was sisiphean in our ascension to becoming the economic specialty writer. Our various successful research projects and publishing that we enjouyed working on together throughout the years that we left behind , has supported us more than once: the Grant financed by the World Bank and the studies that appeared in the national and international specialty publications.

Aware that possibilities for improving the sparkle of this book still exist, we offer this diamond-fruit of our prolonged research to everyone that wishes to perfect themselves in the art of chiseling their financial analysis.

Wether you are novice in the economic field , or you ware the weight of economic responsibilities on your shoulders, just browsing this book once, will make you see that without financial analysis there is nothing.

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Chisellers,Lect.univ.dr. Larissa-Margareta Bătrâncealect.univ.dr. Andrei Moscviciov

Prof.univ.dr.Ioan Bătrâncea

Chapter 1 THEORETICAL-METHODOLOGICAL BASIS OF THE ECONOMICAL-FINANCIAL ANALYSIS

1.1. Methods for scientific research of the objective reality

The scientific knowledge of the objective reality requires the use of certain methods that are unanimously certified in other scientific domains respectively analysis, synthesis, induction, deduction and abstraction.

Analysis is the logic operation of decomposition or detachment of a whole (whether it is an object, phenomenon or process) into elements, with it’s component aspects or characteristics, as well as into factors, causes and conditions that have generated respectively influenced it, with the purpose of establishing the nature, place, role, importance,

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contribution, application and their necessity for determining* a certain state, size and variation of the researched whole.

Therefore, with the help of analysis, the knowledge of the objective reality is possible in all of its complexity.

The process of scientific knowledge of objective reality covers a long road, which interpolates between appearance and essence, the certain perceptive and the definite logic, the entire complexity afferent to that certain whole and its essential characteristics. However, in order to take notice of what is the head clause, characteristic, durable, lawful, of what is connected with the inner side of objects, phenomenons and processes, and concerned with the deep changes, it is necessary to combine analysis with synthesis.

Synthesis is the logic operation of reuniting in one whole, elements with aspects and characteristics, factors, causes and conditions previously isolated in the process of analysis, with the purpose of obtaining integer images, and structurally-relational systems of the whole in order to emphasize the typical essential movements of this whole.

In a strongly related correlation with analysis and synthesis, we also use other methods which are absolutely indispensable in the complex process of scientific research, such as induction, deduction and abstraction.

Induction is the logical operation that can be used for establishing a conclusion, deducting a new method of thinking, following a channel from a particular case to a general point of view, from facts to a general level.

Deduction is the logical operation by the use of which one can establish a conclusion; deduct a new method of thinking, follow a channelling from general thesis to particular conclusions.

Scientific deduction cannot exist without a previous study made through induction; therefore, relying on the research of facts, deduction reveals the essence and the laws of its own evolution.

Induction can only be purely scientifically to the extent that the study of different particular phenomena is based on the knowledge of the law of its evolution and essence.

In fact, induction and deduction are interconnected, similar to analysis and synthesis, in the sense that they are correlative.

Between the two correlative method pairs – analysis and synthesis and induction and deduction – there is a strong co-operative connection, induction and deduction being absolutely indispensable in the synthesis operation, respectively in forming the conclusions and depicting the characteristic of essentiality related to the research. The collaboration between the two pairs of methods offers the knowledge process, its logic, systemic and operational character, necessary for the composition of clear and just decisions.

Moreover, in the knowledge process, the analysis-synthesis and induction-deduction operations are tied to the abstraction method.

Abstraction is also a logical operation* through which, the passing from the definite perceptive to the logic perceptive is realized in the knowledge process, allowing the elaboration of abstractions of different orders through which one can get access into the mechanisms and profound determinations that are essential, necessary, and logic for that * According to dialect, factors and causes generate, provoke and take action on the researched whole and the conditions have an important, less important or inexistent influence to the genesis process of this whole. * The logic character of analysis, synthesis, induction, deduction and abstraction resides in the fact that these operations can not be completed alone and randomly and subjectively, but are in fact mandatory, taking into account the causal connection, that is objectively built, specific to the genesis process, and targeting certain reality, as well as the laws of logic thinking.

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certain whole, which is not accessible for the perceptive knowledge. In this respect, through abstraction, one proceeds intentionally, methodologically, to either a systematic isolation of what is unessential or undecided (similar to the analytical abstraction) or to a pre-depiction of an ideal whole as a result of the prolongation of a real action in a possible mental action (similar to the constructive abstraction).1

Analytical abstraction often permits a more complete understanding and a more profound objective reality by comparison with direct sensation. Through the process of abstraction of a phenomenon, notions, categories and laws, which reflect the bonds between fundamental, essential and internal reality phenomena, are underlined.

One can conclude that scientific research of the objective reality necessitates as a sine-qua-non condition, the correlated use of analysis, synthesis, induction, deduction and abstraction – the cognitive valences of these methods being the fundaments of the entire knowledge evolution.

1.2 Economic analysis – methodological approaches

Analysis is a general method of studying phenomenon and natural and social processes. The notion of analysis stems from the Greek word “analysis” and is concerned with the decomposition of an object or phenomenon in its component parts, in its simple elements, with the aim of detailed research.2

The scientific understanding of natural and social phenomena underlines the need for using analysis in all of its domains and in all the branches of science (Mathematics, Physics, Chemistry, Biology, Economy etc.). With the help of analysis the process of understanding phenomena from singular to general, from concrete to abstract, from appearance to essence, is deepened, thus allowing the bonds of causality, of factors of influence, as well as the forming and acting lawfulness of the researched phenomena to be created.3

In this respect the French philosopher Helvetius (1715-1771) said: “The one who knows the cause is the master of effect.” 4

In the process of understanding, analysis has to be accompanied by synthesis. The notion of synthesis comes from the Greek word “synthesis”, which refers to reuniting parts, components or elements of a phenomenon in a whole, in order to understand its diverse forms and manifestations, existent in reality.5

Analysis is a pre-emerging step towards synthesis, to which it stands in a dialectic way and reciprocity condition.6

The term “analysis” comes from the French language and has a double meaning: 7

Firstly, through the verb “to analyze” one understands “to research a whole phenomenon” by examining each element individually.8

1 Collective – Philosophy, E.D.P., 1985, p. 235-2362 F. Radu – Metode si tehnici de analiza economico financiara, Editura Scrisul Romanesc, Craiova 1999, p.5 3 idem4 ibidem5 ibidem 6 ibidem 7 I Coteanu, L. Seche, M Seche, coordonatori, Academia Romana, Insitutul de Lingvistica “Iorgu Iordan”, DEX, Editura Univers Enciclopedic, Bucuresti, 1998, p. 38 8 ibidem

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Secondly, the noun “analysis” refers to a method of scientific research that systematic study of each stand-alone element, is based on; the detailed examination of a problem.9

The University Professor Alexandru Gheorghiu and the collaborators consider analysis to be a “method of research based on decomposing an object or a phenomenon in its component parts, in simple elements. With the help of analysis man can research objects and phenomena, discover their structure, verify them and establish the causality relations of their generating factors, discovering the laws of their formation of their evolution and based on all of the above they can formulate decisions regarding future actions.”10

Etymologically, the word analysis comes from the Greek “analysis” which means the decomposing of an object or a phenomenon, real or mental, in its component parts, in simple elements. As a corrective, synthesis (from the Greek “synthesis”), refers, to the reuniting of parts, elements of an object or a phenomenon in a whole. 11 While analysis requires an examination of elements in an object, synthesis require the examination of an object in its entity. The understanding of objects and phenomena requires therefore the combination between analysis and synthesis.”12

University Professors Gheorghe Vâlceanu, Vasile Robu and Nicolae Georgescu, believe that analysis “represents a method of research which consists of decomposing a whole (object, phenomenon or process) into components or elements, proceeding to identify the factors, causes and conditions that generated and influenced it.”13

University Professor Lucian Buse, defines analysis to be “a method of understanding based on decomposing the phenomenon, the whole, into component parts, into constructive elements, followed by the study of each individual part and concluding with the establishment of causality relations, generating factors and conclusions about future activity.” 14

Analysis, according to University Professor Constantin Stanescu, Aurel Isfanescu and Aurel Baicusi, “is a method of research based on the process of decomposition of an object or phenomenon into component parts, into simple elements. With the help of specific methods the domain is researched in each individual component, establishing the relations of causality and the factors, which generate them. Conclusions are formed and the frame of future activity is established… As a correlative for the analysis, synthesis is the method used for reuniting in a whole, the elements of an object or phenomenon”. 15 “While analysis means the decomposition of a result, synthesis focuses on analyzing the elements in their entity”16

Synthesis is “scientific method of phenomena research, based on the transcendence from particular to general, from simple to compound, in order to find a general framework; combining two or more elements which comprise in a whole.”17

Through post-factual, current and provisional knowledge of the economic agents’ behavior, of the results and internal resources, of the causes that generated them, economic 9 ibidem10 Al. Gheorghiu ş. c. - Analiza activităţii economice a întreprinderilor, Editura Didactică şi Pedagogică, Bucureşti, 1982, p. 511 Al.Gheorghiu – Analiza economico-financiară la nivel microeconomic, Editura Economică, Bucureşti, 2004, p.1812 idem13 Gh.Vâlceanu, V.Robu, N.Georgescu – Analiză economico-financiară, Editura Economică, Bucureşti, 2004, p.1414 L.Buşe – Analiză economico-financiară, Editura Economică, Bucureşti, 2005, p.1115 idem16 C. Stănescu, A. Işfănescu, A. Băicuşi - Analiza economico- financiară, Editura Economică, Bucureşti, 1996, p. 12-1317 Al Gheorghiu – Op.cit., p.25

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analysis contributes to understanding the efficiency in utilizing human and material resources. 18

French annalist D. M. Chorafas believes that “Economic Analysis studies the ensemble of corporative economic policy”19

German annalist K. Fisher considers that “Economic Analysis researches the phases, production and circulation in the reproduction framework” 20

Annalists J. Lecaillon, J. R. Hicks, J.M. Henderson, R. Gaffing believe that the purpose of microeconomic analysis contain: the analysis of consumer demand, the analysis of the producers’ offer, the analysis of the equilibrium between demand and supply, the currency, credit and the general equilibrium, monopoly, and welfare.21

Most economists in this country are concerned with a special preoccupation in delimiting the sphere of research of the microeconomic analysis.

Within the economic perspective, University Professor Alexandru Gheorghiu believes that economic analysis represents the search for a result, a process or a phenomenon, based on the decomposition of the whole into elements and establishing the factors and causes. 22

University Professor Lucian Buse believes that in its essence, regardless of the degree and its domain of activity, the activity of leading necessitates the knowledge of the entire complex of causes and factors which generate a certain state, fact that is accomplished through economic analysis. 23

The knowledge of the forming factors and economic activity results, establishing the possibilities for improvement of enterprise functioning24 would comprise the defining element of the analysis’ purpose in the industrial enterprises.

Other annalists consider that the sphere of the economic analysis includes the studying of all aspects of human, material and financial resource utilization with the purpose of discovering new development possibilities and perfecting the entire economic activity.25

In other annalists’ opinions, the purpose of economic analysis is the study of phenomena, processes, and activities from an economic perspective, researching the efficiency cost regarding social work in obtaining useful social results.26

Considering the opinion of Petre Malcomete and his collaborators, economic analysis is considered to be a method of research and detailed study of phenomena and economic processes, frame by frame, through decomposing these phenomena into their component parts… It compliments the economic synthesis. 27

18 W.Păăloaia, D.Păvăloaia – Analiza economico-financiară, Editura Moldova, Bacău, 2003, p.1519 Gh.Vâlceanu, V.Robu, N.Georgescu – Op.cit., p.1720 L.Buşe – Op.cit., p.1721 J. Lecaillon – Analyse microeconomicque, Ed. Cujas, Paris, 1985, p.1-7; J- R. Hicks – Valoare şi capital, Ed. Dunod, Paris, 1968, p.5622 Al.Gheorghiu – Op.cit., p.2323 L.Buşe – Op.cit., p.1224 Colectiv de autori – Analiza activităţii economice a întreprinderilor, Editura Didactică şi Pedagogică, Bucureşti, 1977, 1982, p.1225 Colectiv de autori – Analiza activităţii economice a întreprinderilor, Editura Didactică şi Pedagogică, Bucureşti, 1979, p.1826 M. Epuran, I. Mihai – Analiza activităţii economice a întreprinderilor industriale, Litografiat, Timişoara, 1979, p.1227 P. Mâlcomete ş.c. - Concepte, metode şi tehnici de microeconomie, Editura Junimea, Iaşi, 1984, p. 19-20

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George G. Watson Jr. explains that economic analysis “defines the objectives of economic research, evaluates alternatives and predicts future changes of phenomena.”28

Stanley Kaish states that economic analysis “uses the general principle of <cause-effect> in order to establish the area of movement and transformation of economic events.”29

Economic analysis is concerned with the research and study of phenomena or economic processes. Phenomena analysis, from the economic perspective, requires the decomposition into component elements, the study of the structural and causal relations and factors of influence, with the purpose of understanding the evolution and trends of these phenomena in order to discover the essence and lawfulness that generate their appearance and manifestation.30

In the context of transitioning to a market economy, economic analysis allows the scientific understanding of economic phenomena evolution at both micro and macro-economic levels, which in turn allows the possibility of choice for each economic agent. In this respect, it is necessary to study economic phenomena in time and space, considering both the qualitative and the quantitative aspect. Moreover, by combining analysis with synthesis, one can state generalizations regarding positive or negative aspects in the evolution of economic phenomena and can elaborate decisions in order to achieve an optimum in its economic activity. 31

In our opinion, economic analysis, seen as a system that can be decomposed, according to the area of inclusion, consists of the following:

Global Economic Analysis Regional Economic Analysis Macroeconomic Analysis Industry Economic Analysis Microeconomic Analysis

In our opinion, Global Economic Analysis regards the ensemble of economies and politics which coordinate their interconections in the process of efficiently allocating resources with the purpose of maintaining a stable worldwide economic equilibrium.

The main purpose of Regional Economic Analysis is the underlining of economic effort, that is efficient and mutual, of certain states from a certain region of the globe, that assure the economic prosperity of that region.

The main purpose of Macroeconomic analysis is in our opinion, the research of phenomena and processes that determine and condition the economic growth and development of a country.

University Professor, Alexandru Gheorghiu believes that Microeconomic Analysis studies the phenomena on the economic discipline level, national economy level or even world economy level, operating with aggregate, synthetic or global sizes (G.D.P, national income, the value of investments etc.)32

Microeconomic Analysis, in my colleague’s opinions, studies the phenomena and processes on a national or global economy level (the internal and international circumstances, legislation and amendments, demographic factors, culture and beliefs, level of development, social problems, climate factors etc.) operating mainly with global sizes and aggregates such as the G.N.P., G.D.P etc.33

28 George G. Watson, Jr. - Economics, McDougal Littell, Evanston, Illinois, USA,1986, p. 26629 Stanley Kaish - Microeconomics, Harper & Row Publisher, New York, USA, 1976, p. 430 F.Radu- Op.cit.,p.5-631 F.Radu- Op.cit.,p.5-632 Al Gheorghiu – Op.cit., p.2533 Gh.Vâlceanu, V.Robu, N.Georgescu – Op.cit., p.17

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University Professor, Lucian Buse believes that Microeconomic analysis researches the economic phenomena that take place in an economic branch, national economy and/or global economy and operate with aggregate sizes.34

In our opinion, Industry Economic Analysis is concerned with the phenomena that take place and the mechanisms which function on a sector or institution level, in the process of assuring the efficient allocation of resources according to the sector.

In the opinion of university professors Gheorghe Volcano, Vasile Robu and Nicolae Georgescu, Industry Economic Analysis studies the phenomena and processes on the sector level or on the branch of activity level, with the purpose of underlining the firm’s position in the market, and its competitive capacities etc.35

1.3. Microeconomic analysis – content, necessity and objectives

1.3.1. Brief history concerning the evolution of the financial analysis

New procedures were introduced in order to improve the factorial analysis of the

phenomena and the financial results: economic and mathematical modeling, decomposition

phenomena of factors, distribution coefficients procedure, relatively cash-flow procedure and

the regression analysis.

Some of the procedures used by other sciences were adapted to the microeconomic analysis:

the calculation of dispersion, the matrix correlation calculation and the procedure of using

indices as logarithms was taken from the German literature; the production functions are used,

noting that the largest variety of procedures used by the Economic Analysis will make it

easier to search the phenomena and economic processes more diversified and deeper, while

underlying the necessary conclusions for the efficient leading of the enterprises.

Other ways for improving the economic analysis methodology still exist: enlargement

of the results and economic phenomena computing area with the help of synopsis procedure,

the planning of some economic and mathematical procedures regarding the qualitative aspects

of economic activity through the decomposition phenomena of factors, the computerization of

the overall analysis, the factorial analysis, the economic interpretation of their results and the

teaching and testing of knowledge with the help of a computer, the diversification of the

studying methods of consumer demand, producer area and equilibrium of market competition.

1.3.2. Opinions regarding the content and the scope of the microeconomic analysis

The content and the scope of the microeconomic analysis are found in various specialized

works.

34 L.Buşe – Op.cit., p.1735 idem

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As such, Robert C. Higgins thinks that: “the microeconomic analysis must set the measures to

maintain the enterprise in a constant financial equilibrium”1.

The Japanese researcher Hiroyuki Itami considers that besides the post-factum and current

objectives, the economic and financial analysis must offer solutions as far as the chosen

company strategy is concerned, by reviving certain factors less approached in the economic

literature, factors such as: „ the know-how technology and the clients’ loyalty to the

company”.

In the opinion of the university professors Gheorghe Vâlceanu, Vasile Robu and Nicolae

Georgescu the financial analysis regards the correlation between the economic activity

(operating activity) and financial activity (the analysis of financial risk must be correlated

with the operating risk).1

The university professor Lucian Buşe thinks that “the economic and financial analysis

studies the economic phenomena formation and modification mechanism through its

decomposition into components, into simple parts and through the identification of

influencing factors”.

The economic and financial analysis represents in the opinion of university professor Maria

Niculescu „an assembly of concepts, techniques and instruments that ensure the handling of

internal and external information for the purpose of receiving relevant feedback on an

economic agent situation, regarding the level and the quality of his performance and the

degree of risk in a highly competitive dynamic environment.

Thus defined, economic and financial analysis integrates three parts: analysis as a discipline,

analysis as a scientific research activity, and analysis as a practical activity. In any of these

situations, economic and financial analysis is particularly complex because in the economy:

1. The same effect can be generated by different causes;

2. Different effects can be combined resulting in a complex action or force;

3. The complexity and intensity of the cause can determine the quality of the

phenomenon, not only its intensity;

4. The phenomenon analyzed can have features that none of the elements of the

phenomenon had them before;

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5. In real life, the essential features are combined with the less-essential ones, while the

later are the causal ones. However, the analyzed entity is a social organization

presenting itself with a dynamic, complex and a specific ???

Microeconomic analysis is the one that "takes place at the level of the enterprise and its

elements as a system. Microeconomic analysis studies the behavior of the individuals or the

enterprises and reveals the factors that determine the orientation of investment of capital when

using the resources and the results obtained”.

Economically, the analysis of an activity refers to the study of that activity trough the ratio of

expenses made (efforts) and the results obtained (useful effects). So, the word „economic”

refers to the character of the analysis which can make use of an object an economic activity or

a technical activity, social, administrative and so on.

In our opinion, the microeconomic analysis with the help of a system of indicator, studies the

specific phenomena and mechanisms, which act at the level of the entity.

In our opinion, the central objective of the microeconomic analysis, consists of increasing the

efficiency in the company’s business behavior.

1.3.3. The place of the economic analysis among sciences

The concept of science represents the overall knowledge gathered by humanity throughout

time. The ensemble of the sciences form a system that can be structured according to different

criteria:

- According to the notions they operate with, there are fundamental sciences and

applicative sciences;

- According to the degree of the researched objects’ homogeneity there can be:

sciences with homogeneous researched object and sciences with heterogeneous researched

object or multidisciplinary sciences, interdisciplinary sciences, border sciences, contact

sciences;

- According to the motion of matter there are: natural sciences: physics, chemistry,

biology and so on, and social sciences (humanistic) – philosophy, philology, history, law,

economic sciences, sociology and so on.

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Economic activity implies the existence of relations between phenomena and processes that

require the consumption of human, financial and material resources aimed at the achievement

of goods and services necessary for meeting social needs.

Knowing the conditions in which economic activities develop and the initiation of some well

defined action for the achievement of the most efficient purposed goal are prerequisites of a

successful scientific leadership in any field of human activities included in the economic

phenomena: production, consumption, exchange and use of goods and services.

The economic knowledge may be considered scientific, only to the extent at which it

underlines these relationships and only if it searches and explains the economic phenomena

with the help of variables that are influencing their size to a certain degree.

The better use of practical activity and knowledge correlation, the better the company

develops, and also the society does; that’s why the connection between knowledge and

practical activity must be taken into consideration on all management levels.

Under these circumstances the triad analysis-decision-action represents the sine-qua-non

condition of scientific management. Indeed, this is more than ever true today, because

management decisions cannot be based only on empirical knowledge and on a purely

pragmatic action versus reality, but they also require a broad and complex scientific approach.

In setting the objectives, controlling their realization, studying the results recorded in the past

and planning the future activity, an important role is taken by the knowledge of reality. The

economic and financial analysis serves this goal as being one of the main instruments of

modern management as it is a compulsory subject to it. In the context of market mechanisms,

the role of analysis is progressively and considerably amplified with the complexity degree

increase in the company’s economic and financial activity, having deep implications in the

management process that needs extra analysis in order to fundament the operative and

strategic decisions, beside the experience and routine.

This fact is also underlined by university professor Marinela Mironiuc who states that the

economic and financial analysis represent a fundamental element in economic practice; the

idea is sustained because the analysis contributes to the elaboration process, evaluation and

control of decisions taken by the management team in the company. The company activity is

controlled by the economic and financial analysis: its functionality as a system is assessed, the

control measures of company disfunctions are initiated and its strategy is fundamented. This

way, the economic and financial analysis becomes one of the company managements’

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instruments, meant to facilitate the understanding of past and present and in the same time, to

orient the managers’ actions at present and in the future.

Peter Drucker, a famous American consultant and a successful management writer, states that

an efficient manager must dedicate 50% of his time to economic and financial analysis.

Denial of this fact leads to unprofessional management.

In order to set the complexity of factors and causes that determine the leading activity and

regardless of the execution level, the activity implies a detailed knowledge of the concrete

situation. This will make the analysis present a real image of the facts to be taken into account

in the future.

The complexity of the economical phenomena gives the analysis a double character; a

theoretically based discipline, with a corpus of general principles, a discipline of logics that

may be applied for the interpretation of all past or present economical issues and, on the other

hand, a constant practical activity that answers questions referring to the causality relations

between phenomena and factors. Based on the explanation of causes and factors that modified

the indicators, acting as the “grammar” of the economical theory, the analysis formulates

interpretations principles and laws that have to be generalized.

The explanation and prediction of economical phenomena is accomplished with the help of

theoretical analysis and empirical research. Theory guides empirical research, which in turn

enables the checking up of theory’s hypothesis and conclusions. While theory uses the

deductive reasoning, drawing the conclusions of certain initial hypothesis, the empirical

research is inductive by nature. Combining these two types of analysis in reasoning is made

through several stages:

• abstractization of the researched phenomena;

• expressing work hypothesis by inductive means starting from the phenomenon;

• expressing certain laws of the phenomenon by deductive means;

• Verifying and generalizing the deducted laws.

In the analysis of the economical phenomena, there may be more alternatives for explaining

the causes of the reasoning from input to the output.

Analysis, as general research method of natural and social phenomena, implies the

decomposing in component parts, in simple elements, in order to study and discover the

causality relations through procedures specific to the researched area. The economic analysis

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refers to the activities with economic character, resource consuming and results generation. In

the case of natural phenomena, the object of the analysis can be reduced to lab dimensions

allowing generalization of conclusions, but in the economic phenomena analysis this

experiment cannot be used. The economic research uses schemes and models that simplify the

reality and that have the advantage of being easily used. This turns the phenomena into an

abstract one and the conclusions of the analysis can be generalized only if the initial

hypothesis is checked.

The economic and financial analysis belongs to the system of economic sciences, it

has its own object and methodology, it is an applicative, multidisciplinary and functional

science, useful in the economy management.

1.3.4. The necessity of the microeconomic analysisThe university professor Alexandru Gheorghiu thinks that the microeconomic analysis

takes place at the individual level or company level and in its elements as a system.

Microeconomic analysis studies the behavior and the results of the individuals and enterprises

in the economic activity. It reveals the factors that determine the orientation of investment

funds and the use of resources in the creation and manufacture of products.

In our opinion the necessity of economic and financial analysis for the producer is really

obvious.

First, the increase in efficiency of the entire activity of companies represents a central

objective of the analysis. This objective is accomplished through the post – factum, actual and

prediction knowledge on the evolution of the cybernetic system of the company; knowledge

on its internal reserves; knowledge on the causes that determine their emergence and growth.

Second, we believe that the purpose of the microeconomic analysis is knowing the essence of

phenomena and processes that take place in the microeconomic environment, in order to

discover the laws governing the dynamics of the companies’ business portfolios.

Third, we believe that microeconomic analysis, through its methods and procedures,

represents an indispensable instrument for the management activity of companies, since it

provides with practical solutions for preventing and removing the destructive factors and on

this basis, it creates favorable conditions for the free manifestation of factors with positive

influence.

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1.3.5. The objectives of microeconomic analysis

In a company’s activity the goal is the maximization of its efficiency. This means saving

resources.

Besides increasing the efficiency of using the resources, the main objective of the analysis

contains the discovery and mobilization of internal reserves. The complexity of the activities

within each firm and the dynamic and aggressive character of the economic environment turn

the analysis into a complex system of handling the current and future economic information,

system that aims to:

improve management on a basis of a general default diagnostic

adopt some optimal decisions concerning the debt of the company

set adequate decisions concerning the stock exchange activity of the company

analyze the performance of the company compared with other competitors on the

market and take into account the factors of time and space

The objective of the economic and financial analysis must aim specifically at:

1. The increase of shares’ market value (shareholders’ equity)

In the competitive economy the company itself represents an asset, subject to the market

laws and the value of this asset varies in time depending on the position of the company in

the system of the national or regional economy and also on the performances gained on

the though market competition and on the frame of rules imposed by a sustainable

development.

The maximization of the market value of the company becomes a necessity in order to

survive on the market and it is not a wish of the company itself.

2. Insuring financial equilibrium

The ongoing of the company’s activities in conditions of major financial disequilibrium,

leads on the long run, to the loss of the financial control over the company.

At a level of economic and financial analysis, permanent control of the company’s

financial equilibrium is deemed necessary and any type of disequilibrium must be

immediately reported to the management of the company.

3. Decreasing the vulnerability of the company

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Any entity is subject to the negative effects of the market, inflation and competition from

the first day of setting-up. The degree of vulnerability indicates the company’s resistance

to adverse conditions in the economic and social environment and the ability of being in

equilibrium after certain disequilibrium occurs during the economic life of the company.

4. Avoiding bankruptcy risk

The bankruptcy risk represents a permanent threat for any business and the constant

control of this risk represents the only opportunity to avoid an economic tragedy.

Ignoring this risk is a fundamental mistake of the financial management with adverse

consequences over the future of the business, especially when the business grows.

1.3.6. The role of the microeconomic analysis in the management of the company

The necessity of increasing the economic activity efficiency in all the branches of the national

economy elevates the role of economic and financial analysis.

The economic and financial analysis contributes to the continuous increase in efficiency

regarding the use of material and human resources of the company, through the post-factum,

current and future knowledge of the company and through the internal resources and the

causes the determine their appearance.

The factorial analysis of production, labor productivity, unit cost of production, profitability,

production quality, allows the evidence, evaluation and use of reserves for improving the

efficiency and economy; directs its efforts towards the areas that are insufficiently valued. It

also delivers solutions for improving the business activity.

The analysis, in general, as it is the process of research and analysis of economic and financial

phenomena as it is studying economic and financial process, it is required to the process of

knowledge.

Analysis means decomposition of an object or phenomenon into components.

The analysis process is a specific process for studying the reality, the phenomena and

different processes through the cause and effect view.

Any change has a material cause if the same cause produces the same effect in invariant

conditions.

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The study of the causes of phenomena and economic processes has an important

significance in the process of knowledge from the ontological, gnosiology, logical and

methodological point of view.

In studying the reality through the causes that determines its modification and their

consequences, it is easy to underline correlations between the structure of matter and causal

structure, the external and internal structure of phenomena and processes and correlations

between the causal structure and time structure. All these facts prove that through the causal

knowledge and its correlations the phenomena from the society are deeply known.

Causes with a certain stability, frequency and continuity can be discovered through a

research in time and space, continuously leading to economical laws that are very useful to

the economic activity. Thus, the economical and financial analysis is necessary and useful to

the economic laws and to the process of gaining knowledge about the essence of phenomena.

The economical and financial analysis is necessary to the company’s management. It

discovers the essence of the economic phenomena and processes and their modifying causes

and it can elaborate solutions for preventing and removing the causes with a negative

influence. It creates a proper environment for the causes with positive effects that are wanted

for the management of the company.

The management process represents a unitary, complex and continuous activity whose

characteristics are correlated within a system (company, industry, national economy).

The leading activity of any system includes the answer to the cause-effect ratio. This is a

specific feature of the economical and financial analysis.

Knowing how the economical phenomena and processes appeared means the discovery of

essence and its content. Discovering the structure and essence of the economical phenomena

has a great importance for the knowledge processes and for the management activity. As a

conclusion the economical and financial analysis represents a necessity for the continuously

increasing management activity.

The economical and financial analysis contributes to the achievement of the company’s

management functions while at the same time confirming the important role of the analysis in

the managerial process. The university professors Gheorghe Vâlceanu, Vasile Robu and

Nicolae Georgescu think that the achievement of the main functions of the management

implies the analysis of the system in different time instances of its functioning.

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The increase of efficiency in the economical and financial analysis sets the analysis in

observing the place and the time of the economical phenomena development. It orients the

analysis towards the economic activity key-objectives using statistical and mathematical

methods. It also uses computerized means of processing economical information and applying

methods in efficiently leading the company.

From all the above presented it is easy to see that there is a strong connection between the

management functions and that the contribution of economical and financial analysis to this

achievement underlines its role in the process of managing the companies.

1.4. The system of the microeconomic analysis

The microeconomic analysis is structured in two parts (graph 5):

ü Economic analysis (administrative);

ü Financial analysis.

The system of the

microeconomic analysis

economic analysis financial analysis

Graph 5- The system of the microeconomic analysis

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Both administration and financial analysis belong to the management process, between

them takes place a series of informational-decisional flows as follows:

MANAGERIAL SYSTEM

Economic decisions

ECONOMIC ANLYSIS

Financial information

economic information

financial information

economic information

Financial decisions

FINANCIALANALYSIS

Graph 6. – The managerial system

a) between the managerial system and the economic analysis there are:

ascending information regarding the efficient allocation of resources in the

production process;

descending decisional flows regarding the operational management of

productive processes

b) between the managerial system and the financial analysis there are:

ascending financial information concerning the financial state of the

managerial system

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descending decisional flows concerning the recovery of receivable, the debt

service management, the business relationship and so on;

c) Between the two subsystems of the microeconomic analysis there is a continuous

exchange of financial information. Respectively, the financial analysis offers the

economic analysis the information needed to be followed in order to achieve the

efficient allocation of resources like the specific consumptions and the efficiency of

the machines through the revenues and expenses budget. The economic analysis sends

economic information to the financial analysis subsystem. Through these an

evaluation of the general state of the economic agent is allowed, in documents like:

balance sheet and its notes, the profit and loss account, treasury flows...

1.4.1. The economic analysis system

The economic analysis assures the efficiency of extensive and intensive use of resources:

Material resources: inventory and fixed assets;

Labor resources

On the other hand the economic analysis assures the combination and substitution of

resources (graph. 7).

THE ECONOMIC ANALYSIS SYSTEM

The analysis of the efficient use

of material resources

The analysis of the efficient use of fixed assets

The analysis of the efficient use

of labor resources

The analysis of combination

and substitution of resources

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Graph. 7 – The economic analysis system

1.4.2. Financial analysis system

1.4.2.1. Financial management of the companies

Companies performances depend both on operational management( production, human resources) and financial management.

In economical experts’ opinions, financial management objectives are both the profit maximization, and shareholders fortunes maximization.

The opinion of professor Ion Stancu is that “the financial function of the company must not to be assimilated with the general management of the company… The role of the financial function is to protect and consolidate the patrimony and the independence of the company. For the accomplishment of that task, the financial function has to realise and manage balancing, three main actions of the company: (1) investments; (2) their financing and (3) profit distribution. It is obvious that the company’s general management is in charge of decisions in this domain, but the financial functions are in charge of the modalities of execution for choosing means, for assets and liabilities administration, for checking the accomplish of those decisions and for their consequences analysis…”.

In the opinion of George E. Pinches the financial management presumes acquisition, administration and financing of the needful resources to the companies, through money.

John Freear has the opinion that financial management regards those actions adopted in resonance with the shareholders’ objectives, in order to maximize on long term the price of the shares of the company.

In the opinion of some american specialists: ‚‚an adequate financial management inside the company will contribute to offering better products to lowering prices, increasing wages both for the operating staff and the managing staff, and in the same time, to producing higher income for investors who infused capital in the respective business’’.

In our opinion, financial management is a component of the general management (fig. 8), which considers systemic organisation and management of the financial activity of a company through the following ways:

a) by financial forecast;b) by checking the accomplishments of the pre-established financial objectives;c) by continuous monitoring of patrimony administration mode in view of risk

prevention of bankruptcy.The accomplishment of financial management objectives is based on every country’s

financial-fiscal, as well as on specific methods and techniques of financial analysis.

GENERAL

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MANAGEMENTGeneral

decisionsFinancial

information

Financial decisions

FINANCIAL MANAGEMENT

Financial decisions

Information

Information Financial decisions

FINANCIAL FORECAST

Strategic objectives

PATRIMONY ADMINISTRATION

MONITORING

Accomplished objectives

OBJECTIVES ACCOMPLISHING

CONTROLSTRATEGICAL

OBJECYVES AMENDAMENT

Financial decisions

Fig. 8 – Financial Management System

The following conclusions are extracted from the shown model:

1. financial management receives decisions from the general management to whom it is subordinate and to whom it transmits informations;

2. based on the general decision, financial management adopts financial forecast decisions which contain certain strategical objectives;

3. financial management monitors in permanence patrimony administration, domain from which it receives informations and to whom it transmit operative decisions;

4. deppending on realised objectives, based on informations proceeded from control and from the auditoring of accomplished objectives adjustement decisions of strategic objectives initialy predicted, are adopted.

Of course that inside of the management process, the financial analysis assures the informational base required for adopting the running financial and strategical decisions of the companies.

1.4.2.2. Opinions regarding the content of financial analysis

In economical literature there are many interpretations for the content of financial analysis, which we are grouping in four categories:

a) financial analysts’ vision;b) financial economists’ vision;c) bookkeeper economists’ vision;d) Assessor’s vision.

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a) Financial analysts’ vision

Professors Gheorghe Valceanu, Vasile Robu and Nicolae Georgescu consider that Financial analysis especially regards financial flows which are formed at the company level, administration mode and investment of the capital, etc.

Financial analysis, according to professor Ioan Mihai & colls, „consists of a set of instruments and methods which facilitate the appreciation of the financial situation and performances of a company”.

Financial analysis, according to Professor Maria Niculescu’s opinion, “in acceptation of the global strategic diagnostic basic component, is directed towards the investigation of some complex aspects (global performances of the company, it’s perennially), in the last instance it converges with the economical and financial objectives of any company”.

Professor Radu Florea considers that the analysis of the financial situation at a company level regards the study of the means for self-financing accomplishment in conditions of autonomous decisions, the assurance of a dynamic financial balance between different resources and their usage, of an optimal correlation between the level and the structure of assets and liabilities used by the company with the purpose of accomplishing its object of activity and ensuring the integrity of its patrimony.

In the opinion of Professor Silvia Petrescu, financial analysis is going to become a system for information processing able to provide data to the management, necesary for adopting financial decisions.

Financial analysis represent a complex activity, which, based on a set of instruments and methods allows the assessment of financial status, performances and potential of a company, as is the opinion of Ioan Pantea and Lorant Stark from West University from Timisoara.

b) Financial economists’ visionProfessor Ion Stancu appreciates that ”financial analysis is the activity of diagnosing

the state of financial performance in a company at the end of an accounting period. It’s propose is to establish the strengths and the weaknesses of financial administration, in order to layout a basis for new maintaining and developing strategies in a competitional environment.

In another one of his works, the same author appreciates that „financial analysis is the subject of external interests of economic and financial – banking parteners, for the foundation of some possible co-operations activites with the respective company. Both the internal and external analysis have like objectives, namely to establish the profitability, the risk and finaly the value of the company”.

Professor Nicolae Dardac & colls consider that „financial analysis underlines performances of the company in terms of profitability and risk, performance of the last accounting period and the basic for the next one.

The purpose of historical (past) financial data – considers Steve Robinson – ”is to estimate its’ future results... Succesful interpretation of the correlation between environment factors and the internal situation of the company represents the key of some successful estimations regarding the future performances of the company”.

Financial analysis based on instalments, consider m.w.e. gkautier & b. Underdown, underlines the efficiency of the financial perfornance by reporting the net profit to indicators like assets or share price.

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c) Bookkeeper economists’ visionFinancial analysis, „like a component of the economical analysis consists of a

methodical study of the situation and the evolution of a company with respect to the financial structure and profitability”.

Financial analysis, considers Elie Cohen, is „ a set of concepts, methods and instruments which allows the proccessing of accountig information and of other administration informations in order to formulate an appreciation regarding the financial situation of a company or an organization, the risks that affect the entity, the level and qualities of its performances”.

Financial analysis is „ a projection of own methods of economical analysis in the field of finances of company.... Financial analysis received new dimensions, new aplications, serving either internal users or external users for the company. Financial analysis serving internal users is also called internal analysis and helps the continuation of internal financial analysis of the company. ...External financial analysis studies either partially, the life of the company, external users being interesed of certain projects which could be developed with that, or an over all financial aspect that defines the company... As a conclusion, the goal of financial analysis, internal or external, is the establishment of an analysis for the financial situation and for the actual and future profitability of the company”.

Despite of methods disparities – is the opinion of professor Iacob Petru Pantea – financial analysis makes balance sheet data available under the form of three specific aproaches as follows: analysis based on balance sheet properly, analysis based on profit and loss account and combined analysis.

d) Assessors’ visionOften analysts consider that financial analysis and economical-financial activity

diagnostic of a company are one and the same thing.Financial analysis of the balance sheet, considers Adela Deaconu, „serves to reflect the

short and the long term balance under double aspects, namely: the manner it was realised and the consequences in solvency plan, liquidity and bankkruptcy risk of the company”.

Professor Alexandru Gheorghiu has the point of view that a type of analysis post-factum that can combine with prospective analysis is considered to be diagnostic-analysis, therefore on a subdivision or on a problem, per ensemble considerations of a company are obtained.

Diagnostic-analysis presumes establishing the strengths and weaknesses of activities in the company, the disturbances that took place.

Professor Aurel Isfanescu & colls consider that „one of the most interesting and complex steps regarding the approach of the economical-financial diagnostic for it’s valuation into that component of diagnostic, has a key role in the evalation process of the company owing it to the major role inside the report and namely:

role of systematizing conclusions issued from other diagnostic pieces’ role of ensuring the coherency inside the diagnostic relation and application of

evalation merhods (particulary efficiency methods)”.Professor Cazar Mereuta & colls consider that „diagnostic-analysis represents a

managerial instrument meant to proceed to the examination of an economical being, in order to identify and solve the problems whereby it is confronting. Therefore, diagnostic analysis constitues a method which helps the management of the company understand the past and at the same time decide future actions”.

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Professor Dumitru Margulescu & colls consider that „in a sintetic acceptance, diagnostic-analysis suposes identification of symptoms, of disturbances in the company, examination and analysis of facts and responsabilties, identification of causes and perturbations, the draw up of action programmes therefore their application ensures recovery or amelioration of business”.

In our opinion, diagnostic-analysis supposes the decomposition of a mechanism or of a fact into its component elements, establishing its influence factors, the mesurement of factors influence on both its static and dynamic elements and finaly, we have to establish the strengths and weaknesses of the mechanism or of the economical explored fact, proposing also practical solutions for the adjustment of the elements less functional trajectory. Lastly, diagnostic analysis presumes the identification of simptoms, disturbances, establishing the state and the therapy which manages the recovery of a existing situation. The motivation for proceeding to a Diagnostic analysis of the perfomances of the company, may be based both on a situation in which there are difficulties, respectively disturbances, and on a situation in which the state of the company is normal, but we want to improve it.

Financial analysis is, in our opinion a complex system of treating the past and perspective finacial information of a company, a system based on methods and proceedings of scientific research, which regards mainly the following objectives:

1) finacial analysis follows the company’s management improvement, starting from an exact diagnostic;

2) finacial analysis constitues a key factor in contracting a loan;3) finacial analysis ensures the data base for stock exchange transactions;4) finacial analysis ensures the study of a competitor, client or supplier situation

in the matter of administration, sovability or profitability.In the same time, we consider that finacial analysis can be looked upon as a

methodical and systematical situation and evolution study of a company, under the aspect of financial structure and profitability, based on balance sheet and its annex, on the profit and loss account, as well as on other information put at the analist disposal by the informational system of the company.

1 . 4 . 2 . 4 T Y P O L O G Y O F T H E I N T E R - C O N D I T I O N I N G F A C T O R S O F T H E E C O N O M I C P H E N O M E N A

The modification of phenomena and economic processes is influenced by a series of factors which can be classified based on different criteria, presented as follows:

a) By their nature, we distinguish the factors: technique, technological, managerial, economics, and social-politics, demographical, psychological, biological, and natural.

b) By their character ,inside the causal relations , we distinguish: -quantitative factors, material carrier for the qualitative factors.-qualitative factors, which have the same nature as the analyzed phenomenon.-structural factors, which intervene in the case when the analyzed result referrs to aggregate dimensions.For example, in the analysis model of work productivity: W=tz*th*Wh

Where:

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-tz represents the quantitative factors, the average number of days worked by a person in one year.-th represents the quantitative factor, the average number of hours worked by a person in one day.- Wh represents the qualitative factor, productivity per hour.In the analysis model of work productivity, regarding sub-units “j” (Wj) intervenes the aggregate factor Sj , which represents the personnel weight on sub-units “j” (Nj) in the total personnel of the unit (∑Nj) , in this way:

W= , Sj=

c) By the way of action over the phenomenon , we evidence:-I first degree factors or direct (primary, major);-II nd degree factors , ….. ,n or indirect (secondary, derivative);For example ,in the work productivity model:

w

the factors tz and Wz are primary factors, while th and Wh are secondary (derivative).d) By the own effort of the company occur:

-dependent factors regarding the firm’s effort , for example the quality of the products.- factors independent of the firm’s effort , the acquisition cost for the raw materials ,the price for energy.e) After the aggregate model ,we distinguish:-simple factors, which can’t be decomposed.-complex factors , which can take part in the disintegration process.f) By the provenance, our opinion is that the factors are grouped in:-internal factors (endogenous), the production cost;-external factors (exogenesis) , the evolution of the exchange rate of the national currency.g) By their dependence on the variance of the analyzed phenomenon , the factors can be:-fixed (constant), with zero influence.-variable , which can influence the increasing or decreasing trend of the investigated phenomenon. h) After the intensity of the action , can be remarked:-dominant factors or key factors , with an over 80 % influence on the economic phenomenon. -secondary factors , with an influence of up to 20 % on the phenomenon.i ) By the trending direction of influence on the phenomenon , the factors can be grouped in:- positive factors.- negative factors.- indifferent factors.

The classification in positive and negative factors should primarily take into account the correlation between the phenomenon and the factors , and secondly, the algebraic sign of this influence.

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Chapter 2 The methodology of economic and financial analysis of the enterprise2.1 CONCEPTS OF PROCEEDING , TECHNIQUE AND METHOD

In order to become a real and efficient instrument of the enterprises management, in adjusting the economic activity and ensuring a continuous growth of the economic efficiency, methods, proceedings and techniques of the economic and financial analysis consist of , and must have a more important role in the discovery , evaluation and revaluation of the internal resources from the enterprises economy.

In our opinion, the proceeding represents the total steps which the researcher should follow to quantify some objectives that are based on certain premises.

In the same time we consider that the proceeding refers to a systematical mode of accomplishing a study (theme),the manner of action for reaching certain objectives.

The technique represents , in the opinion of “Romanian language explanatory dictionary” authors,”..the totality of proceedings used in practicing a profession ,a science…”.

By method the authors of “Romanian language explanatory dictionary” understand “a mode (system) of research, knowledge and change of the objective reality”.

The notion of method comes from , the Grecian “methods” which means way of research. The method of a science represents the totality of proceedings used to research it’s own objective.

The method, practically consists of the reunion of some specific proceedings, or common with other sciences.

The methodology is “a method of knowledge with maximum generality”. In our opinion , the methodology of a science is closely related to the general theory of existence , to conceptions regarding the world and society and also to the particularities of it’s own object of study.

The methodology of a science , represents also, the assembly methods, proceedings and techniques used. We consider that the methodology of economic analysis has as main objective the decomposition of financial-economic results , phenomena and economic processes into it’s components, setting up their structure and function, quantifying the causes and factors of influence over modifications of financial and economic results , evidence, evaluation and revaluation of the internal reserves, with the goal of permanently increasing the efficiency in the economic activity. Specific for the economic financial analysis is the study of the phenomena and economic processes from the enterprise , in relation with cause-effect correlation. Through this dialectical report the economic analysis can discover the essence of the phenomena ,emphasize the correlation between the phenomena structure and their causal structure while establishing the union between the substance and movement, the correlation between the internal and the external structure, the correlation between the causal structure and the space-temporal structure of the economic phenomena, their order of change from cause to effect, while presenting the finality of the cause-effect report, substantiating the leading decisions with the purpose of increasing the efficiency of the economic activity ,adjustment and self adjustment. In the economic research, the methodology of the analysis includes two groups of methods , as follows: on one hand the qualitative analysis method and on the other hand the quantitative analysis method. According with the opinion of other specialists, the qualitative analysis refers to the essence of the phenomenon , it’s main characteristics. The role of the qualitative analysis is to elaborate analysis models in which essential elements of the phenomenon are presented. The qualitative analysis studies the intensive or qualitative part of the phenomena and economic processes. With the help of this analysis, the essential features of the economic phenomena and the factors that have the same

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nature with the researched phenomena, are established. The reunion modalities of the proceedings, being part of the methods are based on the type of relationship which exists between the phenomenon on one part and it’s influence factor on the other.

2.2.METHODOLOGY OF QUALITATIVE ANALYSIS OF THE COMPANY STATEThe qualitative analysis method established relying on the abstracting science, the

constitutive elements and the factors which compose and influence an economic phenomenon, emphasize the relations of functional, causal and reverse connection, between each element or factor and the studied phenomenon, as well as the relations between elements or factors. The procedure of economic phenomena decomposition, takes into account the structure of the evaluation indicators in first degree factors, second degree factors…., in a well determined space and time. In this direction we distinguish:-temporal decomposition (disintegration) which underlines the deviations from the previous periods of the phenomenon.-space decomposition that reflects the places where have been mentioned deviations in comparison with the firm’s plan or with the previous periods.-breaking up into constituent parts and influence factors allows a profound study regarding the analysis of the phenomenon , until the identification of the final causes which contributed to it’s deviation, is realised. For example, in this context ,the operating incomes , are breaking up into revenues from the sold production, into revenues from the variation of stocks and of the production of non- current assets. The proceedure of correlative grouping of factors and phenomenon components, takes into account the several phenomenon landing criteria,through which all the aspects involved in it’s evolution are pointed out. The grouping of simple factors into aggregate factors is based on certain economic criteria and it has as main objective, obtaining certain information powerful enough to create a generalization of the researched phenomenon. Thus , through grouping the factors of productivity hours and worked hours per day per one person, another aggregate factor is obtained, named daily productivity, which contributes together with the number of days worked per year by a person ,to the stimulation of the work productivity at the entity level. Comparison procedure emphasizes the evolution of companies positions by the post-factum ,current and prediction comparing of it’s results with the economic –financial results of other firms which are in the competition. No matter the type of the comparison , which can be in time, space or mixed ,by the plan or by the other companies achievements , the essential condition for providing the scientific character of the procedure, is ensuring the compatibility of data which must have a homogeneous content , in order to be expressed through a unique standard, and in order to be determined according to a unique methodology.

2.3.THE METHODOLOGY OF QUANTITATIVE ANALYSIS OF THE COMPANY STANDING

Research of the phenomena and proceedings , which take place at the company’s level , can be efectuated with the help of some proceedures that can be grouped depending on the purposed objectives as follows:

1. Proceedure of competition analysis of the companies.2. Proceedure of analysis of economic and financial state of the companies.

In turn, those depending on the type of relationship which can be established between the researched phenomenon on one hand and the influenced factors on the other, can be grouped as:a) Proceedings of determinist evaluation.b) Proceedings of non-determinist evaluation.

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In the following parts we will approach every category of proceedings, using some examples of the economic and financial state of the firms.

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Chapter 3 The methodology of competition analysisIn order to elaborate the top companies that are spreading out their business on a

certain market , different hierarchy procedures can be used in the economic practice, and they can be grouped in two categories:A: Procedures based on the dynamics of the financial performances criteria:-Method of Synthetic indicator.-Method of Comparison matrix.- Method of the distance or model company.-Method of the final scores of the companies.We will present, in the following part , in a comparative analysis these proceedings.

3.1.Procedures based on the dynamics of the financial performances criteria.

3.1.1. Method of Synthetic Indicator. Is a modality for creating a hierarchy of the companies , in which the dimension of the

indicator is determined as a geometric average , well-balanced sum , indexes sum and arithmetic average.

a) Geometric average

Sgj=p , n+m=p

In which:Iij -> represents the value of performance of the direct criterion “i” duet to the firm “j” .Ikj -> represents the value of performance of the indirect criterion “k” due to firm “j” .Sgj -> represents the value of the global synthetic indicator if the firm “j”.

b) Well-balanced sum:

Sej= and + =1

In which:- Sej represents the value of the complex indicator of “j” firm .- Pi , pk represents the weight for the performance of the direct criteria “i” , in

respect with the performance of the indirect criteria “k”.c) Indexes sum :

Sj=

d) Simple arithmetic average:_

Sj=

In which:“n” represents the number of direct factors."m” represents the number of indirect factors.

36

The hierarchy of the companies is aranged in decreasing order of the values of synthetic indicator obtained.

3.1.2. Method of the Comparison Matrix

Consists of evaluating the companies’ performances with the help of a matrix in which the lines represent the selected performance criteria, and the columns represent the place held by the entity in descending order, considering the achieved level of the selected performance criterion.

In which:"i" represents the selected performance criteria"j" represents the place held by the firm regarding „i” criterion

a) In the case the performance criteria has the same importance, the following method applies:

- for each place „j” is given a scoring in descending order:

- the overall financial and economic state of the firm is determined as a weighted sum between the number of apperances on „j” (nj) place of „k” firm and the score lj given to that place like this:

In which: Cgk represents the value of the overall indicator of „k” firm

b) In case the performance criteria has different weights, the value of the overall indicator is determined as a weighted sum between the appearance number in a certain place of „k” firm and of the two scores in the following way:

37

In which: Cek represents the value of the complex indicator of „k” firm

In both cases choosing the level held by each firm in the competition is done in the

overall indicator descending order.

3.1.3. Method of Distance or „The Model Company”

The model company is a hypothetic firm, that reunites the maximum levels (for the direct performance indicators) or minimum (for the indirect perfromance indicators). Applying this method can be done in two ways:

a) The case in which the performance criteria has the same importance. The distance between each entity in competition and the standard firm is calculated as a standard deviation of the

ratio from 1:

In which: Iik represents the value of „i” criterion of „k” firm;Ie represents the value of the base criterion (maximum or minimum);

b) The case in which ,from an economical point of view, the performance criteria is

different. The distance is determined as a weighted standard deviation of the ratios values

from 1.

The classification is made in the ascending order of the computed indicator.

3.1.4. Method of final score of the companies

38

Consists of giving points in descending order to the levels establised through the three methods that were previously presented. The final place of each firm is determined by summing up these points, and the classification is made in the descending order of the obtained score.

In which: Pik represents the corresponding score of the „i” method from the „k” firm.

We will continue analysing the economic and financial situation of six firms using these methods and the data from Table 1.

Table 1 Competition situation

Financial performance criteria

Score given for

„i” criterion

Firms in the competitionF1 F2 F3 F4 F5 F6

1. Net Profit Rate 0,30 102 100 112 90 114 1062. Current Liquidity Rate 0,40 110 90 100 80 112 953.Weight of labor

expenses in added value

0,20 90 110 90 120 100 88

4.Labour Productivity 0,10 80 115 100 130 110 140

1) Synthetic Indicator a) Geometric Average

THE TOP OF THE FIRMS:I F6 (112,50 %) IV F1 (99,93 %)

39

II F5 (108,86 %) V F2 (98,48 %)III F3 (105,61 %) VI F4 (93,97 %)

b)Simple Arithmetic Average

THE FIRMS’ TOPI F6 (63,25 %) IV F1 (50,5 %)II F5 (59 %) V F2 (48,75 %)III F3 (55,5 %) VI F4 (45 %)

c) Indexes Sum

S1 = 102 + 110 – 90 + 80 = 202 %S2 = 195 % S3 = 222 % S4 = 180 %S5 = 236 % S6 = 253 %

THE FIRMS’ TOP I F6 (253 %) IV F1 (202 %)II F5 (236 %) V F2 (195 %)III F3 (222 %) VI F4 (180 %)

d) Well Balanced SumSe1 = 102 x 0,3 + 110 x 0,4 – 90 x 0,20 + 80 x 0,10 = 64,6 %Se2 = 100 x 0,3 + 90 x 0,4 – 110 x 0,20 + 115 x 0,10 = 55,5 %Se3 = 112 x 0,3 + 100 x 0,4 – 90 x 0,20 + 100 x 0,10 = 65,6 %Se4 = 90 x 0,3 + 80 x 0,4 – 120 x 0,20 + 130 x 0,10 = 48 %Se5 = 114 x 0,3 + 112 x 0,4 – 100 x 0,20 + 110 x 0,10 = 70 %Se6 = 106 x 0,3 + 95 x 0,4 – 88 x 0,20 + 140 x 0,10 = 66,2 %

THE FIRMS’ TOPI F5 (70 %) IV F1 (64,6 %)II F6 (66,2 %) V F2 (55,5 %)III F3 (65,6 %) VI F4 (48 %)

2. Comparison Matrix

Table nr.2

40

I II III IV V VI Score given to the criteron

F5 F3 F6 F1 F2 F4 0,30F5 F1 F3 F6 F2 F4 0,40

C F6 F1, F3 - F5 F2 F4 0,20F6 F4 F2 F5 F3 F1 0,10

Score given to the level

0,5 0,25 0,125 0,0625 0,03125 0,015625

a) Case of same importance criteria

THE FIRMS’ TOPI F6 (118,75 %) IV F1 (57,81 %)II F5 (112,5 %) V F4 (29,68 %)III F3 (65,62 %) VI F2 (21,87 %)

b) differenciated by points

41

THE FIRMS’ TOPI F5 (36,87 %) IV F1 (17,03 %)II F6 (21,25 %) V F2 (4,06 %)III F3 (17,81 %) VI F4 (3,90 %)

3. Method of the Distance

The basis for comparison of the financial performance criteria which are being considered are the following:

-Net Profit Rate 114%- Liquidity Rate 112%- Weighted expenditures with the wages 88%- Labour Productivity 140%

a) case of same importance

THE FIRMS’ TOP after Dk:I F6 (16,72 %) IV F2 (38,47 %)II F5 (25,39 %) V F1 (44,10 %)

42

III F3 (30,64 %) VI F4 (51,31 %)

b) differenciated by points

THE FIRMS’ TOP after Dek:I F5 (9,11 %) IV F1 (14,81 %)II F6 (10,34 %) V F2 (18,88 %)III F3 (11,38 %) VI F4 (27,00 %)

43

4. Method of Final Score of the Company

a) – Same importance criteria

Table no.3Place Score

per place

Geometric Average

Indexes

sum

Arithmetic Average

Comparison matrix

Distance

Method

Final Score per entity

I 100 F6 F6 F6 F6 F 6 F 1 24 pII 20 F5 F5 F5 F5 F 5 F 2 19 pIII 10 F3 F3 F3 F3 F 3 F 3 50 pIV 5 F1 F1 F1 F1 F 2 F 4 12 pV 4 F2 F2 F2 F4 F 1 F 5 100 pVI 2 F4 F4 F4 F2 F 4 F 6 500 p

THE FINAL TOP:I F6 (500 p) IV F1 (24 p)II F5 (100 p) V F2 (19 p)III F3 (50 p) VI F4 (12 p)

b) Differenciated by points

Table no.4Place number

Score Weighted Sum

Compared

Matrix

Distance

Score for an entity

TOP FINAL

Entity

Points Place number

Entity Score

I 100 F5 F5 F5 F1 15 p I F5 300 pII 20 F6 F6 F6 F2 12 p II F6 60 pIII 10 F3 F3 F3 F3 30 p III F3 30 pIV 5 F1 F1 F1 F4 6 p IV F1 15 pV 4 F2 F2 F2 F5 300 p V F2 12 pVI 2 F4 F4 F4 F6 60 p VI F4 6 p

Table 5 The compared analyse of the topsLevel Top in same

importance case

Top in Romanian field

I F6 F5

II F5 F6

44

III F3 F3

IV F1 F1

V F2 F2

VI F4 F4

3. ConclusionsThe following conclusions can be established after the data analysis:- the methods based on the evolution of the financial performance criteria

reflect the economic reality more corectly in its evolution- according to us, the differenciated method of the financial performance

criteria has applicability in the economic environment- by according more attention to financial performance criteria, synthesis

criterias is reflected into the final economic efficiency of the firm.

45

46

Chapter 4 THE METHODOLOGY OF ANALYSIS OF THE INTERNAL STATE OF THE ENTITY

The analysis of the phenomena and processes which take place in nature and in society presume the use of a wide range of methods and investigation techniques by the researchers, among which a special part is occupied by the modelling method.

The modelling method is a way, a manner of knowledge and action, which is used both in diverse branches of natural sciences (mathematics, mechanics, physics, chemistry, biology, etc.) and in different social sciences.

A component of the modelling process, which regards the phenomena and the economic processes, is in our opinion, the economic modelling.

In essence the economic modelling refers to the different components of the financial economic mechanism. In the process of economic modelling, a decisive role belongs to the economic theory which represents both a starting point in research and a final point for verifying the model built by the researchers.

Emphasizing the financial-economic state of the firms can be realized through applying the principles and the mathematic rules in the process of construction of the competitive analysis model.

Throughout this process a decisive role is played by the stabilization of the reciprocal conditioning modality of the phenomena’s influential factors which determine the order of their quantitative and qualitative analysis.

The quantitative factors are expressed in physical measures and from the point of view of measuring the efficiency of resource consumption these are practically limited in the firms effort of maximizing/minimizing the phenomenon variation.

The qualitative factors have the same nature as the analyzed economic phenomenon and it is expressed in the same measure with it. ???Establishing and then maintaining the analysis order in the process of separating the factors’ influence, is of great importance because from aggregate factors simple factors can be obtained, factors which in the combination process can contribute to the commendation of some new evolution dimensions of the studied phenomena.

In this way, in the analysis model of labor productivity the following combinations of factors can be established:

in which:w - represents the annual productivity;td - represents the average number of days worked by a person in a yearth - represents the average number of hours worked by a person in a daywd - represents averege dayly productivitywh - represents average hourly productivitynh - represents the average numbert of hours worked by a person in a year

The metodology of analising the internal state of the firms takes into consideration two categories of proceedures:

47

a) proceedures applicable in the case of deterministic relationsb) proceedures applicable in the case of undeterministic relations

4.1 Analyzing the procedures applicable in the case of deterministic relationsIn the category of these procedures we distinguish:a) proceedings of evaluation of the factors’ influence in absolute measures:- the procedure of isolated determination of the influence of the factors - the procedure of connected substitutions;- the procedure distribution coefficients;- the procedure of the arias;- the procedure of the matrix;- the procedure of the balance sheet;b) procedures of evaluation of the influence of the factors in relative measures:- the procedure of the relative connected substitutions;- the procedure of the indexes;- the procedure of the balance sheet;- the procedure of the logaritmation of the indexes;

Further on we present these procedures of separating the influences of the factors.

48

4.1.1. Procedures of evaluating the factor’s influence in absolute measures

4.1.1.1. The procedure of isolated determination of the factor’s influence

Premisesa) the proceedure is applied in the case of ratio product relations or complex product

relations (of product and ratio);b) Determining the certain relation between the phenomenon and its influential factors;c) the absolute change of the phenomenon is split up into isolated influences of each

factor and common influences of two, three, „n” factors;d) Establishing the partial influence of each factor assumes the determination of its

measure compared to the base norm, while the rest of the factors remain in the initial state;

e) The common influences of the factors mean, in the case of product relations, the simultanious variotion of two, three, „n-1” factors, while the rest of the factors remain in the initial state.

The steps of applying the proceedure :

I. Determining the absolute deviation of the phenomenon in comparison with the comparation base;

II. Determining the succesive isolated influence(partial) of each factor;III. Establishing the common influences:

- for two factors: Cn2

- for three factors: Cn3

...................................................................

- for „n” factors: Cnn

IV. The synthesis of the influences.

Applying the procedure in the case of product relations

Let F be the analised phenomenon and x,y its influental factors which are in product relation, then we can write:

F = x . y

By following the previously specified steps it results:I. The absolute change of the phenomenon

where:„0” represents the base level;„1” represents the effective level.

49

II. Establishing the partial influences:1. For the x factor:

2. For the y factor:

III. Establishing the common influences for two factors (N2):

IV. The truth relation is the following:

Relation IV can be demonstrated in the following way:If F = x . y and the fact that phenomenon F modifies with a quantity, which we

denote with F, F = F1 - F0, is admited, then in a similar way the influential factors of F modify with the coresponding quantitiyes respectively x = x1 - x0 and y = y1 - y0. Then the relation becomes:

from where:

and taking into consideration the relation F = x . y results:

By replacing x with x0 and y with y0, we obtain:

We exemplify de application of the precedure considering the data from table 4.1:

The analisys of the Return On Equity

Table 4.1

Current No.

Indicators MU Symbol

Financial period Deviation

Indexes%

Previous

Current

1. Turnover Lei T 40.000 45.000 +5 112.52. Equity Lei EQ 10.000 10.000 - 100 3. Net profit Lei NP 150 100 -50 66.664. Equity Turnover - EQT 4 4.5 +0.5 112.55. Return On Sales % ROS 0.375 0.222 -0.153 59.26. Return On Equity % ROE 1.5 0.999 -0.501 66.60

50

Analysis model:

ROE = EQT x ROS,

1. The absolute change of FRR:

ROE = ROE1 – ROE0 = 0.999 – 1.5 = -0.501 %

2. The patial influence of the factors:

- for GA:

ROE(EQT) = EQT . ROS0 = (4.5 – 4) x 0.375 = +0.1875 %-for RR

ROE(ROS) = ROS . EQT0 = (0.222 – 0.375) x 4 = -0.612 %

3. The common influence:

I(EQT, ROS) = EQT . ROS = (4.5 – 4).(0.222 – 0.375) = 0.5 x (-0.153) = -0.0765 %

4. The truth relation:

ROE = ROE(EQT) + ROE(ROS) + I(EQT, ROS) = 0.1875 – 0.612 – 0.0765 = -0.501 %

The application of the phenomenon in the case of ratio relationLet F be the analised phenomenon and x, y its influential factors which are in a ratio

relation, then we can write:

Proceeding in a analog way with the product relation it results:

I. The absolute change of the phenomenon:

II. Establishing the partial influences:

1. For x factor:

51

2. For y factor:

III.Establishing the common influence: N2 = C22 = 1

IV. The truth relation will be:

F = F(x) + F(y) + I(x,y)

The exemplification of the procedure in the analysis of the financial state of the entity, on the base of the „ Rate of return” indicator.

The analisys data are represented in table 4.1:The analysis model:

I. The absolute modification of the phenomenon:

ROE = ROE1 – ROE0 = 1 – 1.5 = -0.5 %

II. Establishing the partial influences:

1. For equity:

2. For the net result:

III. Establishing the common influences:

The synthesis will be:

52

ROE = ROE(EQ) + ROE(NP) + I(EQ, NP)

In our opinion, the disadvantages of applying this procedure are the following:

- the disregard of the analysis order can make it impossible for the analyst to establish the final causes which contribute to the change of the phenomenon;

- determining a large number of common influences, which are treated as aggregate factors, whose content can not be precisely specified;

- obtaining some measures without economic content;- extremely elaborated analytic calculus in the case of a large number of factors;

All these inconveniencies can be eliminated through the application of other proceedures, for example: the connected substitutions, repartition coefficients, areas etc.

4.1.1.2. The procedure of the connected substitutions:

Premises:a) the application of the procedure takes place in the case of the product relations or ratio

relations or the complex ones;b) In the procedure of the separation of the factor’s influences, a substituted factor

remains in this state until the end of the substitution process.

Steps of realization:

I. Establishing the analysis model of the phenomenon and the commendation of the qualitative and quantitative factors.

II. Determining the absolute change of the phenomenonIII. Determining the successive influence of the factorsIV. Establishing the truth relations through the decomposition of the values of simple

influences this way resulting aggregate influences

Applying the procedure in the case of product relation

I. Establish the analysis modelLet the following relation be:

F = x * y

We suppose that the influential factors have the following order: x represents the quantitative factor; y represents the qualitative factor:II. Determine the absolute change of the phenomenon:

III. Determine the factor’s influence:

53

1. for x factor:

2. for y factor:

IV. Establish the truth relation:

F = F(x) + F(y)

The exemplification of this procedure is made on basis of the data from table 4.1.

1. The absolute change of FRR:

ROE = ROE1 – ROE0 = 0.999 – 1.5 = - 0.501 %

2. The influence of the factors:- for EQT quantitative:

ROE = EQT x ROS0 = + 0.1875 %

- for RR calitativ:

ROE(EQT) = EQT1 . ROS = 4.5 x (0.222 – 0.375) = 4.5 x (-0.153) = -0.6885 %

3. The synthesis:

ROE = ROE(EQT) + ROE(ROS) = -0.501 %

Applying the procedures in the case of ratio relations:

a) The case of two factors

a1) The situation in which the quantitative factor is at the numerator:

I. The following model is considered:

II. The absolute change of the phenomenon:

54

III. The influence of the quantitative factor y:

a2) The situation in which the quantitative factor is at the denominator (y)

I. The following model is considered:

II. The absolute change of the phenomenon is determined in this way:

III. The succesives are determined this way:1. The influence of the quantitative factor y:

2. The influence of the qualitative factor x:

IV. The truth relation satisfies the equality:

F = F(y) + F(x)

The exemplification of the ratio case is made on the base of the data from table 4.1.

In the analisys model the quantitative factor is the “social capital” indicator.

II. The absolute change of the analyzed indicator: ROE = -0.50 %

III. Establishing the influence of the factors:1. The influence of the equity (EQ):

55

ROE(EQT) = 0

2. The influence of net profit (NP): ROE(NP) = -0.50 %

IV. The truth relation will be:

ROE = ROE(EQ) + ROE(NP) = -0.50 %

4.1.1.3. The procedure of the coeficients of distribution This procedure removes the shortcomings previously mentioned, assigning the

common influences of the factors proportionally with their partial influences36.The applying of this process is based on the following premises:A). the procedure is applied in the case of deterministic product relations, report and

complex;b). In the process of devising the influences, a replaced factor reverts to the initial

state.Application steps I. Establishing the interdependence model of the factors in the researched phenomena II. Determining the absolute variance of the phenomena regarding the established

standard;III. The successive computation of the partial influences of the quantitative and

qualitative factors;IV. Establishing the common influences of two, three …”n” factors;V. Computing the sum of common influences for two, three, “n” factors;VI. Determining the values of the distribution coefficients, afferent to the common

influences of the factors;VII. Computing the total influences of the factors;VIII. Establishing the truth relation.

Applying the procedure in case of product relations

I. Let the relation:F = x * y

36 I.Căinap, I.Bătrâncea, E.Kolozsi, Determining the influence of the factors on the deviation of the economic-financial results through the method of the allotment coefficients, Economical Studies and Researches , vol.2, Universiy "Babes-Bolyai", Cluj-Napoca, 1987, p.38

56

II. The absolute modification of the phenomena F.

III. Establishing of the partial influences:1. For x factor x:

2. for y factor:

IV. Establishing the common influences for the two factors.

I(x, y) = x . y

V. Computation of the sum of common influences for the two factors:

S(x,y) = | F(x ) | + | F( y) |

VI. Computation of the values of the allotment coefficients:

VII. Computing the total influences of the factors:1. for x factor:

2. for y factor:

VIII. The truth relation will be:

F = F(x)'+ F(y)'

Further we present this method’s means of application in the case of two factors, relying on the data from table number 4.1.

57

1. The absolute change of ROE:

ROE = ROE1 – ROE0 = - 0.501 %

2. The partial influences:- For EQT

ROE (EQT) = + 0.1875 %

- For ROS ROE (ROS) = - 0.612 %

3. The common influence:I (EQT, ROS) = -0.0765 %

4. The bases of distribution:

S (EQT, ROS) = | 0.1875 | + | -0.612 | = 0.7995

5. Computing the coefficients of distribution:

6. Computing the total influences:- For EQT:

ROE(EQT)’ = ROE(EQT) + . I(EQT, ROS) = 0.1875 + 0.23 . (-0.0765) =

= 0.169905 %

- For ROS

ROE (ROS)’ = ROE (ROS) + . I (EQT, ROS) = - 0.612 + 0.77. (-0.0765) =

= - 0.670905 %

7. The synthesis:

ROE = ROE (EQT) ‘+ ROE (ROS) = -0.501 %

Applying the procedure in case of ratio relations I. Analysis model is:

58

II. The absolute change of the phenomenon:

III. Establishing the partial influences:1. For X factor:

2. for Y factor y:

IV. Establishing the common influences of the two factors:

V. The sum of the two factors is given by the relation:

S(x, y) = | F(x) | + | F(y) |

The distribution coefficients were presented beforehand.Computing the total influences and the truth relation is done according to the

preceding equalities. The illustration in this case is done based upon the data in table 4.1.1. The absolute deviation of ROE:

ROE = - 0.50 %

2. The partial influences of the factors:- For EQ

ROE (EQ) = 0

- For NP ROE (NP) = –0.50 %

1. The common influence of the factors:

59

I (EQ, NP) = 0

Due to the fact that the common influences is equal to zero, the remainder steps.

2. The synthesis:

ROE = ROE (NP) = - 0.50 %

4.1.1.4. The areas method Premises

a) The application of the method takes place in the case of determing, product report or complex relations;

b) Establishing the order of analysis of the phenomenon;c) The factor whose influence has been separated before, will remain in this status;d) The quantitative factor is represented on the abscissa axis;e) The influence of a factor is established as the area of a surface, like the area of a

square, a rectangle or trapeze.

Application steps:1. Establishing the analysis model and the influence factors of the model;2. Determining the deviation of the phenomenon from the standard (present or

previous period);3. Separation of the influence of factors;4. Establishing the synthesis.

Applying the method in case of product relations

Let phenomenon F and its influence factors X and Y, be in a product relation, namely:F = x * y

a) The case in which both factors are increasing (x1 > x0, y1 > y0) (fig.4.1)

y

y1 A

y0 B C

0 x x0 x1

60

Fig. 4.1. The graph of abstractedness of the influence of factors in case “a”

The absolute change of the phenomenon:

1. The influence of the absolute change of the quantitative factor:

2. The influence of the absolute change of the qualitative factor:

The truth relation will be:

b) The case in which both factors are decreasing; (x1 < x0, y1 < y0) (fig. 4.2)

y

y0 C B

y1 A

0 x x1 x0

Fig. 4.2. The graph for the factors’ influence in case “b”.

The absolute deviation of the phenomenon:

1. The influence of the absolute deviation of the quantitative factor:

2. The influence of the absolute deviation of the qualitative factor:

61


c) The case in which the quantitative factor is increasing and the qualitative factor is decreasing (x1 > x0, y1 < y0) (fig. 4.3)

y

y0 B C

y1 D A

0 x x0 x1

Fig. 4.3. The graph of abstractedness of the influence of factors in case “c”.

The absolute change of the phenomenon is determined by the following relation:

1. The influence of the absolute modification of the quantitative factor “x”:

2. The influence of the absolute modification of the quantitative factor “y”:

62


a) The case in which the quantitative factor is decreasing and the qualitative factor is increasing (x1 < x0, y1 > y0) (fig. 4.4)

y

y1 A

C y0 B

x 0 x1 x0

Fig. 4.4. The graph of abstractedness of the influence of factors in case “d”

The absolute modification of the phenomenon will be:

1. The influence of the absolute modification of the quantitative factor “x”:

2. The influence of the absolute modification of the qualitative factor “y”:


Based on the data from table 4.1 arises the next situation:

63

RR

ROS0 0.375 B C

ROS1 0.220 D A

GA 0 4 4.5

EQT0 EQT1

Fig.4.5. The graph of the separation of the influence of factors

1. The absolute change of ROE

2. The influence of the factors- for EQT:

- for ROS:

3. The synthesis:

ROE = ROE (EQT) + ROE (ROS) = -0.501 %In case that the levels registered by a factor coincide (example

x1 = x0 or y1 = y0), then the absolute modification of the phenomenon is identical with the non-zero influence of the other factor.

In case of “n” factors the product “n-1” converts into an aggregated factor, the model lessening at an above presented situation. Further, other “n-1” factors are separated as a product of two factors and the method is repeated until the final changing causes of the phenomenon are found.

Between the advantages of this method we remind:- the method offers considerable ease in the measurement of the influence of the

factors;- following the separation of the influence of factors doesn’t lead to aggregate

increments, separate of the factors;- the increments that weren’t separate are attributed, accordingly considering the

quantitative, qualitative factor or in a percent of 50% to each factor;- the method is based on geometrical representations, therefore the complex

separation methods of the factors is no longer necessary.

64

4.1.1.5. The matrix 37 methodIn the process of analysing the economic and financial status of the enterprises/

companies it is necessary to find out the final causes that contribute to the modification of the studied entities. This means in fact the abundent analysis at the level of each assortment, on one side, and the establishing of raw materials consumption, energy, salaries etc. and on the other, in order to determine the profitability of the analised assortments.

Thus, we believe the matrix method represents a method for distinguishing these aspects.

The matrix method supposes the construction of matrixes that on one hand, have the purpose of following the influence of specific consumptions, and on the other, following the influence of the raw materials acquisition expenses on the materials expenses at the level of assortment.

a) the case of two factorsLet the specific consumption matrix cs:

and

The matrix of the acquisition expenses (prices) of the raw materials.In the matrix of the specific consumptions the first line represents the real

consumption and the second line represents the previously scheduled (standardised) consumption. In the matrix of the prices the first column represents the real prices and the second the scheduled acquisition prices. The product of the two matrixes represents, in fact, the matrix of total expenses (Ct) whose elements have the following meaning:

- real material expenses:

- materials expenses recomputed after the specific consumption:

- materials expenses recomputed after the acquisition cost:

37 I. Căinap, I Bătrâncea, Analiza economică şi financiară a firmelor industriale, Universitatea Babeş-Bolyai, Cluj-Napoca, 1993, p.70

65

- scheduled (standard) materials expenses:

It can be observed that the element C21 has no economic content from the point of view of the influence of factors separation process. In these conditions the separation of the influences of factors is done as follows:

- The absolute modification of the materials expenses:

1. The influence of modifying the specific consumptions:

2. The influence of modifying the acquisition costs:

The truth relation will be: C = C (cs) + C (p)

We illustrate the application of this method in the case of an assortment, in which four base raw materials are included (table 4.2):

The raw materials consumption analysis

Table 4.2

Assortment Specific consumption(SC) - sqm/pair -

Acquisition price (AP) - lei/ sqm -

PreviousPeriod

CurrentPeriod

PreviousPeriod

CurrentPeriod

m1 0.100 0.150 1000 1100m2 0.050 0.040 1200 1000m3 0.290 0.280 2000 2500m4 0.300 0.400 3000 2800

The model:

MC = SC x AP

1. Matrix of materials consumption:

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a) m11 = 0.150 x 1100 + 0.04 x 1000 + 0.280 x 2500 + 0.400 x 2800 = 2025 lei

b) m12 = 0.150 x 1000 + 0.040 x 1200 + 0.280 x 2000 + 0.400 x 3000 = 1958 lei

c) m21 = 0.100 x 1100 + 0.05 x 1000 + 0.290 x 2500 + 0.300 x 2800 = 1725 lei

d) m22 = 0.100 x 1000 + 0.05 x 1200 + 0.290 x 2000 + 0.300 x 3000 = 1640 lei

1. The absolute change of MC:

MC = m11 - m22 = 2025 - 1640 = +385 lei

2. The influences of the factors:- for SC

MC (SC) = m12 - m22 = 1958 - 1640 = +318 lei

- for AP MC (AP) = m11 – m12 = 2025 - 1958 = +67 lei

3. The synthesis: MC = +385 lei

4.1.1.6. The balance method

Premises:a) The method allows separating the influence of the factors in case of the determinist

relations of sum and difference;b) The factor, whose influence was previously measured, remains into this state until the

end of the influence of factors separating procedure.

Necessary steps for applying the method:1. Establishing the model of the phenomenon analysis;

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2. Establishing the order of analysis;3. Measuring the absolute modification of the examined phenomenon;4. Measuring the influence of each factor;5. Establishing the truth relations.

1) Let F be the economic phenomenon and x, y, z its factors of influence, verifying the following relation:

F = x + y –z

2) We suppose that the x, y, z factors are analysed in this order3) The absolute modification of the phenomenon:

4) The influence of the factors:

- for the x factor:

- for the y factor:

- for the z factor:

5) The synthesis:F = F(x) + F(y) + F(z)

We exemplify the application of the method in the case of an enterprise’s sales of merchandise (table 4.3)

The commercial balance of the enterpriseTable 4.3

- lei -Indicators Symbol Financial exercise Indexes

%Previous CurrentStock at the beggining of period

SI 40,000 44,000 110

Merchandise supply I 600,000 580,000 96.66Stock at the end of period

SE 150,000 120,000 80

Sales of merchandise S 490,000 504,000 102.85

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The model of merchandise sales analysis:

S = SI + I – SE1. Abolute change of S

S = S1 – S0 = 504,000 – 490,000 = +14,000 lei

2. The SI influence:

S(SI) = SI = 44,000 – 40,000 = +4,000 lei

3. The I influence:

S(I) = I = 580,000 – 600,000 = -20,000 lei

4. The SE influence: S(SE) = - SE = - (120,000 – 150,000) = +30,000 lei

5. The synthesis:

S = 4000 – 20,000 + 30,000 = +14,000 lei

4.1.2. Methods for evaluating the facors’ influence in relative sizes

The evaluation of the economic and financial state of the firm can also be efectuated in relative sizes, the phenomenon deviation and the factors’ influence being established as a percentage.

4.1.2.1. The method of relative linked substitutions

This method is based on the same premises and follows the same steps as in the process of linked susbstitutions, except that the obtained sizes are expressed in percentages.

Applying the method in case of the multiplication relationI. We consider the following relation:

F = x * y

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having the factors of influence in this order. We denote by IF the index of the examined phenomenon:

II. The realtive modification of the phenomenon:

III. Determining the facors’ influence:

- for x factor:

- for y factor:

!V. Establishing the truth relation IF = IF (x) + IF (y)

Observation 1:The influence of the factors in relative sizes is determined as a ratio between their

absolute influence and the standard value of the phenomenon.We exemplify the application of the method using the analisys data presented in table

4.1.

1. The relative modification of ROE:

IROE = -33.4 %2. The realtive influences of the actors:

- for the quantitative EQT:

IROE(EQT) = = +12.5 %

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- for the qualitative ROS

IROE(ROS) = = -45.9 %

3. The synthesis:

IROE = -33.4 %

Applying the method in the case of a ratio relation

a1) the situation where the quantitative factor is at the nominator (x):

then:

Following the same procedure as in the case of the relations of multiplication, we obtain:

The relative change of the phenomenon:

1. The influence of the quantitative factor x:

2. The influence of the qualitative factor y:

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IF = IF (x) + IF (y)

Observation 2:As in the situation of multiplying the factors, the relative influence is determined as a

ratio between the absolute influence of the factor and the basic state of the phenomenon.

a2) the situation where the quantitative factor is at the denominator:

1. The influence of the quantitative factor y:

2. The influence of the qualitative factor x:

The truth relation:

IF = IF(y) + IF(x)

The evaluation in relative sizes of the indicator’s deviation „the financial rentability ratio” is made using the data presented in table no. 4.1, as follows:

The realtive modification of the indicator:

IROE = 66.66 – 100 = -33.34 %

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1. The influence of the relative modification of the equity:

IROE(EQ) = 0 2. The influence o the relative change of net profit:

IROE(NP) = = -33.34 %


IROE = IROE(EQ) + IROE(NP) = -33.34 %

4.1.2.2. The indexes method

This method allows the evaluation, in percentages, of the factors’ influence upon the relative deviation of the studied phenomenon.

The results obtained through this method and those determined through the method of relative substitutions are identical.

Premises:a) The method is applied in the case of determinist relations of multiplication, ratio

or complex relations.b) In the process of separating the factors’ influence, the index of the substituted

factor remains in the same state. Applying the method in the case of the multiplication relations

We consider the following relation:

We denote by:

and by

Replacing ix and iy in the previous relation, it results that:

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The steps for separating the influence of each factor are identical with those presented in the method of relative substitutions.

We consider that the order of the analisys is the following: x - quantitative factor and y - qualitative factor.

The relative modification of the phenomenon:

1. The influence of the x factor:

2. The influenece of the y factor:


IF = IF ( ix ) + IF ( iy )

Based on the data from the table no. 10. we will determine the relative influence of the factors:

1. The relative deviation of the phenomenon:

IROE = -33.4 %

2. The relative influences of the factors:- for EQT:

IROE(IEQT) = IEQT – 100 = 112.5 – 100 = +12.5 %

- for ROS:

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IROE(IROS) = - IEQT = IEQT = 112.5 = -45.9 %

2. The synthesis: IRoe = -33.4 %

Applying the method in the case of ratios:a1) the situation where the quantitative factor is at the numerator

We consider the following relation:

The relative modification of the phenomenon is determined as follows:


2. The influence of the y factor:


IF = IF ( ix ) + IF ( iy )

a2) the situation where the quantitative factor is at the denominator

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The relative modification of the phenomenon is similar to that in the subcase (a1):

1. The influence of the y factor:



IF = IF ( ix ) + IF ( iy )

In this case, we exemplify the application of the indexes method using the data from table no.4.1

Analisys model:

1. The relative change of ROE

IROE = IROE – 100 = 66.66 – 100 = -33.34 %

3. The relative influences of the factors - for quantiative EQ

IROE(EQ) = 100 = 0

- for qualitative NP

IROE(NP) = (INP – 100) = (66.66 – 100) = -33.34 %

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3. The synthesis relation:

IROE = IROE(EQ) + IROE(NP)

4.1.2.3. The relative balance method

a) Using this method we evaluate the relative influence of factors for the sum and difference relations;

b) The relative influence of a factor is determined as a ratio between the absolute influence of the factor and the base level of the phenomenon.

If we consider the balance model:

F = x + y – z and

it results:The realtive modification of the phenomenon:

1. The relative influence of the x factor:

2. The relative influence of the y factor:

3. The relative influence of the z factor:

The truth relation:

F = F(x) + F(y) + F(z)

We exemplify the application of the relative balance method using data from the table 4.1.1.6.

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1. The relative change of sales:

IS = 102.85 – 100 = + 2.85 %

2. The relative influence SI:

IS(SI) = = + 0.81 %

3. The relative influence of I:

IS(I) = = - 4.08 %

4. The relative influence SE:

IS(SE) = = + 6.12 %

5. The synthesis relation:

IS = 0.81 – 4.08 + 6.12 = + 2.85 %

4.1.2.4. The method of applying the logarithm to the indices38

In order to increase the efficiency in analyzing the economic and financial standing of companies by using the process of separating the factors’ influences in relative sizes, we will often use in practice, the method of applying the logarithms to the indices. The method relies on the same premises as in the case of the indices process.

We should recall some of the properties of the logarithms, such as the product rule for logarithms (which allows us to combine and / or break apart matching base logarithms that are being multiplied together), and the quotient rule for logarithms (which allows us to combine and / or break apart matching base logarithms that are being divided).

a) Applying the method for the functional product relationships

Let: F = x. yWe will denote:

38 I. Bătrâncea - Considerations on the ways that can be applied to some of the methods for estimating the influence of factors in relative proportions to the economic analysis, Studia Oeconomica, Universitatis „Babeş-Bolyai”, vol.I, Cluj-Napoca, 1986, p. 65-74

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So, we can write:

IF = Ix . Iy

Appling the logarithm to the relationship, we will have:log IF = log ( Ix . Iy )

From which:log IF = log Ix + log Iy

or: | log IF | = | log I x | + | log I y |

We will divide by I F

Where:

is the influence of the x factor.

Example:Consider the data from the following table:

The material consumption Table 4.4

No. Indicators Unit of measurement

tn tn-1 Indices %

1. Material Spendings (F) Lei 30,576 23.760 128.682. Quantity of product (x1) pieces 420 400 105.003. Specific consumption (x2) Kg/b 280 270 103.704. Acquisition cost (x3) Lei/kg 0.26 0.22 118.18

From the above equalities, we obtain:

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From which:1 = 0.1933 + 0.144 + 0.6627

Meaning that the three factors influence the increase of material spending with 19.33 %, 14.4 %, and 66.27 %.

If: log I x > 0, log I y < 0 and | log I x | | log I y |

then: | log I F | = | log I x + log I z | = | log I x | - | log I y |.

Dividing both members of the equation by | log IF | , we get:

Thus, separating the factors’ influences.

Example:Conisder the data from the following table:

The material consumption

Tabelul 4.5


tn tn-1 Indices%

1. Material spending (F) Lei 8,960 6,160 145.452. Quantity of products (x1) pieces 320 280 114.283. Specific consumption (x2) Kg/b 200 220 90.914. Acquisition cost (x3) Lei/kg 0.14 0.10 140.00

From the previous relationship, we get:

From which:

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or1 = 0.3563 – 0.2543 + 0.8980

We conclude that both the quantity of products and the acquisition cost will influence the material spending by increasing its value with 35.40 %, respectively 89.70 %. However, the specific consumption will influence the material spending by decreasing its value with 25.10 %.

If log I x and log I y fail to meet the foreset conditions, then the equality will be divided by | log IF |, obtaining:

Where:

and represent the influences of the two factors .

Example:Consider the data from the table:

The material consumptionTabelul 4.6


tn tn-1 Indices%

1. Material spending (F) Lei 22,464 23,760 94.542. Quantity of products (x1) piece 360 400 90.003. Specific consumption (x2) Kg/b 260 270 96.294. Acquisition cost (x3) Lei/kg 0.24 0.22 109.09

From the previous relationship, we get:

Meaning:| 1 | = | -1.8699 – 0.6685 + 1.5384 |

We can observe that the material spending is influenced by the quantity of products (-186.99%), and the specific consumption (-66.85%), both decreasing the value of material spending. The acquisition cost will increase the material spending with 153.84%, influence which is inferior to the decrease of material spending of -253,84% (-186.99 % - 66.85%).

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b) applying the method for the functional ratio relationships

Let:

Applying the logarithm to both members of the equation, we obtain:

Following the sames steps as in the case of the product relationship, we will have:

Where each ratio represents the influences of a factor.

Method „A”

Assuming that log Ix , log Iy > 0 and

log Ix log Iy or log Ix . log Iy < 0and

log Ix < log Iy or log Ix 0, log Iy 0

Will result the following:

Thus, separating the influence of the two factors.

Example:We have the situation in table 4.7.

The material consumptionTable 4.7


tn tn-1 Indices%

1. The volume of production piece 16,800 10,000 168.002. Total consumption (x) Kg 42,000 40,000 105.00

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3. Specific consumption (y) Kg/b 2.5 4 62.5

We obtain for the previous relationship:

or

1 = 0.0941 + 0.9059

Both factors will influence the increase of the physical volume with 9.41 % and 90.59 %.

Method “B”

If we have different data than in method “A”, from the previous equality we will have:| log IF | = | log Ix - log Iy | or

.

Thus, we separate the influence of the factors.

Example:Considering the situation from table 4.8:

The material consumptionTabelul 4.8


tn tn-1 Indices%

1. Unitary cost (F) Lei 8,000 10,000 80.02. Total cost (x) Lei 480,000 400,000 120.03. Quantity of products (y) piece 60 40 150.0

Replacing the data in the equality from method B, we obtain:

| log 0.80 | = | log 1.20 – log 1.50 | : | log 0.80 |

From where:

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| 1 | = | 0.8334 – 1.8334 |

We observe that the volume of production is influenced by decreasing the cost per unit by 183.34 %, whereas the total cost increases the cost per unit by 83.34%.

From what we mentioned above, we can conclude that if the properties of the logarithm are not correctly applied, missinterpretations of the influences can and will occur.

4.2. Procedures of the function of production specific to non determinist relations

In evaluating the performance of firms, besides the determinist connections, it is often necessary to assess the influence of factors that are not in determinist connections with the phenomenon studied. We will do this by using post-factum analysis.

In this sense, we will bear in mind the connection between the annual profile, on one hand, and the utilization degree of the production capacity, the quality of products, personnel qualification, etc., on the other hand. This is why in analyzing the state of an entity, we apply procedures based on previous data that will approximate the form of connection between the phenomenon and its factors of influence.

During the production process, change in some of the inputs will occur as a result of production (outputs). This basically means a mix of inputs in relation with decision, command factors: management, production programming, organizing the production, etc.

The mix of different factors relies on the technological substitution attribute of the production process (the technology used), on one hand, and on the economic substitution (the price of factors), on the other.

A way of mixing the factors was first described by P. H. Wicksteed, who introduced the general notion of function of production: the product is a function of production factors, therefore, P = f (a, b, c,).39

Paul Samuelson interprets the function of production as being a catalogue of all receipts in the current techonolgy’s cook book for obtainig a product with given inputs.40

Kenneth Boulding considers that the function of production, which shows what quantities of inputs can be transformed in specific quantities of output, is a fundamental tranformation relationship for the entity. 41

The following form of the function of producton results from the above:Q = f (x1, x2, ... xn)

Where:xi , i = - represents the independent variables; the quantities used form each of the

x1, x2, ... xn factors;Q - is the dependent variable (the volume of production);f - the form of connection between the independent variables and the analyzed

phenomenon.

39 P .H. Wicksteed – The Coordonation of the Laws Distribution, reprodus după N. Georgescu Roegen – Legea entropiei şi procesul economic, Editura Politică, Bucureşti, 1979, p. 39040 P. Samuelson, Foundations, reprodus ibidem, p. 39141 K. Boulding – Economic Analysis, New York, 1986, p.145

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This is the neoclassical form of depicting the function of production. It is a punctual relationship, meaning a relationship between a set of numbers and one single number.

In economic literature, the independent variance of factors in the process of production is known as the „production law”. It was fist formulated by J. Turgot, for defining the decreasing law of yields in the agriculture production. Thus, the production can be obtained using different ways of mixing the inputs. The optimal mix is determined by the maximum economic efficiency conditions, out of which we mention: maximizing the volume of production, profit maximization, and minimazing costs.

Another way of mixing the factors of production is represented by the Cobb-Douglas function:42

Q = A * Lα * Kβ A > 0, 0 < α, β < 1Where:

A – is the influence of other factors, not included in the proudction process, such as technological progress, entrepreneurial abilities, etc.;

L – represents the hours of work of the presonnel, expressed in hours;K – is the time machines are functionning, expressed in hours.

Measuring the variance of the volume of production can be made by:- modifying/changing the work hours of personnel, if the other factors is held

constant;- modifying/changing the work hours of machines, if the other factor is held

constant;- Modifying/changing both factors at the same time.

a) The measure of the influence of the first factor on the volume of production can be determined from the first maximization condition of a function:

or

From the last equality, we can conclude that the production varies with α %, if the work hours of personnel vary with 1%, and the second factor is held constant.

We denote: the marginal production of the personnel working time factor,

and: the labour productivity.

We will obtain: MPL = α . APL

42 C.W. Cobb, P.H. Douglas – A Theory of Production, American Economic Review, vol.18 (march supplement) 1928, g. 139-165, reprodus după I. Căinap, I. Bătrâncea – Analiza economică şi financiară a firmelor industriale, Universitatea „Babeş-Bolyai”, Cluj-Napoca, 1993, p. 89

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Where α measures the variance of the marginal production if the labour productivity varies with 1%.

b) modifying the work hours of machinery

Following the same steps an in case a), we obtain:

From where:

Where:β - measures the relative variance of production, when the work hours of machines

varies with 1%.

We denote with and with . We will obtain:

MPK = β . APK

Thus, β measures the precent change of the marginal production, when the main yield of the machinery varies with 1%.

c) The influenece of modifying both factors of production on the volume of production can occur in the following situation:

c1) the efficiency of the sum of factors used is constant:α + β = 1

meaning, the increase in production is a direct function of the total increase of work hours (personnel + machinery ) in proportion of A.

C2) the decreasing efficiency of the sum of factors used:

α + β < 1

meaning, a simoultaneous increase of 1% of the quantity of factors will determine a 1% increase in production.

C3) the increasing efficiency of the sum of factors used:

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α + β > 1

meaning, an increase in the sum of factors of 1% of the quantities used by each factor will determine a production increase of 1%.

We will use table 4.9 to illustrate the procedures.

The Sales Analysis Tabelul 4.9

Indicators Unit of measure

ment

Symbol Fiscal yearPrevious Current

Turnover lei CA 40,000 45,000Number of workers - N 1,000 1,500

Interpreting the results:For a 1% increase in the number of workers, sales will increase with 0.25 %. As a

consequence, from the economic point of view, an increase in the number of workers is adviced.

4.3. The Financial Analysis Functions

By knowing the sphere and content of the research problems, there can be emphasized a series of functions which the analysis can fulfill in the actual coordinates of the functional market economy.

First, the analysis has to establish the “diagnosis” of the economical and financial state of a firm in a particular time and space. The establishment of a correct diagnosis will open, in this way, the path of “therapy” administration, imposed by the economical and financial state of the entity. This “therapy” will raise the credibility which actual and potential investors grant the entity with.

This way, the analysis evaluates post factum, current and forwards the economical (administration) and financial state of the entity with the help of an efficiency indicators system that can be expressed in absolute sizes, as well as in relative ones.

The economical and financial state of the entity is aggregate evaluated by comparing it with other states of the companies that are in the same competition with the analyzed entity and in the same administration period.

Comparability means presenting the information in a certain way, such that managers can be able to identify similarities, differences and tendencies in the evolution determined by competition of the companies or between different administration periods.

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Comparability is considered to be rigorous, scientific, if the evaluation procedures/methods used in evaluating the entity do not change during an analyzed administration period. On this basis, it is ensured, in our opinion, the consistence of the entities competition state analyzing process.

After diagnosing the entity, a series of variants for changing the entities strategy, related to the competition in which they used their resources, are elaborated.

The results conserving function assumes that, in the following period, the entity reaches at least the performance level of the precedent financial exercises. This makes necessary maintaining the financial position, the financial performance and other criteria of performance in the precedent financial exercise parameters. On this basis, the entity will permanently generate cash and equivalents of cash, necessary for financing current and future entity business.

The principle of total discovery of internal reserves of which an entity disposes is another function of the analyses that has a favorable impact upon the correct evaluation of entities state. On this basis the economical protection of the present investors, attraction of new investors as well as protection of the entity shares inventory from the stock market will be ensured.

The discovery and mobilization of the internal reserves allows the making evident of the factors, causes and the moment of appearance of them in the entity mechanism. On this basis, it can be elaborated prevention and elimination of malfunctioning states strategies.

Another entity state analysis function is the one of increase in economical efficiency of the entire activity. In this way, the analysis deals with the fact that any action or activity which takes place inside, as well as outside the entity has to be analyzed through the principle of minimum cost and maximum profit. According to this principle, the estimation of maximum economical efficiency, expresses, on one side, the economical growth of the entity, and on the other side, the society dynamics.

Concerning this, we consider that the cost-profit relation is rediscovered in fact, on one hand, in the quotation at the stock exchange of entity shares, and, on the other hand, cost-profit relation is implemented in society in the form of prices and social shares of the entity, relation that will reflect the efficient (inefficient) allocation of resources depending on the client reaction at the enterprise offer.

4.4. Features and types of financial analysis

The analysis, as a general method of knowledge, supposes the decomposing of phenomena and processes into their component parts, the evaluation of the correlation between them, the illustration of structures of phenomena and processes, of the factors and causes which determine their genesis and evolution, the illustration of their development and represents the foundation for future strategic decisions.

In comparison to other sciences, in the economical environment, the laboratory experiment means in fact the “living” experimentation of a strategy, from which the respective entity can more or less benefit. That is way different from physics, biology, chemistry etc.; the economical experiment cannot repeat itself when the entity has reached bankruptcy. All these explain why the economical analysis contains a series of duties, out of which we mention:

- The supply of useful and operative information for the evaluation of the investing and the decision of taking bank credits. For this purpose, the economical and financial analysis must synthesize the entity standing, for the

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present investors and creditors, as well as for the new customers which want to go into business with the respective entity. - The presentation of some useful information concerning financial flows functioning perspectives. Thus, with the help of performance criteria system, the analysis will provide the investors and creditors with relevant information regarding:

the size, the moment and the risk of dividend encashment; the gains resulted from selling and repurchase; the maturity of shares inventory from the stock market; the opportunity of bank loans;

The economical and financial analysis types generated by the variety of phenomena and economical processes, by their complexity and mobility, can be grouped, according to more criteria, in the following ways:

a) according to the researched sphere in a certain segment of knowledge we have: total analysis of the segment (for example: the total analyses of the

resources); Partial analysis of the segments (for example: the labor productivity

analysis).b) according to the reporting period we distinguish:

permanent, current analysis (of the entity plan); Occasionally, special analyses, asked by the managers and shareholders.

c) according to the modalities in which the analysis take place we may find: analysis that take place on organizational levels, for instance, at firms, on regions, on states; Analysis on themes, as for example, the analysis of the economical and financial state of the commercial company.

d) according to the modality of supervising the phenomena over time we may have: static analysis (vertically) that investigate the economical and financial phenomena at a certain moment; Dynamic analysis (horizontally) that investigates the economical and financial phenomena which are in a continuous movement and transformation. This analysis emphasizes the connection between different financial phenomena states, which have taken place one after the other, relying on the research of factors that determine the positional chances of the phenomena.

e) according to the time horizon which the analysis refers to, there are: short term analysis, made inside the financial exercise; Long term analysis, made during more financial exercises.

4.5. The Informational System- condition and instrument needed in order for the financial analysis process to take place

For serving at realization of the analysis functions, the economical and financial analysis makes use of a series of data that are provided by the entity informational system.

In our view, The Informational System means a collection of principles and rules which govern the transformation of data into information to be used in the decisional managerial process.

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The Information represents, in fact, the transformation of the primary data into informational output. This process is realized by the personnel, equipments, working methods and procedures. All these components are especially set up so that they are realizing a specific set of functions:

- The first function deals with the informational transformation of inputs into outputs;- The second function represents the illustrating of internal informational connections

of the procedural system;- The third function allows the informational prominence of cybernetic system

interactions in the enterprise environment; - The forth function conveys the possibility of informational signaling of the

exceptions that have appeared in the system.

The informational evaluation is based on numerous estimations, allocations and rationalizations of data and information. The results of the economical activities of a firm, in a dynamic economy, are uncertain and can result from the distinct combinations of endogenous and exogenous factors. Thus, the economical and financial analysis must offer synthesis information to the decisional factors from an entity. But, without synthesis information offered by a capable informational system, from the procedure point of view, the economical and financial analysis cannot comply with this objective. In the present, there is a great emphasis on the real time electronic manufacturing system of the financial- accounting data, which can supply the necessary information for the performance evaluation of the investigated commercial companies and all the way to economical and financial analysis.

In order for the economical financial analysis activity to take place, a special instrument based on the information support offered by the financial and administration accounting43 is used.

It is obvious that, in the absence of a rigorously organized accounting, that would respect the present law, it is impossible to realize a pertinent economic-financial analysis that offers viable solutions to the entity management.

However, there are empirical work instruments at the level of economic-financial analysis, out of which most used are the ones based on the direct study of the financial- accounting documents (accounting audits, balance sheets, results accounts).

Anyway, the importance of the economical- financial analysis lies in the fact that the simple reading of the accounting documents cannot give reasonable conclusions, the reading being at most the prolog of a scientifically based analysis, oriented especially towards the discovery of internal levities proper to the economical phenomena manifested at the enterprise level.

A particularity of the instruments used by the economical- financial analysis consists in reconsidering of the assets and liabilities elements reflected with the help of financial and administration accounting, related to the present value (market value) of these, most times these being fundamentally different from the accounting value subscribed in the official accounting documents.

According to the informational support used, distinct analysis instruments are used in practice: the board of the intermediary administration balance accounts, the profitability rates, own financing capacity, working capital, working capital necesity, financial levy effect, profitability threshold, treasury flows etc.

4.6. Stages of the financial analysis process

43 C. Crecană- Op. cit., pag. 32

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The practical activity of financial analysis is strongly correlated to the audit, control and management activity of the enterprises.

This is why we consider that without an economical and financial analysis, the control and realization of the audit and financial management objectives would not be possible.

The achievement of the objectives of the enterprises management, the implementation of planning decisions, the coordination and regulation of the economic activities of the enterprise are based on the economic-financial analysis’ conclusions, and they are linked to the factors and causes of modifications in the economical and financial results, modifications on the solutions offered by the analysis in order to prevent and dismiss some negative factors.

The level of the economic efficiency of the analysis activities- decision- control- audit depends on the investigation methods used, on the qualities, experience and professional training of the personnel, but it depends even more on the personnel ways of thinking.

The success of the economic-financial analysis, in the economic practice, is linked to the honesty and realism in thinking and efectuating the stages of the analysis.

The displaying stages of the practical activity of the economic-financial analysis are:a) realization of the analysis plan;b) gathering and selection of necessary information for the analysis;c) checking the gathered information;d) proper analysis of the economical information (Phases of the analysis process);e) Realization of the analysis report.

a) Realization of the analysis plan supposes mentioning the purpose of the microeconomic analysis, of the main objectives that have to be fulfilled, of the key-issues to be investigated for the goal achievement, of their execution order, the mentioning of the display place of the analysis, of the time period for the display, of the analysis informational base. It also supposes the establishment of the annalists team and the establishment of mixed teams for solving some of the more complex problems and for distributing tasks between the team members.

Concerning the completion of the analysis plan, the team informs itself about the economical- financial situation of the enterprise, about the objective of its activity, about the technological and organizational particularities.

b) Gathering and selection of necessary information for the analysis insures the database necessary for the analysis display. The bearers of economic information, the economic evidence or other information represent the main informational sources which can be used by the analysis.

The direct observations, the clients’ remarks, the materials from mass media regarding economic profiles, the control departments’ reports, the normative acts, the instructions elaborated by the Ministry of Public Finance, the correspondence with the resort minister and the sub unities from the group can offer important information that contributes to the achievement of the analysis objectives.

The selection of the economic information according to its purpose, the use of representative economic information, according attention to different sources for gathering economic information, the grouping and classification of the economic information eases up the display of the microeconomic analysis.

c) Checking the gathered information has the purpose of ensuring the informational basis of the analysis in acordance with the existent economic realities in the enterprise, and it can have three forms: the checking of the presentation form of data, the checking of calculus and background checking of the economic information.

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The checking of the presentation form of the bearers of information (the economic plan, statistical, accounting reports etc.) means that the financial reports have to be made up with the built in norms and their advance from the deposit term, economic content, authorized signatures, and certificated correctors’ point of view.

The calculus checking of the economic indicators, compared to the legal norms emphasize the eventual calculus errors and non-correlations between different economic indicators.

The background checking of the economic information refers to the truthfulness of the information, the concordance between the economic evidence and the practical reality inside the enterprise, the factual checking meant to identify the economic resources of the enterprise, to the correct evaluation of some economic indicators from the balance sheet, from the profit and loss account, from the cash flows situations etc… and finally, to ensuring comparability between distinct economic indicators.

Through the complex checking of the economic information it is guaranteed the precisefulness and realism of the established conclusions in the microeconomic analysis.

d) Proper analysis of the economical information (Phases of the analysis process). The transformation of the economic information with the aid of the economic-financial analysis methods, supposes the display of a post-factual, current (operative) and prospective analysis.

Through the prospective analysis, the modality of funding the economic plan of the enterprise is detailed, with the purpose of ensuring a new objective etalon, actualized in the appreciation of the economic activity that takes place in the entity. This way, the critical points of the plan fulfillment (restrictions in the use of resources, activities with novelty character, with a high degree of complexity) are identified, then the potential deviations from the plan are distinguished, the place and the moment of their appearance, the probability of the potential deviations transformation into real deviations and the imposed prevention measures are established.

The post-factum and current analysis aims at the real possibilities of the enterprise in comparison with the effectively obtained results, emphasizing and valuing the internal reserves identified in the enterprise economy.

The display of this type of analysis supposes taking into consideration the following phases:

1) The ascertain of the economic-financial results of the enterprise at a certain moment or on a given period, the comparison and establishment of the deviations from the plan or in dynamics from one period considered as the basis of comparison for emphasizing the degree of accordance to the plan and the phenomena tendency.

The analysis emphasizes the period between the appearance of deviation moment and the certainty of the deviation moment as well as the modalities of solving the deviation, because time represents an important material reserve in the economic-financial analysis.

2) The decomposing of the economic-financial results into their component elements, in factors of their propelling force, in causes that in fact explain the essence of the phenomena, of the economical and financial results.

Through decomposing, the component parts of the economic phenomena and their correlations are emphasized, the phenomena structures are discovered and the causes of their modifications are distinguished.

3) The third phase of the analysis is The presentation of the correlation between the phenomena or the analyzed economic result and the influence factors (functional correlations or statistical, probabilistic correlations) and the establishment of the inter-conditioning order

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(of analysis) of the influence factors, (that is reverse to the way of formation of the economic phenomena).

According to the type of correlation between the economic phenomena and the influencing factors, the adequate method of establishing the size and direction of the influencing factors is chosen.

Through the calculus of influencing factors it is evaluated the size of enterprise internal reserves concerning the improvement of the economic-financial performance, the priorities of reserves valuation are being established according to: their size, the importance of the domain in which they are included, the disposable time for valuation, the emphasizing efficiency of the valuation of reserves, their evolution tendency.

e) The Synthesis presented in the analysis report conveys the possibility of establishing the overall conclusions concerning the positive and negative aspects of the economic-financial results of the enterprise. Relying on the knowledge of factors and causes of economic- financial deviations from the plan, or in relation to a timeframe taken as a comparison base, the measures that have to be made for the straightening or improvement of the situation are elaborated. This is the only way that multiple variants of strategies for the improvement of the enterprise situation can be offered to the management of the enterprise, in order to make possible the adoption of an optimal decision. According to the adopted decision and according to the future periods’ conditions, the forecast of the economic-financial situation of the enterprise is being elaborated.

4.7. The Objectives of the financial statements and the financial analysis report44

The objective of the financial situations and of the financial analysis reports is to provide information about the financial position, performances, financial position changes and inform about the risk of loosing the investment made in the enterprise capital, information that a large number of users could use when taking economic decisions.

The financial situations elaborated for this purpose satisfy the common necessities of the majority of users. However, the financial situations do not confer all the information which the users need when taking economic decisions, because in most of cases, these reflect the financial effects of some past events and do not reflect the non-financial information. Thus, the financial analysis reports overcome the necesity of information for the internal and external users.

The financial situations represent, also, the managers results for enterprise administration, including the means by which the given resources are administrated. Those users that wish to evaluate the administration modality or the management’s degree of responsibility, are doing this in order to be able to take economic decisions; these decisions can, for example, refer to the option of keeping or selling the investment in the respective enterprise or to the replacement or reconnection of the management.

The economic decisions that are taken by the users of financial situations are based on the evaluation of an enterprise’ capacity to generate cash or equivalents of cash, and on the evaluation of the safety and duration of cash generation. And lastly, on this depends, the capacity of an enterprise to pay its employees and suppliers, to pay debts, to refund credits, and to remunerate its owners. It will be much easier for the users to evaluate this capacity of generating cash or cash equivalents if they are offered detailed and concentrated information

44 OMFP no. 3055/2009, pentru aprobarea Reglementărilor contabile conforme cu directivele europene published in M. Of. no. 766/10.11.2009

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on the financial position, performance and modifications of financial position of an enterprise.

The financial position of an enterprise is influenced by the economic resources that it controlls, by its financial structure, by its liquidity and solvency, as well as by its capacity of adapting to the changes taking place in the medium where the activity is efectuated.

The information about the economic resources controlled by the enterprise and its previous capacity to modify these resources is useful for anticipating the enterprise capacity of generating cash or equivalents of cash in the future.

The information about the financial structure is useful for anticipating the future crediting needs and the way which the profits and the future treasury flows will be distributed between those who benefit from the enterprise; these are also useful for anticipating the enterprise chances to receive funds in the future.

The information about liquidity and solvency is useful for anticipating the enterprise capacity of respecting its due financial arrangements.

The information about an enterprise performance, especially about its profitability, is necessary for evaluating the potential modifications of economic resources which the enterprise will be able to control in the future. Thus, the information about the performance variability is important. The information about the performance is useful for anticipating the enterprise capacity of generating treasury flows using the existent resources. They are also useful for the formulation of arguments related to the efficiency of the enterprise when using new resources.

The information concerning the modifications of the financial position of an enterprise is useful for evaluating its exploitation, investment and financing activities for the reporting period. This information is useful as it conferrs the user a starting point for evaluating the enterprise capacity of generating cash or cash equivalents, for evaluating the enterprise needs of using these treasury flows. When drawing up a situation of financial position modification, the funds could be defined in diverse ways, such as: all financial resources, working capital, liquidities or cash.

The information regarding the financial position is offered by the balance sheet. The information related to the performance is conveyed, in the first place, by the profit and loss account. The information concerning the modifications of financial position is provided in financial situations through a distinct situation.

The component parts of the financial situations are inter-related, because they reflect distinct aspects of the same transactions or of other events. Although each situation confers diverse information, it is probable that none of them serves a single purpose or offers all the information imposed by the specific necessities of users. For example, the profit and loss account offers an incomplete image of the performance if it is not used together with the balance sheet and the situation of financial position modifications.

The financial situations also contain notes, supplementary materials, as well as other information. For example, they can contain supplementary information relevant for the users necessities, related to the balance sheets and profit and loss accounts elements. Also, information concerning risks and uncertainties that affect the enterprise, as well as any resources and obligations that do not appear in the balance sheet (e.g., mineral reserves) can be included. The information about the geographic and industrial segments, as well as about the effect of the price changes on the enterprise can also be offered under the form of supplementary information.

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4.8. The users of financial statements45 and financial analysis reports

The users of financial situations and financial analysis reports include managers, present and potential investors, employed personnel, creditors, suppliers and other commercial creditors, clients, financial annalists, government and its institutions, as well as the public. The mentioned above, use the financial situations in order to satisfy a part of their diverse necessities of information, in the following way:

The main responsibility of making and presenting the financial situations of the enterprise is passed over to the management department. The enterprise managers are interested also in the information included in the financial situations, even if they have access to the supplementary financial and administration information that help to the planning process, decision taking and control. The management has the capacity of determining the form and content of such supplementary information in order to satisfy its own necessities.

With respect to all of these, at the enterprise level, the financial analysis must take place in a continuous way. The primary objective of the managers is having a permanent control upon the financial activity of the trading companies, in order to maintain the entity in a permanent equilibrium. The information provided by the financial analysis must be a starting point for the fundamentation of current as well as future and strategic operative decisions concerning the directives that the enterprise is to follow; these would be: the expansion or the restrain of the business portfolio, the evolution of some financial states such as the service of duty, the financial liquidity and solvency, the financial autonomy and independence, all of these hapening while in the financial safety halls that prevent the bankruptcy risk of the entity and ensure the financial security of the enterprise. Thus, the managers take over the risk of the entity entering into incapacity of payment because of an incomplete financial and general management, practiced during business administration.

The investors. The capital market investors’ object is to speculate the price of the purchased shares and to obtain dividends that are at least equal with the interest provided by banks for the sums deposited under the form of deposits on distinct terms. Thus, the investors need financial information in order to decide if they must buy, keep, or sell the shares they own in the respective entity. The shareholders are also interested in the information that allows them to evaluate the enterprise capacity of paying its dividends. The capital tenders and their consultants are preoccupied by the inherent risk of the transactions and of the benefit brought by their investments. In the same time, the investors assume the risk of loosing the capital involved in the respective business.

The employees. The employed personnel and their representative groups (unions etc) are interested in the information regarding the stability and profitability of the enterprises that employ them. They are interested in the information that allows them to evaluate the enterprise capacity of offering remunerations, pensions and other advantages, as well as professional opportunities. The employed personnel assume the risk of loosing their workplaces.

The financial creditors. The financial creditors are interested in the information that permits them to determine whether the loans granted and their afferent interests will be reimbursed at the payment due date. The banks are the creditors that finance mainly the economic activity of a firm. The funds are put at the disposal of the investors in different and multiple forms. The financial-banking creditors are interested in the information which allows them to determine if the given credits and their afferent interests are going to be reimbursed at the due date. This way, the financial politics and strategy of banks, the means for risks avoidance, has an impact even on the way the financial analysis of the entity is made. From the point of view of the investors and creditors, the difference consists on one hand, of the 45 Ibid, page. 40-41

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way which they analyze future projects, and on the other the investors wish that the money invested in a business generate a maximum profit. The creditors, on the other side, are preoccupied mainly by transforming money into valuable assets and also by their in time retrieval of the current rates, that is of the credit rates and afferent interests for the granted credits.

In the same time, the investors are aware that by investing in a business they are exposed to certain risks of loosing the investment, therefore they expect that the obtained profit will be according to the risk at which they are exposing their financial resources. The banking creditors, on the other hand, ensure themselves against the risk of loosing their granted loans, through establishing some material guarantees.

The suppliers and other commercial creditors. The suppliers and other commercial creditors are interested in the information that allow them to establish if the sums owned to them (receivables) are going to be paid on the due date. The commercial creditors are probably interested in an enterprise on a shorter period than the banking- creditors, but only if they do not depend on the continuity of the enterprise activity as main client. The suppliers and other commercial creditors that do business with an enterprise at which the financial dependency degree grows over 50% from the entity assets, assume for themselves a higher commercial risk than the risk the owners of the entity assume in the moment of setting up the entity.

The Clients. The clients are interested in information about the continuity of an enterprise activity, especially when they have a long term collaboration with the respective enterprise or depend on it. Thus, the clients assume a commercial risk.

The financial analysts. Of some specialized institutions are periodically evaluating the entities standing at the request of some clients, in the case of commercial litigations or, when annually evaluating the entity top.

The government and its institutions. The government and its institutions are interested in resource allocation and, implicitly, in the enterprise activity. These also ask for information regarding the regulating of the enterprise activity, the determining of the fiscal policy and as a base for computing the national income and other similar statistical indicators. The government and its institutions assume a fiscal risk generated by the non-cashing in due time of the fiscal and social obligations from the enterprise.

The public. The enterprises influence the public in a variety of ways. For example, the enterprises can have a substantial contribution in the local economy taking into consideration the number of employees and the collaboration with the local suppliers. The financial situations and the financial analysis reports can help the public by offering information about the recent evolution and the tendencies linked to the enterprise prosperity and the due time activities sphere. The public takes into consideration the investment risk as well as the commercial risk, when it goes into business with an enterprise.

Although not all the information necessities of the users can be satisfied by the financial situations, there are common demands for all the users. As the investors are the suppliers of risk capital of the enterprise, providing financial situations satisfies their necessities and also, will satisfy the majority of necessities of other users.

All the above presented users, utilise the information provided by the post-factual analysis, as well as the current one. Also, they are interested by the future financial potential of the entity and the risks that come with it. Otherwise, the precedent performances of the entity often represent a useful barometer for the evaluation of future performances. That is why any partner of the entity is interested in knowing the previous sales, expenses, profit, and cash-flow and the recuperation period trends. These trends offer a complete image of the past managerial performance and are constituted in a possible analysis system for evaluating future performances of the entity. In addition, an analysis of the current position of the enterprise

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emphasizes the assets used in the business, the debts that must be acquitted, the entity monetary state, the report between receivables and obligations and how updated is the enterprise fortune. Therefore we consider that the identification of the precedent performances and the current position are very important for evaluating future performances of the entity.

The potential future of a firm can be evaluated with the help of some methods and instruments of prediction of the entity’s business behavior. This way, with the help of methods of results actualization with inflation, methods of analysis of future foreign exchange, methods of prediction of economic growth for the enterprise, and of the bankruptcy state, the following objectives are evaluated:

ü if the economic growth of the entity can be sustained, on the basis of the performance of some volution criteria such as: the equity efficiency, the dividend rate and the reinvested profit rate;

ü the evolution of the entity actions stock exchange quotation with the help of the following indicators: the price per share and the gain per share;

ü The bankruptcy risk that can be anticipated with the help of debt rates and some specific models: banking, statistical, managerial, patrimonial etc.

Chapter 5 THE FINANCIAL ANALYSIS POSITION OF THE ENTERPRISE

5.1. General aspects concerning the financial position of the enterprise

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International Accounting Standards mention the fact that in a report, apart from the financial situation (balance-sheet, profit and loss account, modifications of the owned capital, situation of cash-flows, accounting policies and explanatory notes) financial analysis describes and explains the main characteristics of the financial performance and positioning of an enterprise, as well as the main uncertainties that the enterprise is confronted with. Such a report may include an analysis of the following aspects:

a) Main factors and influences that determine performance, including modifications of the environment in which the enterprise develops its activity, the companies’ reactions to the given modifications and their effects, as well as the investment policies for maintaining and improving these performances including dividend policy.

b) The enterprise’s financial resources, the indebt policy and risk management.c) Strong aspects and enterprise resource whose values are not reflected in the balance-

sheet according to International Accounting Standards46 .According to these international articles we consider that the financial analysis is aiming for:

- analysis of financial position, based on the balance-sheet;- analysis of financial performance, based on profit and loss account;- analysis of modifications of the financial position, based on the Treasury’s

flows;- analysis of the policy of the risk management.

The balance-sheet is an accounting document of synthesis that highlights active and passive elements of the enterprise at the ending of the financial year. The balance sheet structure according to financial regulation. 47

Table 5.1 The Balance SheetNr. SOLD at Previous CurrentA B 1 2

A. FIXED ASSETS 4,343,415,765 4,417,134,375 I INTANGIBLES ASSETS 2,558,993 111,220,628

1 Constitutive Expenses 1 2 Development Expenses 2 3 Licenses and Other Intangibles Assets 3 2,558,993 13.845.0914 Goodwill 4 5 Intangible Capital Work in Progres 5 97.375.537

TOTAL: (raw. 01 at 05) 6 2,558,993 111,220,628 II TANGIBLE ASSETS 4,246,191,642 4,252,140,150

1 Land and Construction 7 3,606,018,314 3,571,980,3652 Installation and Machines 8 367,133,191 271,247,285

3Other installation, equipment and furniture 9 21,092,995 16,868,420

4 Tangible Capital Work in Progres 10 251,947,142 392,044,080 TOTAL: (raw. 07 at 10) 11 4,246,191,642 4,252,140,150 III FINANCIAL ASSETS 94,665,130 53,773,597

1Financial investments as part of the company 12

2Receivables about the companies outside the company 13

46 International Accounting Standards 2000, Editura Economica, Bucuresti, 2000, p.80-81

47 Idem

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3 Financial investments 14 19,937,500 27,729,000

4Receivables from financial investements 15

5 Fin. Investements owned as assets 16 73,119,645 25,634,3756 Other receivables 17 1,607,985 410,2227 The company's own shares 18

TOTAL: (raw. 12 at 18) 19 94,665,130 53,773,597 ASSETS - TOTAL (raw. 06+11+19) 20 4,343,415,765 4,417,134,375 B. CURRENT ASSETS 8,140,366,925 5,946,395,920 I STOCKS 920,324,737 887,107,754

1 Raw materials and consumables 21 919,796,721 887,022,6472 Work in progres 22 3 Finished goods and wares 23 393,398 4 Advances to ware' s suppliers 24 134,618 85,107

TOTAL: (raw. 21 at 24) 25 920,324,737 887,107,754 II RECEIVABLES 6,051,496,941 4,463,048,095

1 Trade receivables 26 5,650,272,899 3,769,605,002

2Collected numbers as part of the company 27

3Collected numbers from financial investements 28

4 Other receivables 29 401,224,042 693,443,0935 Receivables on called up share capital 30

TOTAL: (raw. 26 at 30) 31 6,051,496,941 4,463,048,095

IIISHORT TERM FINANCIAL INVESTMENT 704,933,205 0


2 Other short term fin. investments 33 704,933,205 TOTAL: (raw. 32 at 34) 34 704,933,205 0 IV CASH AND CURRENT ACCOUNT 35 463,612,042 596,240,071 TOTAL (raw. 25+31+34+35) 36 8,140,366,925 5,946,395,920 C. PREPAYMENTS 37 9,962,291 15,677,068 D. DEBTS PAYED DURING A YEAR 6,481,350,819 3,627,434,892

1 Loans from debentures 38 2 Credits 39 1,981,103,511 748,935,425

3 Collected advance 40 949,574 22,330,7634 Trade debts 41 3,938,552,829 2,205,920,8165 Payed trade efect 42 6 Debts of the companies from group 43 7 Fin. Investments' debts 44 3,604,500 3,000,0008 Other debts 45 557,140,405 647,247,888

TOTAL: (raw. 38 at 45) 46 6,481,350,819 3,627,434,892

E. CURRENT ASSETS , CURRENT DEBTS - NET 47 1,668,274,212 2,334,638,096

(raw. 36+37-46-62)

F. TOTAL ASSETS MINUS CURRENT DEBTS (raw. 20+47) 48 6,010,524,830 6,750,989,582

G. DEBTS PAYED OVER A YEAR 1,045,348,891 1,056,970,145

1 Loans from debentures 49 0

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2 Credits 50 919,045,672 1,056,970,1453 Collected advance 51 0 4 Trade debts 52 0 5 Payed trade efect 53 0 6 Debts of the companies from group 54 0 7 Fin. Investments' debts 55 126,303,219 8 Other debts 56 0

TOTAL: (raw. 49 at 56) 57 1,045,348,891 1,056,970,145 H. PROVISIONS

1 Provisions for pensions 58 0 2 Other provisions 59 9,463,507 396,550,958

TOTAL: (raw. 59+60) 60 9,463,507 396,550,958

I. ADVACE REVENUES: (raw. 62+63) 61 1,869,332 782,889

1 Subsidies 62 1,165,147 782,8892 Advance revenue 63 704,185

J. CAPITAL AND RESERVES 4,955,712,432 5,297,468,479 I CAPITAL (raw. 65 at 67): 64 3,029,826,406 3,031,407,325 * unpayed shared capital 65 * payed shared capital 66 3,029,826,406 3,031,407,325 * administration's capital 67 II CAPITAL BONUS 68

IIIREVALUATION SOLD CR 69 480,444,565 625,007,898

SOLD DB 70

IV RESERVES (raw. 72 at 75) 71 1,407,763,969 1,453,951,681 Legally Reserve 72 47,859,353 54,607,539

1 Reserve for own shares 73 2 Statute Reserve 74 3 Other reserve 75 1,359,904,616 1,399,344,142

V

ACC DEFICIT SOLD CR 76 37,677,492 187,101,575

SOLD DB 77 VI

PROFIT AND LOSS ACCOUNT SOLD CR 78 806,646,231 373,953,942

SOLD DB 79

PROFIT ALLOCATION 80 806,646,231 373,953,942 Own Share 81

TOTAL: (raw. 64+68+69-70+71+72+76-77+78-79-80-81) 82 4,955,712,432 5,297,468,479

Public Capital 83 TOTAL: (raw. 82+83) 84 4,955,712,432 5,297,468,479 TOTAL ASSETS (raw. 20+36+37) 12,493,744,981 10,379,207,363

TOTAL PASSIVE (Liabilities and Equity) (raw. 46+57+60+61+84) 12,493,744,981 10,379,207,363

Regarding the balance-sheet, legal norms have the following rules:- If an asset or a debt from the balance-sheet is linked to more than one element,

its relation needs to be presented in explanatory notes, if such a presentation is essential for understanding of annual financial reports.

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- Shares held at affiliated entities need to be presented in the working frame of the elements with this dedicated purpose.

- In case there is no obligation to present them as debt, all commitments under the form of guarantees of any kind, need to be clearly presented in the explanatory notes; we also need to make distinction between different types of guarantees acknowledged by national legislation. Also, a separate presentation of any valuable guarantees needs to be made if there is such a case. This type of commitments that exist in the relation of affiliated entities need to be presented distinctly.

This kind of balance-sheet structure (list) highlights the assets, debts and capital as well as their relationship with respect to financial position.

The analysis of the financial position is based on data from the balance-sheet and it comprises:- The analysis of the economic resources controlled by the entity, meaning the

analysis of the assets and equity.- The analysis of the financial structure of the assets, debts and capital. The

financial structure of the capital shows the way profit will be divided among different financiers as well as the capacity for future financial growth;

- The analysis of the solvency and liquidity, expressed by their ratios;- Financial adaptability, meaning the capacity of the enterprise to influence the

volume and the moment of generating cash-flows. Financial adaptability of a company is often highlighted in difficult times, when the company records losses or when financial investment opportunities occur.

Financial adaptability depends on the following factors: Means of increasing social capital; Means of reducing capital and payment of debts; The possibility of obtaining cash by selling available assets, without

affecting the continuity of business like portfolio financial investments which assure liquidity reserves;

Realizing an important growth in the cash-flow of the operating activity.Assets are company controlled resources resulted from past events and out of which

future economic benefits are to be expected.48

Equity represents obligations of a company as a result of past events, and whose payment is expected as an economic benefit outcome.49

Social capital highlights the relationship between the assets and equity, and is mathematically computed as the difference between assets and equity of the company.

The active elements are grouped according to nature, destination and level of liquidity, and passive elements are grouped according to nature, origin and eligibility.

1.) According to their nature, elements of the active can be grouped in:

a) non-current assetsb) current assets c) in advance expenses /prepayments

Elements of the passive can be grouped according to the same criterion in:a.) debts towards 3rd parties

48 Hennie van Greuning, Marius Koen, Standardele Internaţionale de Contabilitate-Ghid practic,Casa de Editură IRECSON, Bucureşti 2003, p.1249 idem

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b.) risk and expense provisionsc.) accrued incomesd.) capital and reserves

2.) According to destination elements of the active can be structured in :

a.) Assets used in more financial cycles formed out of non-current assets.

b.) Assets used in a single financial cycle which do not include current assets and expenses.

3.) Passive elements grouped after origin as follows: a.) debts towards 3rd parties which include: total

debts, risk and expense provisions, and accrued incomes;

b.) Debts towards share-holders which do not include capital and reserves.

4.) According to level of liquidity, elements of the active are:

a.) assets with reduced liquidity, which do not include non-current assets;

b.) assets with partial liquidity formed out of stocks, debts and advance expenses/prepayments;

c.) Liquid assets comprising short term financial investments and bank accounts.

5.) According to the eligibility, passive elements are grouped in :

a.) eligible passives on short term which comprise current debt(debt that needs to be paid in one year as well as accrued incomes);

b.) eligible passives on long term which include long term debts, risk and expense provisions, and investment subsidies;

c.) Capital and reserves represent debts towards share-holders and associates for an undetermined period of time.

In the balance-sheet, assets are presented in the order of the liquidity, starting with the intangible assets, with a reduced liquidity, ending with current assets which have a high liquidity. The company’s obligations are presented in the balance-sheet according to their eligibility, starting with current debts, going on to long term debts and ending with commitments towards shareholders and associates, reflected in the company’s capital.

The analysis of the financial position based on the balance-sheet aims at its three components:

- Dynamic analysis or horizontal analysis which is based on indexes in which balance-sheet positions are expressed as modifications in percentage towards the value of the same position of a year considered equal to 100% (fixed base index), or they are successively compared to a previous period (chain-based indexes).

- Static analysis or vertical analysis is based on shares, in which each position from the balance-sheet is expressed as a percentage from the total assets, debts, and capital.

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5.2 The Assets Analysis

5.2.1 Assets Vertical Analysis The active of the balance-sheet comprises on one hand, the net value of cash, and on the other hand debts that the company has to encase from 3rd parties.The balance sheet’s assets include on one hand the net value of the material means and on the other hand, the debts which the enterprise has to get from the third parties.The net value of an asset is obtained by deducting from its entrance value the amortizations and the provisions legally constituted.According to legal stipulation, the balance sheet’s assets are structured in the following groups:

A. Non-current assetsB. Current assetsC. Prepayments/Advanced expensesD. Net current assetsE. Total assets minus current liabilities

The assets which are contained in the balance sheet for the current and previous periods and according to Romanian law at SC AMIGO SA, are presented in table 5.1.

The assets horizontal analysis is based on the computation of some indexes which represent the percentage modifications of each asset compared to the same asset from a base year (considered equal to 100%) or the value of the previous year.

The evolution of the assets for SC AMIGO SA is presented in the Table no. 5.2, where the indexes of each asset were computed, having the previous period as a base for comparison.

Table 5.2 The Balance Sheet of SC AMIGO SANo. SOLD at Previous Current IndexesA B 1 2 3

A. FIXED ASSETS 4,343,415,765 4,417,134,375 101.7 I INTANGIBLES ASSETS 2,558,993 111,220,628 n.a

1 Constitutive Expenses 1 2 Development Expenses 2

3Licenses and Other Intangibles Assets 3 2,558,993 13,845,091 n.a

4 Goodwill 4 5 Intangible Capital Work in Progres 5 97,375,537

TOTAL: (raw. 01 at 05) 6 2,558,993 111,220,628 n.a II TANGIBLE ASSETS 4,246,191,642 4,252,140,150 100.14

1 Land and Construction 7 3,606,018,314 3,571,980,365 99.062 Installation and Machines 8 367,133,191 271,247,285 73.88

3Other installation, equipment and furniture 9 21,092,995 16,868,420 79.97

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4 Tangible Capital Work in Progres 10 251,947,142 392,044,080 155.61 TOTAL: (raw. 07 at 10) 11 4,246,191,642 4,252,140,150 100.14 III FINANCIAL ASSETS 94,665,130 53,773,597 56.8


2Receivables about the companies outside the company 13

3 Financial investments 14 19,937,500 27,729,000 139.08

4Receivables from financial investements 15

5Fin. Investements owned as assets 16 73,119,645 25,634,375 35.06

6 Other receivables 17 1,607,985 410,222 25.517 The company's own shares 18

TOTAL: (raw. 12 at 18) 19 94,665,130 53,773,597 56.8

ASSETS - TOTAL (raw. 06+11+19) 20 4,343,415,765 4,417,134,375 101.7

B. CURRENT ASSETS 8,140,366,925 5,946,395,920 73.05 I STOCKS 920,324,737 887,107,754 96.39

1 Raw materials and consumables 21 919,796,721 887,022,647 96.442 Work in progres 22 3 Finished goods and wares 23 393,398 n.a4 Advances to ware' s suppliers 24 134,618 85,107 63.22

TOTAL: (raw. 21 at 24) 25 920,324,737 887,107,754 96.39 II RECEIVABLES 6,051,496,941 4,463,048,095 73.75

1 Trade receivables 26 5,650,272,899 3,769,605,002 66.72

2Collected numbers as part of the company 27

3Collected numbers from financial investements 28

4 Other receivables 29 40,124,042 693,443,093 172.83

5Receivables on called up share capital 30

TOTAL: (raw. 26 at 30) 31 6,051,496,941 4,463,048,095 73.75

IIISHORT TERM FINANCIAL INVESTMENT 704,933,205 0 0


2 Other short term fin. investments 33 704,933,205 n.a TOTAL: (raw. 32 at 34) 34 704,933,205 0 n.a

IVCASH AND CURRENT ACCOUNT 35 463,612,042 596,240,071 128.61

TOTAL (raw. 25+31+34+35) 36 8,140,366,925 5,946,395,920 73.05 C. PREPAYMENTS 37 9,962,291 15,677,068 157.36

D. DEBTS PAYED DURING A YEAR 6,481,350,819 3,627,434,892 55.97

Loans from debentures 38 1 Credits 39 1,981,103,511 748,935,425 37.8

Collected advance 40 949,574 22,330,763 n.a2 Trade debts 41 3,938,552,829 2,205,920,816 56.013 Payed trade efect 42

4Debts of the companies from group 43

5 Fin. Investments' debts 44 3,604,500 3,000,000 83.23

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6 Other debts 45 557,140,405 647,247,888 116.17 TOTAL: (raw. 38 at 45) 46 6,481,350,819 3,627,434,892 55.97

E. CURRENT ASSETS , CURRENT DEBTS - NET 47 1,668,274,212 2,334,638,096 139.94

(raw. 36+37-46-62)

F. TOTAL ASSETS MINUS CURRENT DEBTS (raw. 20+47) 48 6,010,524,830 6,750,989,582 112.32

G. DEBTS PAYED OVER A YEAR 1,045,348,891 1,056,970,145 101.11

1 Loans from debentures 49 0 2 Credits 50 919,045,672 1,056,970,145 115.013 Collected advance 51 0 4 Trade debts 52 0 5 Payed trade efect 53 0

6Debts of the companies from group 54 0

7 Fin. Investments' debts 55 126,303,219 n.a8 Other debts 56 0

TOTAL: (raw. 49 at 56) 57 1,045,348,891 1,056,970,145 101.11 H. PROVISIONS

1 Provisions for pensions 58 0 2 Other provisions 59 9,463,507 396,550,958 n.a

TOTAL: (raw. 59+60) 60 9,463,507 396,550,958 n.a

I. ADVACE REVENUES: (raw. 62+63) 61 1,869,332 782,889 41.88

1 Subsidies 62 1,165,147 782,889 67.192 Advance revenue 63 704,185 0

J. CAPITAL AND RESERVES 4,955,712,432 5,297,468,479 106.9 I CAPITAL (raw. 65 at 67): 64 3,029,826,406 3,031,407,325 100.05 * unpayed shared capital 65 * payed shared capital 66 3,029,826,406 3,031,407,325 100.05 * administration's capital 67 II CAPITAL BONUS 68

IIIREVALUATION SOLD CR 69 480,444,565 625,007,898 130.09

SOLD DB 70

IV RESERVES (raw. 72 at 75) 71 1,407,763,969 1,453,951,681 103.28 Legally Reserve 72 47,859,353 54,607,539 114.1

1 Reserve for own shares 73 2 Statute Reserve 74 3 Other reserve 75 1,359,904,616 1,399,344,142 102.9

VACC DEFICIT SOLD CR 76 37,677,492 187,101,575 496.59

SOLD DB 77

VIPROFIT AND LOSS ACCOUNT SOLD CR 78 806,646,231 373,953,942 46.36

SOLD DB 79

PROFIT ALLOCATION 80 806,646,231 373,953,942 46.36

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Own Share 81

TOTAL: (raw. 64+68+69-70+71+72+76-77+78-79-80-81) 82 4,955,712,432 5,297,468,479 106.9

Public Capital 83 TOTAL: (raw. 82+83) 84 4,955,712,432 5,297,468,479 106.9 TOTAL ASSETS (raw. 20+36+37) 12,493,744,981 10,379,207,363 83.08

TOTAL PASSIVE (Liabilities and Equity) (raw. 46+57+60+61+84) 12,493,744,981 10,379,207,363 83.08

This analysis takes in consideration the computation of the chained indexes.The horizontal assets analysis deals with the detailed analysis by components,

meaning by groups of assets and by elements in each group.A. The non-current assets are formed of mobile and immobile goods, tangible and

intangible, achieved from the third parties or produced in the enterprise and which enter into its patrimony through different ways (investments, donations, etc)

From their material content point of view, the non-current assets are grouped in:- Intangible assets- Tangible assets- Financial assets

I. THE INTANGIBLE ASSETS:According to the legal stipulations, an intangible asset is an identifiable, not monetary

asset, without a material support and held for utilization in the process of production, or in the process of goods and services delivery, to be rented to the third parties or for administrative purposes.IAS 38 applies to all intangible assets which were not treated in any other IAS 38: trademarks, computer programs (software), licenses, franchises and other intangible assets.According to the international regulation (IFRS), an intangible asset is an identifiable and not monetary asset:

Without physical substance Which is separable Which may be separated or divided by the entity and sold, transferred, authorized,

rented or changed, individually or together with a contract, assets or correspondent debt and

Which is controlled and it may be distinguished from the commercial fond of the enterprise

An intangible asset must be recognized in the balance sheet if it’s estimated that it will generate economic benefits for the entity and the asset’s cost may be evaluated in a credible way. All the other costs corresponding to the intangible assets appear as expenses.

As intangible assets there are:- Setup costs- Development costs- Concessions, patents, licenses, trademarks and similar rights and assets, except the

ones created internally in the unity- Goodwill- Other intangible assets- Advanced payments and intangible assets in progress

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II. THE TANGIBLE ASSETS:The tangible assets represent the productive component of an enterprise, being

recognized in the financial position, if it is estimated that they will generate economic benefits for the enterprise and the assets cost may be evaluated in a credible manner.According to the legal stipulations, the tangible stipulations are assets which accomplish the following conditions:

- They are held by the enterprise for the own production, held to be rented to the third parties or to be used in administrative purposes.

- They are used in a one year period.- They have a value greater than the limit established in the legal stipulations. At the

present moment, the minimum limit established by the Government is of 1,800 lei.

In the category of tangible assets are included the following categories:1. Land and buildings2. Plant and machinery, motor vehicles3. Other plant and machinery, furniture4. Advanced payments and tangible assets in progress

III. THE FINANCIAL ASSETS:The financial assets are formed out of the shares in related parties, participating interests, loans related to the company granted to the entities despite the participating interests, other investments held as assets, other loans.In the receivables accounts, representing loans granted, the sums granted to the third parties in the basis of certain contracts for which the entity colects interests, are registered according to the legal stipulations.As other loans there are: guarantees, deposits and bails made by the entity to the third parties.

B. The current assets represent a component of the assets, connected to one cycle of operation only. That’s why their transforming speed is higher than in the tangible assets. From the financial point of view, the increase in the current assets rotation speed , deals with the creation of the necessary premises for the increasing the entity’s auto financing capacity.

According to the legal stipulations, an asset is a current asset when:a. It is acquired or produced for its own consumption or for the purpose of

commercialization and it is expected to be realized within a period of 12 months from the balance sheet’s date.

b. It is represented by the receivables related to the operation cycle.c. It is represented by the treasury or equivalents of the treasury for which the utilization

is not restricted.

The exploitation cycle of an entity represents the timeframe between the acquisition of the raw materials which enter a transformation process and finalizing it into treasury in the form of a treasury equivalent.The treasury equivalents represent the short term financial investments, which are liquid and easy to convert into cash and are set under an insignificant risk of value change.

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In the category of current assets, there are:a. Inventories, including the value of the services for which there has not been an invoice

issued.b. Receivablesc. Short term investmentsd. Cash in hand and cash in bank accounts

I. Receivables represent the sums held by third parties.

In general, the increase of the net turnover determins an increase of the receivables volume, which on long term may cause financial liquidity problems when the issued invoices are not encashed on time. Another category of receivables is represented by the debtors which are receivables to some other juridical or natural persons. If the sails structure modifies in the favour of some products with high values, then an increase of the receivables will ocur.

II. Short term invesments represent the bonds emitted and rebought, the bonds acquisitioned and other values acquisitioned with the purpose of realising a profit on a short term.

When entring an entity the short term financial investments are evaluated by the acquisition cost, which means the buying cost or at the established value according to the contracts.When exiting the financial administration, the LIFO, FIFO or CMP methods are applied.For depreciating investments, adjustments for loss of value are reflected at the end of the financial exercise, on the basis of expenses.At the end of each financial exercise, the adjustments are increased, decreased or annuled, depending by case.III. Cash in hand and cash in bank accounts:

The financial operations regarding the sums existent in the enterprises payment office are efectuated according to the reglementations set up by the National Bank of Romania.The bank accounts are formed of: outstanding values, like cheques and bills of exchange, short term bank loans, accrued interest on credits granted by the bank in current accounts.The sums deposited at the banks are registered in a different account.The accrued interest receivables are registered differently in the accounting in comparison with the accrued interest payables and also in comparison with the accrued interest on short term loans.The accrued interest receivables and payables are registered as financial expenses or financial incomes.The opperations regarding the encashments and the payments in foreign currencies are registered in the accounting at the exchange rate of the day, communicated by the National Bank of Romania.The selling-buying currency opperations are registered in the accounting at the exchange rate used by the commercial bank , rate at which the currency transaction is realised, without generating exchange rates differences in the accounting.

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At the closing of the financial exercise the exchange rate differences - resulted from the evaluation of the currency values and some other treasury values, like letter of credits, or short term deposits at the exchange rate communicated by the National Bank of Romania, valid at the closing date of the financial exercise,- are registered in the account for expenses or incomes.In order to pay some bonds to the suppliers, the entities may ask for the opening of letters of credits in lei or in foreign currencies.The sums deposited in the banks and the cash sums which are at the disposal of the personnel or third parties in order to make some payments for the entity, are registered in the accounting in different accounts.In the account of internal transfers are registered the transfers between bank accounts and the payment office of the entity as well as between accounts among banks.The financial opperations in lei or in foreign currencies are effectuated by respecting the rules established by the National Romanian Bank.The short term financial investments and the petty cash and bank accounts form the treasury of the enterprise.

C. PREPAYMENTS

The prepayments are expenses which are paid in the current exercise but which reffer to a future financial exercise when it is going to be included in costs formed by expenses with rents, subscriptions and other expenses made in advance. In general, if these exspenses grow, the monetary surplus has the tendency of obtaining future benefits.

D. WORKING CAPITAL

In the entity analyzed, the net current asset presented positive values, on the whole period it has registered positive values.

E. TOTAL ASSETS MINUS CURRENT DEBTS

At SC AMIGO SA this indicator has registered an increase by 12.32%. This evolution was influenced by the current debts evolution, the total asset has registered a permanent increase on the whole period analyzed.

5.2.2. The Assets Vertical Analysis

From the data presented in table 5.1 we notice the that non-current assets have a growing evolution in comparison with the current assets in the total assets balance sheet, with a stabilization tendency for the current period.

For an even more detailed analysis of the asset structure we can refer to its analysis on the basis of structure rates.

The structure rates (percentage) of the balance sheet assets divide into: The Non-current Assets or Fixed Ratio; The Current Assets Ratio; Prepayments Ratio. These ratios are computed in table no.5.3.

Table 5.3 The Balance Sheet Structure

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No. SOLD at Previous Ratios

% Current Ratios

% A B 4 5

A. FIXED ASSETS 34.76 42.56 I INTANGIBLES ASSETS 0.02 1.07

1 Constitutive Expenses 1 0 02 Development Expenses 2 0 03 Licenses and Other Intangibles Assets 3 0.02 0.134 Goodwill 4 0 05 Intangible Capital Work in Progres 5 0 0.94

TOTAL: (raw. 01 at 05) 6 0.02 1.07 II TANGIBLE ASSETS 33.99 40.97

1 Land and Construction 7 28.86 34.412 Installation and Machines 8 2.94 2.613 Other installation, equipment and furniture 9 0.17 0.164 Tangible Capital Work in Progres 10 2.02 3.78

TOTAL: (raw. 07 at 10) 11 33.99 40.97 III FINANCIAL ASSETS 0.76 0.52

1 Financial investments as part of the company 12 0 0

2Receivables about the companies outside the company 13 0 0

3 Financial investments 14 0.16 0.274 Receivables from financial investements 15 0 05 Fin. Investements owned as assets 16 0.59 0.256 Other receivables 17 0.01 07 The company's own shares 18 0 0

TOTAL: (raw. 12 at 18) 19 0.76 0.52 ASSETS - TOTAL (raw. 06+11+19) 20 34.76 42.56 B. CURRENT ASSETS 65.16 57.29 I STOCKS 7.37 8.55

1 Raw materials and consumables 21 7.36 8.552 Work in progres 22 0 03 Finished goods and wares 23 0 04 Advances to ware' s suppliers 24 0 0

TOTAL: (raw. 21 at 24) 25 7.37 8.55 II RECEIVABLES 48.44 43

1 Trade receivables 26 45.22 36.322 Collected numbers as part of the company 27 0 03 Collected numbers from financial investements 28 0 04 Other receivables 29 3.21 6.685 Receivables on called up share capital 30 0 0

TOTAL: (raw. 26 at 30) 31 48.44 43 III SHORT TERM FINANCIAL INVESTMENT 5.64 0

1 Financial investments as part of the company 32 0 02 Other short term fin. investments 33 5.64 0

TOTAL: (raw. 32 at 34) 34 5.64 0 IV CASH AND CURRENT ACCOUNT 35 3.71 5.74 TOTAL (raw. 25+31+34+35) 36 65.16 57.29 0 0 C. PREPAYMENTS 37 0.08 0.15 0 0 D. DEBTS PAYED DURING A YEAR 51.88 34.95

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Loans from debentures 38 0 01 Credits 39 15.86 7.22

Collected advance 40 0.01 0.222 Trade debts 41 31.52 21.253 Payed trade efect 42 0 04 Debts of the companies from group 43 0 05 Fin. Investments' debts 44 0.03 0.036 Other debts 45 4.46 6.24

TOTAL: (raw. 38 at 45) 46 51.88 34.95 0 0 E. CURRENT ASSETS , CURRENT DEBTS - NET 47 13.35 22.49 (raw. 36+37-46-62) 0 0 0 0 F. TOTAL ASSETS MINUS CURRENT DEBTS (raw. 20+47) 48 48.11 65.04 0 0 G. DEBTS PAYED OVER A YEAR 8.37 10.18

1 Loans from debentures 49 0 02 Credits 50 7.36 10.183 Collected advance 51 0 04 Trade debts 52 0 05 Payed trade efect 53 0 06 Debts of the companies from group 54 0 07 Fin. Investments' debts 55 1.01 08 Other debts 56 0 0

TOTAL: (raw. 49 at 56) 57 8.37 10.18 0 0 H. PROVISIONS 0 0

1 Provisions for pensions 58 0 02 Other provisions 59 0.08 3.82

TOTAL: (raw. 59+60) 60 0.08 3.82 I. ADVACE REVENUES: (raw. 62+63) 61 0.01 0.01

1 Subsidies 62 0.01 0.012 Advance revenue 63 0.01 0

0 0 J. CAPITAL AND RESERVES 39.67 51.04 I CAPITAL (raw. 65 at 67): 64 24.25 29.21 * unpayed shared capital 65 0 0 * payed shared capital 66 24.25 29.21 * administration's capital 67 0 0 II CAPITAL BONUS 68 0 0 III REVALUATION SOLD CR 69 3.85 6.02 SOLD DB 70 0 0 IV RESERVES (raw. 72 at 75) 71 11.27 14.01 Legally Reserve 72 0.38 0.53

1 Reserve for own shares 73 0 02 Statute Reserve 74 0 03 Other reserve 75 10.88 13.48

V ACC DEFICIT SOLD CR 76 0.3 1.8 SOLD DB 77 0 0 VI PROFIT AND LOSS ACCOUNT SOLD CR 78 6.46 3.6 SOLD DB 79 0 0 PROFIT ALLOCATION 80 6.46 3.6 Own Share 81 0 0

TOTAL: (raw. 64+68+69-70+71+72+76-77+78-79-80-81) 82 39.67 51.04

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Public Capital 83 0 0 TOTAL: (raw. 82+83) 84 39.67 51.04 TOTAL ASSETS (raw. 20+36+37) 100 100

TOTAL PASSIVE (Liabilities and Equity) (raw. 46+57+60+61+84) 100 100

1. The fixed assets ratio (RFA) is determined as a percentage ratio between the non-current assets and the total assets and it distinguishes the value that the non-current assets have in the total assets.

RFA = * 100

In the case above the ratio presents an ascending evolution from 34.76% in the previus period to 42.56% in the current period. The ascending evolution is the result of the permanent growth in the value of non-current assets, but also the result of the reduction in the current assets. The growth in the absolute sum of non-current assets is just the result of the investments made and not due to some reevaluations made by the society. This aspect means reinforcement of the entity’s infrastructure and, on this basis, a growth of the society’s credibility in front of the investors and creditors.

2. The current assets ratio (RCA) represents the weight of the current asset in the balance sheet’s assets.

RCA = * 100

In the case of the analyzed entity, the rate records a significant drop in previous year form 65.16% to 57.29%.

In the purpose of identifying the causes that determine the state of this index the analysis is extended on to three levels:

Inventory ratio; Receivables ratio; Treasury ratio.

3. The prepayments ratio (RPP)

RPP = * 100

This rate is insignificant (0.08% in the previous year to 0.15% in current year), being the result of some anticipated expenses for the next year (press subscriptions, economic legislation, gazettes) engaged by the entity this year.

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5.3. Liabilities and Equity Analysis

5.3.1. The Resources Evolution

According to the balance sheet the liabilities and equity include:

D. Debts Paid During a Year;

G. Debts Paid Over a Year;

H. Provisions;

I. Advance Revenues;

J. Equity.

The horizontal analysis of the liabilities and equity is based on indixes, which express the percentage of change for each position in the balance sheet, compared to the value of the same position from a reference year (taken equal to 100%) or to the value recorded in the year before.

The structure of the liabilities and equity of the company is presented in table 5.2, where the indices for every position in the balance sheet have been calculated by comparing current period with the previous period.

A. Debts paid during a yearA debt can be classified as a short-term debt or debt paid under a year if:

a) it is expected to be reimbursed during the normal course of exploitation cycle for the unit; or

b) its due date is within 12 months from the date of the balance sheet.

All the other debts should be classified as debts paid over a year.

In the case study we observe that this indicator has decreased by 44.03%.

E. Debts paid over a yearThe loans and similar debts due to be paid over a year include the following

categories: loans from debentures and the premiums on their redemption, long term bank loans, debts towards related entities and other entities linked to the company by virtue of participating interests, other loans and similar debts, and the interests.

The loans from debentures represent the value of the debentures issued according to the legal stipulation. Among these loans we can distinguish loans from convertible shares.

Debts regarding concessions and other similar debts refer to the goods taken by the receiving entity as concessions, according to the signed contracts.

At the end of the concession contract, the goods are returned to the owner, and in this case the respective debts are cancelled.

The entities have to keep a classification of their long-term debts with interest even when they are due within 12 months from the date of the balance sheet if:

a) the initial due date was for a period greater than 12 months; and b) there is a refinancing agreement or an agreement concerning a delay of payments,

signed before the date of the balance sheet.

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When the sum that has to be paid back for the debt is larger then the received amount, the difference is recorded in an active account. This difference has to be presented in the balance sheet and in the explicative notes, as a correction of the debt.

The value of this difference has to be submitted to the depreciation procedure by choosing a reasonable sum for each financial period so that it is completely covered, but no later than the due date of the debt.

In the case study debts paid over a year increased by 1.11%.

H. Provisions

Provisions are constituted at the end of the financial period for covering those elements whose realization or payment is uncertain, or for expenses which are due in the next period (fines, penalties and other uncertain debts, expenses related to the service activity in the warranty period and others).

Provisions represent an intermediary category between equity and liabilities. As long as the risks for which they have been constituted do not appear, these provisions remain at the disposal of the entity, without having a certain due date.

Provisions cannot exceed the value of the sums necessary for extinguishing the current obligation at the date of the balance sheet.

A provision is a debt with uncertain due date or valueA provision will be recognized only when: - the entity has a current obligation generated by a previous event; - it is probable that a release of resources will be necessary for respecting the

particular obligation; and - a credible estimation of the value of the obligation can be made. If these conditions are not met, the provision will not be acknowledged.

Provisions are different from other types of debt, like commercial loans and committed but unpaid expenses, because of the uncertainty factor connected to the due date and value of future expenses needed for extinguishing the debt, therefore:

a) the debts from commercial loans represent the obligation of payment for goods and services received from or sent by the suppliers and which were invoiced, or whose payment was officially agreed upon with the suppliers;

b) the committed expenses are the payment obligations for goods and services received from or sent by the suppliers, but that were yet unpaid, including the salaries owed to employees (for example, the amounts for the paid holiday). Although sometimes there is a need for estimating the value or the due date of these debts, in general, the uncertainty element is more reduced than in the case of provisions.

The provision for future operational losses is not considered. There will be acknowledged as provisions only those obligations generated by

previous events which are independent from future actions of the entity (for example, how activities proceed).

Examples of such obligations are the fines and the costs of eliminating the negative effects on the environment, punished by the law, both of them generating releases of the resources which comprise economic benefits, no matter the future actions of the entity. Similarly, an entity acknowledges a provision for the costs of shutting down an oil plant, with the condition that the entity already makes up for the damage caused.

Different from this situation, an entity may intend or need, due to commercial or legal pressures, to make some expenses in order to act in a certain way (for example, installing

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smoke filters for a particular type of factory). The entity can avoid future expenses through different measures (e.g. modifying the production process), therefore it does not have a current obligation connected to that future expense, and will not acknowledge a provision.

Provisions are constituted for elements like: a) litigations, fines and penalties, compensations, damage and other uncertain debt; b) the expenses connected to the service activity in the guarantee period and other

expenses related to the guarantee offered to clients; c) actions of reorganization; d) pensions and similar obligations; e) taxes; f) other provisions.

The index of these provisions is not avaible.

I. Advanced Revenues

They refer to the incomes that are collected in the current period for goods and services, but refer to future periods.

In this category are also included the subsidies for assets and for revenues. Subsidies can be received from: the actual government, governmental agencies and

other similar national and international institutions. Among subsidies we can differentiate: - governmental subsidies; - irredeemable loans representing investment subsidies; - other sums received as investment subsidies; The subsidies for assets are subventions which granted with the main condition that

the beneficiary entity builds or purchases fixed assets. A governmental subsidy can have its own form of non-monetary asset transfer, in

which case the subsidy and the asset are recorded at the fair value. The accounts for investment subsidies are used also for donations for investments, and

tangible and intangible assets inventory surplus. Subsidies for revenues include all the other subventions, which are not for assets. Subsidies are recognized on a systemic basis as incomes of the periods when the

expenses were made, expenses which these subsidies will compensate for. Subsidies are not to be recorded directly in the equity accounts. The subsidies for assets, include the non-monetary subsidies at the fair value, they are

recorded in accountancy as subsidies for investments and they are considered in the Balance sheet as postponed revenue. The postponed revenue is recorded in the Profit and loss account along with the depreciation expenses, or the transfer of assets.

Paying back the subsidy for an asset is recorded by diminishing the remaining value of the postponed revenue with the refundable amount.

Paying back a subsidy for revenues is made by diminishing the postponed revenues if they exist, if not, by increasing the expenses.

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To the degree in which the paid back amount exceeds the postponed revenue or if there is not such a revenue, the surplus, respectively the paying back of the entire value, is recognized immediately as an expense.

At the analyzed company the indicator decreased by 58.12.

J. Equity and Reserves

The equity includes:

- capital;- capital bonuses;- revaluation reserves;- reserves;- retained earnings;- net profit/loss;- profit allocation;- own shares.At the limited company AMIGO equity increased by 6.9%

5.3.2. The Passive Vertical Analysis

For a more detailed analysis we consider the passive structural ratios, which point out two ideological aspects:

- how much each group weighs in the total of the total passive;- the relation between the two subgroups of the passive; In this first category of indicators we can include:

the ratio of total financial autonomy (RFAT); the ratio of provisions (RP); the total debts ratio (RTD ); the ratio of advanced revenues (RAR ).Table 5.3 presents the evolution of this ratios over the analyzed period.

A. The total financial autonomy ratio (RFAT) or the patrimony’s solvency expresses the degree to which the entity can pay up its debt. The indicator is determined as a ratio between the owners’ equity (EQ) and the passives (TP).

RFAT = * 100

The ratio increases from 39.67% to 51.04%.

According to specialists the patrimonial solvency is considered to be good when its value is higher than 30%.

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B. Provisions ratio (RP) indicates the reserves created by the entity in order to cover the losses expected in the future.

RP = *100

This ratio increased from 0.08% in previous period to 3.82% in current period, thus reflecting an increase in the risk of having losses from foreign exchanges connected to the receivables and debts in foreign currency, with a closing balance at the end of the year (considering the nature of these provisions).

C. Short Term and Long Term Debts Ratio

RSL = * 100

An entity which is healthy from a financial point of view, should have this rate under 100% (or smaller than 1). The lower this rate is the less the indebtment level of the entity.

At AMIGO Ltd., this ratio has a decreasing trend, from 60.25% to 45.13% having a reasonably good level over the discussed period.

In the second category of passive ratios, we notice:

1) The financial assets ratios: other resources ratio and equity ratio;2) The structure ratio.

1. The other resources financing ratio (ROR) reflects the other resources (TOR) financed the company assets (TA):

ROR = * 100

2. The owners resources financing ratio (REQ) reflects the own resources (EQ) financed the company assets (TA)::

REQ = * 100

This ratio is permanently decreasing reflecting the increase in the degree of financial independence of the entity.

.

3. The capital structure ratio (RS) reflects the proportion between total debts ( short term, long term, investments, provisions) and the equity.

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RS = * 100

The optimum level of this indicator is considered to be fewer than 30%. The increase in the degree of financial dependency, will determine a reduction in the entity’s capacity of self-financing over the short, medium and long-term.

The evolution of these ratios is presented in the next table.

Table 5.4 The Financing Ratios

Indicators Previous period % Current period %The other resources financing ratio (ROR) 60.33 48.96The owner resources financing ratio (REQ) 39.67 51.04The capital structure ratio (RS) 152.11 95.93

5.4. Liquidity and Solvency Analysis

The liquidity and solvency express the capacity of an entity to pay its debts (on term). While the financial liquidity reflects the capacity to pay on short term (usually the duration of the fiscal period), the solvency aims at the medium and long term coordinates of payment of a company.

5.4.1. Liquidity Analysis

5.4.1.1. Aspects Regarding Liquidity

The International Accounting Standards50 emphasize the fact that liquidity refers to cash availability in the near future, after taking into account the financial obligations for this period.

The following aspects emerge from the presented opinions:ü liquidity emphasizes cash availability in the near future; ü liquidity is a component of the finacial diagnostic;ü liquidity represents a form of the ability to pay;ü liquidity exists only in and through its own forms;ü liquidity is a component of the ability of indebting of the entity;In our opinion, liquidity is a state of financial equilibrium that expresses the ability of

an entity to pay, on short term, by synchronizing the cashflow during the financial exercise. The liquidity state is characteristic of the financial circuit of the entity, liquidity that

depends on the following factors:

50 International Accounting Standards 2000

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ü firstly, on the ratio between the rotation speed of assets and the rotaton speed of liabilities. Thus, the time between two successive cashings diminishes, while the time between two successive payments increases, and the state of liquidity is consolidated without the delay affecting the increases .

ü secondly, we consider that a net pozitive treasury consolidates the state of liquidity;ü thirdly, we believe that an accelerated amortization consolidates the monetary

reserves necessary for due payments;üfourthly, we apreciate that increasing provisions for risks and expenses can represent

a real liquidity source;ü fifth, we believe that the state of real (banking) profability is a fundamental

component of the financial liquidity;ü a pozitive cashflow from the exploitation activity, investments and the financing

activity consolidates the state of liquidity.

5.4.1.2. Liquidity RatiosIn our opinion, the liquidity ratios are:

Current Liquidity Ratio (RCL); Quick Ratio (QR); Effective Liquidity ratio (RE);

Current liquidity reflects the capacity of the avaible current assets (inventories, receivables, prepayments, shorterm investments, cash in hand and cash in bank) to cover the current debts (debts paid during a year and revenues in advanced):

It is appreciated that the entity has a favorable liquidity when the ratio of liquidity is between 200% and 250%.51

In the oppinion of other specialists, the ratio of liquidity must be over 150%.52

In the british and american specialty literature53 it is apreciated that the general ratio of liquidity has to be at least 200%.

In our oppinion, the safety interval for the financial indicator is between 150% and 250%.

Quick Ratio emphasizes the capacity of current assets, other than inventories (receivables: RB and tresaury:TR) to participate in the finance of the due debts:

51 O.M.F. 596 from 28.03.1995, of approving the methodological Norms regarding the creation of the revenues and expenses budget by the administrations and comercial entities with state capital, Of.M. no.70 from 18.04.1995, p.1552 H.G. 364 from 10.05.1999, for approving the methodological Norms regarding signing of administration contracts for national companies, comercial companies, where the state or a public administration is a shareholder, published in Of.M. no.213 from 14.05.199953 Terry Gaskin - Op. cit., p. 23

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The legal Norms54 prescribe that the value of the indicator should be between 50%55

and 100%.Terry Gaskin considers that the optimal level of the indicator must be 100%.56

In our oppinion, the financial safety interval of the indicator is between 50% and 100%.

Effective liquidity measures the degree in which the available treasury (TR) (cash in hand and cash in bank accounts plus short term investments) covers due debts:

The liquidity is favorable when the ratio reaches 100%.57

In our oppinion, the financial safety interval is between 50% and 100%.The evolution of ratios 5.5.Table 5.5 The Liquidity Ratios

Indicators Previous period%

Current period%

Current Ratio 779.15 564.07

Quick Ratio 690.22 478.66

Effective Ratio 111.71 56.41

Conforming to the above table regarding the analysis of liquidity, the liquidity ratio are enclosed in the safety gaps.

5.4.2. Solvency Analysis

5.4.2.1. Aspects regarding the solvency

54 O.M.F 596 from 28.03.1995, Op. cit., p. 1555 H.G. 364 from 10.05.1999, Op. cit., p. 956 T. Gaskin, Op .cit., p. 2357 I.P.Pântea - Managementul contabilităţii româneşti, vol.II, Op.cit., p.594

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The International Accounting Standards mention that solvency refers to cash availability on a period of time greater that one year until the financial agreements are due. 58

Other specialist define solvency as the ability of the entity to face its monetary obligations, to honor its due payments, namely having the ability to pay.59

Yves Bernard and Jean Claude Colli claim that solvency represents the capacity of a person to respect his commitment regarding the aggregate resources that make his asset.60

The methodological norms of the Romanian Ministry of Finance61 define solvency as the degree by which a unit can face payment obligations.

Robert Higgins considers that solvency is the state of a company that expresses the ability of a company to pay its long term obligations.62

Out of these opinions the following results emerge:- Solvency aims at cash availability throughout a period of time greater

than 1 year; - Solvency expresses the degree of credit coverage;- Solvency is measured through ratios of solvency (meaning the ratio

between possible assets and the demandable debts);- Solvency means the capacity of a firm to face long term or short term due

debts;- Solvency express the degree by which the firms can handle their debt

obligation;In our opinion, the state of solvency must be analyzed on one hand, from the point of

view of its function and of the time it refers to, on the other hand time. That is why, we consider that solvency expresses the capacity of a company to reimburse the current installments to banks and other financial institutions, at due time (greater then one year).

At the same time we consider that solvency is a state of financial equilibrium that measures the value of the capital, in regard with the size of the assets.

The first outcome of these definitions is that solvency is specific to more financial circuits, which take place over consecutive financial periods.

Similar to liquidity, solvency depends on the factors stated in this example.Solvency aims at the capacity of reimbursement of the current installments owed to

banks and other financial institutions.Also we appreciate that solvency is influenced by the current assets turnover.We believe that solvency depends on the monetary policy, on the economic and

political stability of a country.

5.4.2.2. Solvency Ratios The solvency is expressed through a number of ratios.General solvency ratio expresses the capacity of a firm to reimburse at maturity the current

installments for long and medium term credits that were not fully reimbursed.

TAr = FA + WK

58 O.M.F.P. no. 94/29.01.2001,Op.cit.59 A. Işfănescu, A. Ţuţu - Practica evaluării economice a întreprinderii, Buletin economic şi legislativ, Tribuna economică nr. 2, Bucureşti, 1995, p .31.60 Y. Bernard, J. C. Colli - Op. cit., p. 375.61 O.M.F 596 from 28.03.1995 - Op. cit.62 R. Higgins - Op. cit., p. 6.

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where:-TAr

represents TOTAL ASSETS MINUS CURRENT DEBTS (F from Balance Sheet)- FA represents Fixed Assets.

The general financial solvency ratio is determined as a percentage ratio between TOTAL ASSETS MINUS CURRENT DEBTS and long term debts (LTD):

Where: LTD represents long term debts (debts over a year, provisions and investments).

In our opinion, the financial safety interval of the indicator is between 80% and 180%.Some british analysts believe that the state of solvency is obvious through the financial debts

ratios (The Debt Equity Ratio - RDE; The Debt to the Debt plus Equity Ratio ): 63

Where: STL represents short term loansLTL represents long term loansTR represents treasury (cash in bank and cash in bank

accounts, short term investments).The financial safety gap for this indicator is situated between 0% and 50%.

Another model of solvency is The Debt to the Debt plus Equity Ratio:

The solvency can be shown with the aid of the financial leverage ratio calculated as a ratio between total debts (TD) and turnover (T):

The ratio shows the degree to which the resources of the entity have been purchased using foreign capital.64

The evolution of these ratios at SC AMIGO SA is presented in the table no.5.6.Table 5.6 Solvency Ratios

INDICATORS Previous period %

Current period %

General solvency ratio 79.74 132.85

63 J.Kind - Accounting and Finance for Managers,Clays Ltd.,St.Ives plc,U.K, 1999, p.6864 .Backer,P.T.Elgers,R.J.Asebrook - Financial Accounting,Harcourt Brace Jovanovich, Inc.,N.Y, USA,1988, p.607

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The Debt Equity Ratio 34.94 22.83The Debt to the Debt plus Equity Ratio 36.92 25.42The debts to turnover ratio 53.01 29.71

From the above table, regarding the solvency analysis, emerges the following:■ The general solvency ratio has an ascending evolution growing from 79.74% to 132.85% ;■ The solvency presents an ascending trend throughout the analyzed period, a positive

aspect for the entity.

CHAPTER 6. THE PERFORMANCE ANALYSIS

6.1. General aspects concerning the analysis of the financial performance of the company

Keeping the companies in business is conditioned by the development of rational and efficient activity. In the market economy, the rational economy activity is the activity that generates profit. The profit or benefit is the money expression of the gain obtained through an operation, activity or action.

The general condition for obtaining profit is the economic activity. Its result is computed as a difference between the selling price and the cost of the product or service.

A company’s financial statements contain specific links to the type of the activity displayed by the company, links that can be emphasized through the financial analysis of the individual components of every financial statement and through the analysis of specific rates of the financial performance. The financial statements reflect the company’s field of activity and economy conditions and they apear due to the decisions taken by the management.

6.2. The analysis of the performance according to the income statement

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A dimension of the financial performance is emphasized by the income statement.. The income statement presents the results of the exploitation, financial and extraordinary activity in a determined financial period period. This financial statement provides information used for the evaluation of the past performance of an entity, in order to estimate the future financial results of the company.

6.2.1. The general analysis of the performance on the basis of the income statementThe income statement groups the revenues and the expenses of an entity by types of

activities:- the operating activity;- the financial activity;- the extraordinary activity.The income statement is a synthesis accounting document through which the

operating, financial and extraordinary flows of an entity are regrouped. With its help it is explained in different stages the period result set-up, giving way to conclusions about the economic performance level of the activity developed by a company in a specified financial period.

The economic flows are reflected through the income statement as follows: a) Operating flows, which include economic operations with a specific, usual and

repetitive character that focuses on the current and normal activity of an entity, excluding the influence of some financial or extraordinary factors. The operations that take place, allow the determination of the operating result, a real result, generated by the base activity of the entity.

b) Financial flows are that economic operations that refer to the financial activity and which have a specific, usual and repetitive character.

The financial flows allow the determination of the financial result. The current flow includes the operating and financial flows and generates the current

result for the period. c) Extraordinary flows include economic operations that don’t have a direct

connection with the entity’s normal object of activity. These kinds of operations have an accidental character. The extraordinary flows allow for the extraordinary result to be revealed.

Through summing up these partial results, we can obtain the gross result of the period.One aspect of the general analysis is the identifying the importance(weight) of each

category of profit/loss in the gross profit/loss (GP) throughout the period. the weight of the operating profit (ROP):

Where PO represents profit/loss from operating activity the weight of the financial profit (RFP):

Where PO represents profit/loss from financial activity

• the weight of the extraordinary profit (REP):

Where PO represents profit/loss from extraordinary activity

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By evaluating these indicators, the contribution of each sub activity at the general efficiency (or inefficiency) of the entity can be observed on one side, and on the other,the importance of each sub activity in the whole activity, in a financial period, by the entity.

Another aspect refers to the way of forming each of the following:The operating profit (PO) is computed as a difference between the income from

operations (IO) and the operating expenses (EO):

The operating result emphasizes the economic profitability of an entity, according to its normal activity.

The financial profit (PF) is computed as a difference between the financial incomes (FI) and the financial expenses (FE):

The financial result is an indicator that measures the profitability of an entity at the financial flows level.

The extraordinary profit (PE) is computed as a difference between the extraordinary incomes (EI) and the extraordinary expenses (EE):

The extraordinary result is an indicator that emphasizes the profitability of an entity at the level of extraordinary flows.

Through the operating and financial results we get the current profit/loss of the period (CP):

The current result of the period is an indicator that measures an entity’s profitability from the operating and financial activity.

Another results’ indicator is the gross result of the period (GROP) that includes the current result of the period and the extraordinary result:

The gross result of the period is an indicator that measures the financial resources that a company has before taxation.

An essential aspect of the income statement analysis is the vertical analysis for 3-5 years that emphasizes the reports between different components of the total incomes in a financial period. A way of emphasizing these reports is presented in table 46.

Table 6.1

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The vertical analysis of the income statement

Indicators The structure of the income statement

Total Incomes 100 %Total Expenses ( %)Gross profit/loss of the period +( ) %Operating incomes + %Operating expenses (%)Profit/loss from operation activities +( ) %Financial incomes + %Financial expenses (%)Profit/loss from financial activities +( ) %Current profit/loss of the period +( ) %Extraordinary incomes + %Extraordinary expenses ( %)Profit/loss from extraordinary activities

+( ) %

Income taxes ( ) %Net profit +( ) %

In tables 6.2 is presented the profit and loss account, the evolution and the structure at SC AMIGO SA.

Table 6.2 Profit and Loss AccountEXPLANATIONS Nr. Financial Period Indexes vertical vertical

rd. Previous Current analysis analysisA B 1 2 3 previous current

1. Turnover (rd. 02 la 04) 1 14,220,821,855 17,106,098,411 120.29 97.69 96.07Sales 2 14,210,146,037 17,103,057,376 120.36 97.62 96.05Goods sales 3 10,675,818 3,041,035 28.49 0.07 0.02Revenues from subventions 4 2. Stock varation SOLD C 5 248,735 SOLD D 6 18,855 3. Capital expenditure 7 91,331,180 74,508,432 81.58 0.63 0.424. Other operating income 8 84,834,326 125,292,905 147.69 0.58 0.70OPERATING INCOMES - TOTAL (rd. 01+05-06+07+08) 9 14,397,236,096 17,305,880,893 120.20 98.90 97.195. a) Cost of materials 10 10,495,661,991 12,547,830,244 119.55 72.10 70.47Other cost of materials 11 281,750,609 814,902,527 289.23 1.94 4.58b)Other expenses (energy and water) 12 16,574,720 21,754,657 131.25 0.11 0.12Cost of goods 13 5,823,805 3,000,189 51.52 0.04 0.026. Expenses with employees (rd. 15+16) 14 1,634,971,360 1,850,328,076 113.17 11.23 10.39a) Wages 15 1,209,742,330 1,400,382,133 115.76 8.31 7.86b) Social security expenses 16 425,229,030 449,945,943 105.81 2.92 2.537. a) The adjustment of the value of the assets 17 702,182,358 497,123,688 70.80 4.82 2.79

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(rd. 18-19) a.1) Expenses 18 702,182,358 497,123,688 70.80 4.82 2.79a.2) Incomes 19 7.b) The adjustment of the value of the current assets (rd. 21-22) 20 -671,707,342 -408,508,854 60.82 -4.61 -2.29b.1) Expenses 21 75,428,557 189,911,212 251.78 0.52 1.07b.2) Incomes 22 747,135,899 598,420,066 80.10 5.13 3.368. Other operating expenses (rd. 24 la 26) 23 1,019,297,695 1,207,068,795 118.42 7.00 6.788.1. Expenses refering to outside services 24 128,608,828 222,221,604 172.79 0.88 1.258.2. Expenses from other taxes 25 817,777,162 811,262,013 99.20 5.62 4.568.3. Other operating expenses 26 72,911,705 173,585,178 238.08 0.50 0.97 The adjustment of the provisions (rd. 28-29) 27 9,463,507 354,834,575 n.a 0.07 1.99Expenses 28 9,463,507 368,136,234 n.a 0.07 2.07Incomes 29 13,301,659 0.07OPERATING EXPENSES - TOTAL 30 13,494,018,703 16,888,333,897 125.15 92.70 94.85(rd. 10 la 14+17+20+23+27) OPERATING RESULT: * Profit (rd. 09-30) 31 903,217,393 417,546,996 46.23 6.20 2.34 * Loss (rd. 30-09) 32 9. Incomes from financial investment 33 * as part of the group 34 10. Other incomes from financial investment 35 1,606,252 1,926,079 119.91 0.01 0.01 * as part of the group 36 11. Interest revenues 37 25,736,490 101,187,533 393.17 0.18 0.57 * as part of the group 38 Other financial revenues 39 132,209,842 396,956,436 300.25 0.91 2.23FINANCIAL REVENUES - TOTAL (rd. 33+35+37+39) 40 159,552,584 500,070,048 313.42 1.10 2.8112. The adjustment of the value financial assets 41 0 396,443 (rd. 42-43) Expenses 42 0 63,064,225 0.35 Incomes 43 62,667,782 0.3513. Interest expenses 44 58,126,987 106,888,976 183.89 0.40 0.60 * din care, in cadrul grupului 45 Other financial expenses 46 142,955,615 253,708,146 177.47 0.98 1.42FINANCIAL EXPENSES - TOTAL (rd. 41+44+46) 47 201,082,602 360,993,565 179.53 1.38 2.03FINANCIAL RESULT: * Profit (rd. 40-47) 48 0 139,076,483 n.a 0.78 * Loss ( 47-40) 49 41,530,018 0 n.a 0.2914. CURRENT RESULT : * Profit (rd. 31+48) 50 861,687,375 556,623,479 64.60 5.92 3.13 * Loss (rd. 32+49) 51 15. Extraordinary Revenues 52 16. Extraordinary Expenses 53 17. EXTRAORDINAR RESULT: * Profit (rd. 52-53) 54 * Loss (rd. 53-52) 55 REVENUES TOTAL (rd. 09+40+52) 56 14,556,788,680 17,805,950,941 122.32 100.00 100.00EXPENSES TOTAL (rd. 57 13,695,101,305 17,249,327,462 125.95 94.08 96.87

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30+47+53)PROFIT BEFORE TAX: * Profit (rd. 56-57) 58 861,687,375 556,623,479 64.60 5.92 3.13 * Loss (rd. 57-56) 59 18. Income tax 60 55,041,144 182,669,536 331.88 0.38 1.03Income tax 61 55,041,144 182,669,536 331.88 0.38 1.03Deffered tax-expense 62 Deffered tax-asset 63 19. Other expenses with the taxes 64 (ct. 698) 20. RESULT AFTER TAX: * Profit 65 806,646,231 373,953,943 46.36 5.54 2.10 * Loss 66 21. Earnings per share * essential 67 * diluted 68

A closer look at the dates points out the following aspects:- The operating incomes have the biggest weight (over 97%) in realizing the total

incomes. The goods sales have the predominant weight in the operating incomes. - The operating expenses grow from 92.70% to 94.85%. - The financial expenses increase to 1.38% to 2.03%.- The net profit decreased from 5.54% to 2.10%.

On account of the result, partial result indicators and final result indicators on different levels can be built. These indicators’ values are presented in table 49, and their evolution, in the analyzed period, is reflected in table 6.3.

1. The commercial margin

CM = GS – CGSwhere :

GS – Goods salesCM - commercial margin;CGS - cost of goods sold

2.Production margin

PM =(S+∆SK+KE) – (ME + SO )where :

PM- production margin;S – sales∆SK – stock variationKE – capital expenditureME- materials expenses;SO - Outside services expences.

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The production margin means the newly created value in the productive activity in a determined period, the financial period.

3. Value added

VA = CM + PM

where VA - value added

The value added means the newly created value of an entity in a determined period, the financial period.

The importance of the analysis of the value added is emphasized in the following aspects:

- The value added is the most important source of activity’s auto financing - The value added is the source of paying the personnel - The value added is the source of financing the debts to the state - The value added is the source of multiplication the entity’s reserves.

4. Gross margin

GM = RO + COS

5.Earnings Before Interest, Taxes, Depreciation and Amortization

EBITDA = RO + COS

6.Earnings Before Interest and Taxes

EBIT = EBITDA-D-A+IR

7.Earnings Before Taxes

EBT = EBIT-IE

7.Net Income

NI = EBT-IT

Table 6.3 Income statement indicatorsIndicators Previous period Current periodOperating Revenues (RO) 14,397,236,096 17,305,880,893Cost of sales (COS) 13,454,080,180 16,444,884,488Gross margin GM 943,155,916 860,996,405Operating Profit before Depreciation (EBITDA) 943,155,916 860,996,405Amortization (A) 702,182,358 497,123,688Depreciation (D) -662,243,835 -53,674,279Interest Income (IR) 159,552,584 500,070,048

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Total Income Avail for Interest Expense (EBIT) 1,062,769,977 917,617,044Interest Expense (IE) 201,082,602 360,993,565Income Before Tax (EBT) 861,687,375 556,623,479Extraordinary Income/Losses 0 0Income Taxes 55,041,144 182,669,536Net Income 806,646,231 373,953,943Commercial margin 4,852,013 40,846Production margin 3,379,129,804 3,570,856,776Value Added 3,383,981,817 3,570,897,622

-

6.2.2. The Profitability Ratios

Accounts Receivable Turnover (RT). Turnover is the relationship between the

amount of an asset and some measure of its use. Accounts receivable turnover is the number

of times per year that the average amount of receivables is collected. The ratio is calculated by

dividing net credit sales to average net accounts receivable, that is, accounts receivable after

deducting the allowance for uncollectible accounts:

When a ratio compares an income statement item (like net credit sales) with a balance

sheet item (like accounts receivable), the balance sheet item should be an average. Ideally,

average net accounts receivable should be computed by averaging the end-of-month balances

or end-of-week balances of outstanding net accounts receivable during the period. The greater

the number of observations used, the more accurate the resulting average. Often only the

beginning-of-year and end-of year balances are averaged because this information is easily

obtainable from comparative financial statements. Sometimes a formula calls for the use of an

average balance, but only the year-end amount is available.

In theory, only net credit sales should be used in the numerator of the accounts receivable

turnover ratio because those are the only sales that generate accounts receivable. However, if

cash sales are relatively small or their proportion to total sales remains fairly constant, reliable

results can be obtained by using total net sales. In most cases, it is necessary to use total net

sales because the separate amounts of cash sales and credit sales are not reported on the

income statement.

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Number of Days' Sales in Accounts Receivable (Td). The number of days' sales in

accounts receivable ratio, which is also called the average collection period for accounts

receivable, is calculated as follows:

The ratio measures the average liquidity of accounts receivable and gives an indication

of their quality. Generally, the shorter the collection period, the higher the quality of

receivables. However, the average collection period will vary by industry: for example,

collection periods will be short in utility companies and much longer in some retailing

companies. A comparison of the average collection period with the credit terms extended to

the customers by the company will provide further insight into the quality of the accounts

receivable. For example, receivables arising under terms of 2/10, n/30 that have an average

collection period of 75 days need to be investigated further. It is important to determine why

customers are paying their accounts much later than expected.

Inventory Turnover (IT). A company's inventory turnover ratio shows the number of

times its average inventory is sold during a period. Inventory turnover is calculated as

follows:

When comparing an income statement item and a balance sheet item, both

should be measured in comparable national currency. Notice that both the numerator and

denominator are measured in terms of cost rather than sales dollars. (Earlier, when calculating

accounts receivable turnover, both numerator and denominator were measured in sales

dollars). Inventory turnover relates a measure of sales volume to the average amount of goods

on hand to produce this sales volume.

A company that achieves a high inventory turnover ratio by keeping extremely small

inventories on hand, may incur larger ordering costs, lose quantity discounts, and lose sales

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due to lack of adequate inventory. In attempting to earn satisfactory income, management

must balance the costs of inventory storage and obsolescence and the cost of tying up funds in

inventory against possible losses of sales and other costs associated with keeping too little

inventory on hand.

Total Assets Turnover (TAT)

Total assets turnover shows the relationship between the dollar volume of sales and

the average total assets used in the business and it is calculated as follows:

Total assets turnover =

This ratio measures the efficiency with which a company uses its assets to generate

sales. The larger the total assets turnover, the larger will be the income on each dollar invested

in the assets of the business. Equity, or long-term solvency, ratios show the relationship

between debt and equity financing in a company.

Return on Operating Assets (ROA). The best measure of earnings performance

without regard to the sources of assets is the relationship of net operating income to operating

assets, which is known as the rate of return on operating assets. This ratio is designed to show

the earning power of the company as a bundle of assets. By disregarding both nonoperating

assets and nonoperating income elements, the rate of return on operating assets measures the

profitability of the company in carrying out its primary business functions. The ratio can be

broken down into two elements-the operating margin and the turnover of operating assets.

Operating margin reflects the percentage of each dollar of net sales that becomes net

operating income. Net operating income excludes nonoperating income elements such as

extraordinary items, nonoperating revenues such as interest revenue, and nonoperating

expenses such as interest expense. The formula for operating margin is:

Turnover of operating assets shows the amount of sales dollars generated for each

dollar invested in operating assets. Operating assets are all assets actively used in producing

operating revenues. Nonoperating assets are assets owned by a company, but not used in

producing operating revenues, such as land held for future use, a factory building rented to

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another company, and long-term bond investments.

These nonoperating assets are not used in evaluating earnings performance. Total

assets also should not be used because they include nonoperating assets that do not contribute

to the generation of sales. The formula for the turnover of operating assets is:

The rate of return on operating assets of a company is equal to its operating margin

multiplied by turnover of operating assets:

Rate of return = Operating x Turnover of

on operating assets margin operating assets

or

Return On Assets = x

Return on Sales Ratio (ROS). Another measure of a company's profitability is the net

income to net sales ratio, calculated as follows:

Net income to net sales = Net income/Net sales

Although the ratio of net income to net sales indicates the net amount of profit on each sales

dollar, care must be exercised in the use and interpretation of this ratio. The amount of net

income includes all types of nonoperating items that may occur in a particular period;

therefore, net income includes the effects of such things as extraordinary items and interest

charges. Thus, a period that contains the effects of an extraordinary item will not be

comparable to a period that contains no extraordinary items. Also, since interest expense is

deductible in the determination of net income while dividends are not, net income is affected

by the methods used to finance a company's assets.

Return On Equity (ROE). From the stockholders' point of view, an important

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measure of the income-producing ability of a company is the capability of net income to

average common stockholders' equity, also called rate of return on average common

stockholders' equity, or simply the return on equity (ROE). Although stockholders are

interested in the ratio of operating income to operating assets as a measure of management's

efficient use of assets, they are even more interested in the return the company earns on each

dollar of stockholders' equity, The formula for net income to average common stockholders'

equity is:

Times-Interest-Earned-Ratio (RTIE). The profitability of a company is also shown

by the indicator Times-Interest-Earned-Ratio (RTIE), which is determined as a ratio

between the net profit before the payment of taxes and interests (Earnings Before Interest and

Taxes-EBIT) and the total payed installments:

Where: IE represents interest expenses.

The ratio shows the degree of coverage of the instalment from the obtained

revenues.65

Table 6.4 Performance ratios

IndicatorsPrevious Period

Current Period

Accounts Receivable Turnover (RT) 2.35 3.83 Number of Days' Sales in Accounts Receivable (Td) 155.32 95.23 Inventory Turnover (IT) 12.12 16.39 Total Assets Turnover (TAT) 1.14 1.65 Return On Assets (ROA)% 6.46 3.6

65 idem, p. 608

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Return On Sales Ratio (ROS)% 5.67 2.19 Times-Interest-Earned-Ratio (RTIE) 5.29 2.54 Return On Equity (ROE)% 16.28 7.06

135

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CHAPTER 7. THE TREASURY CASH FLOW ANALYSIS

7.1. The financial framework based on treasury cash flows

The third fundamental financial situation of a company, beside the balance sheet and the

profit and loss account is represented by the “ Cash Flow Statement “.

If the balance sheet reflects the wealth of a company, the profit and loss account

emphasizes its profitability, and the cash flow statement catches the company’s modifications

in the financial position.

The financing model based on the treasury cash flows, is drawn up by the companies

from the Anglo – American world, but also by those aligning at the International Accounting

Standards. The model is based on the cash and liquidity concepts.

7.2. Short history of the treasury cash flows

The American Institute of Accountants ( American Institute of Certify Public

Accountants – AICPA ) founded in 1897, set up in 1936 the Committee Accounting

Procedures – CAP , in order to elaborate the American Accounting Regulations.

This Committee developed its activity for 20 years, being replaced in 1959 by the

Accounting Principles Board – A.P.B.

During 1959 – 1973, the APB organization issued 31 Opinions and 4 recommendations,

among which the 19th Opinion regarding the cash flow can be found.

In the 19 th Opinion, published by the APB in 1971, it was imposed that the companies

listed on the Stock Exchange would have to draw up beside two fundamental reports

(Balance Sheet and Income Statement ) a special report named the company’s modifications

of the financial position.

This financial statement had the purpose of presenting to the investors the effects of the

inflows and outflows of a company’s funds in the course of an established period of time.

The APB 19th Opinion permitted the company’s management to define funds as cash or

work capital ( meaning current assets minus current debt ). At the beginning many companies

made up this statement based on the “ work capital “ algorithm, but in time the American

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companies preferred to elaborate the financial position modifications statement based on

SCF.

As a matter of fact, FASB ( Financial Accounting Standard Board ) founded in 1973 ,

imposed that beginning with July 1986, the American companies will replace the financial

position modifications statement with the Cash Flow Statement SCF.

In July 1975 FASB issued SSAP.10 ( Statements of Source and Application of Funds )

and required the publishing of the companies’ cash flows statements together with the annual

statements. The Funds Statement explains the changes between the opening and closing of the

balance sheet, classifying the modifications of the fixed assets and capital on the long run in

two categories :

1. the source of the funds, containing the funds from operations and other sources like

the sale of fixed assets and the issue of shares and loans.

2. the use of the funds, containing the paid taxes, paid dividends and bought fixed assets

and reimbursement of capital on the long run.

The difference between the source and usage of the funds represents the net change in

working capital.

In 1987 was published in SUA2 – The Cash Flow Statement. It was concluded that this

cash flow statement should replace Funds Flow Statement focusing upon the changes in cash

and not upon changes in working capital. Cash flow statement should have emphasized all the

encasings of the company and the payments made in a period of time. It is also wide spread in

Great Britain – the General MacDonald example – in 19883 who considered the Cash Flow

Statement more than a useful decision, suggesting the replacement of Funds Flow Statement

with SCF.

7.3. The Concept of Treasury Flow The best method to evaluate the success of a business is when the firm generates bigger

cash inflows than cash outflows. The management essence of a business is to attract resources

and to use them in order to obtain products for which people would pay more than the real

price. Nobody can survive in a business if it takes out less money than invested.

This is why, the first financial function a company must assume is the administration of

its treasury, meaning the assurance of solvency, with a minimum of financial and

administrative expenses.

In our opinion4 , when approaching this issue the following aspects should be analyzed :

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money circulation

the sources and destinations of the money

7.4. International Accounting Standard IAS – 7 regarding the cash flow statements The International Accounting Standard testifies to the fact that the treasury flows have a

great importance in the financial mechanism of a company, as these flows depend on the “

evaluation of the continuous viability development of a business”.

7.4.1. The objective, appliance area and importance of cash flows The main objective of this standard [ 25 ] is to emphasize the history of the cash and cash

convertible moments of a firm through cash flow.

On this basis, the capacity of a firm to generate cash flow is evaluated, as well as the

moment and certainty of the cash flow.

The appliance area of this standard aims to help productive companies and financial

institutions and in general, any activity that generates incomes and obligations.

The importance of the cash flows results in the following :

the cash flow permits its users to evaluate the net asset modification

the cash flow permits its users to evaluate the financial structure, the liquidity and

solvency of the company

the cash flow permits the evaluation of the company’s capacity to influence its

market value and the appearance moment of the cash flows in order to adapt the

entity to the new opportunities

the cash flow permits the entity to emphasize its capacity to generate cash and cash

convertibles

the cash flow permits a company to develop a performing model of present value

analysis for the future cash flow simulation

the cash flow permits the comparison between the exploitation results of firms as it

eliminates the effects of the utilization of alternative accounting treatments for the

same transactions and events

the cash flow is a value moment, appearance and safety indicator of the future cash

flow

the cash flow is useful in verifying the precision of the past evaluations in order to

emphasize, with the help of the same models, the future cash flow

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the historic cash flow is used in the correlation analysis between profitability, actual

cash flow and the current variation of prices.

7.4.2. Cash Flow Structure Cash flow statements must emphasize the existence, movement and transformation of

cash on three types of activities :

exploitation activities

investment activities

financial activities

a ) Cash flow from exploitation activities has an important role in determining the future

evolution of the company, as these activities are the main components of incomes, and this

cash flow is the main financing resource for production, investment and dividend payment to

the shareholders.

The cash flow from the exploitation activity is structured on two segments ; payments

and encasings :

- encasings from the sale of goods and services

- encasings from fees, commissions, rents paid periodically at fixed periods of time and

fixed quotations and other incomes

- payments to goods and services suppliers

- payments to and on behalf of employees

- encasings and payments of insurance companies for damages, premiums annuities and

other benefits from insurance policies

- payments or refunds from income taxes that cannot be identified on financing and

investment activities

- encasings and payments resulted from investments and trading contracts

b ) Cash flow from investment activities stands out, on one side, the measure in which these

activities have been self financed, and on the other side the fact that the amounts spent for

investments can generate positive cash flows in the future. The specific payments and

encasings of investment cash flow can be :

- payments made for the acquisition of tangible and intangible assets on the long run but

also those carried out by itself

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- cashing from the sale of land, buildings, plants, equipment and intangible assets bought

earlier on the long run

- payments for the acquisition of capital / equipment and other company’s receivables

and the investments in associates ( others than the cashing for those instruments

considered to be cash equivalent or those held with the purpose of trading and

investment

- cash advances and the loans made to other parties

- the cashing from the reimbursement of advances and loans made to other parties

- cash payments for the future, forward contracts, option and swap contracts, beside the

case in which the contracts are held with the purpose of investment or trading and when

the payments are classified as financing activities

- cash received from future, forward, option and swap contracts, beside the case in which

the contracts are held with the purpose of investment or trading or when the cashing are

classified as financing activities.

C ) Cash flow from financing activities emphasizes the future evolution of cash provided

by foreign investors. The components of this flow are :

- incomes obtained from the issue of shares and other capital instruments

- payments made to shareholders for the acquisition and rebuying the entity’s shares

- monetary incomes resulted from the issue of trading bills, credits, bonds, mortgages and

other short and long term loans

- the reimbursement of some important sums

- cash payments for the reduction of the obligations related to a financial leasing

operation

7.4.3. Methods for evaluating and reporting cash flows Cash flows can be evaluated depending on the exploitation activities, through two

methods :

- direct method, with the help of which major cash classes of gross payments and cashing

are presented

- indirect method, through which the net profit or net loss are adjusted with the effects of

transactions that have non cash origins, the cash payments and cashing delays or

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commitments from past exploitation and income and expense elements associated with

the cash flows from investments or finances

7.4.3.1. Direct method for evaluating cash flows The direct method of cash flow is made of :

A. Cash flows from exploitation activities

+ Cashing from clients

- Payments to suppliers

+ = Cash generated by exploitations

- Paid interests

- Paid income tax

+ = Cash flow before extraordinary elements

+ Gains from earthquake insurances

+ 0 = Net cash exploitation activities

B. Cash flows resulted from investment activities

- The acquisition of a new subsidiary without the cash acquired ( according to note A )

- The acquisition of land, building and equipment ( according to note B )

+ Cashing from the sale of equipment

+ Received interests

+ Received dividends

+ 0 = Net cash used in investment activities

C. Cash flows from financial activities

+ Incomes from the issue of social capital

+ Cashing from long term loans

- Payments for financial leasing operations

- Paid dividends

+ 0 = Net cash used in financial activities

+ Net increase of cash and cash equivalents ( A + B + C )

+ Cash and cash equivalents at the beginning of the period ( C )

= Cash and cash equivalents at the end of the period ( C )

The structure of cash notes is as follows :

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1) A regarding the acquisition of a subsidiary has the following components :

+ Cash

+ Inventories

+ Receivables

+ Land, building, equipment and plant

+ Suppliers

+ Long term debt

+ = Acquisition total price

- The cash acquired subsidiary

= Cash flow from the acquisition of the subsidiary without the acquired cash

2) B regarding the acquisition of land and fixed assets refers only to effective payments:

- Acquisition cost of land and fixed assets

+ Financial leasing due to these acquisitions

= Effective payment corresponding to these acquisitions

3) C aims the cash and cash equivalents evolution at the beginning and end of the period,

meaning the funds availability, bank balance and their investments in the monetary

market instruments like :

+ Funds availability and bank balance

+ Short term financial investments

= Cash and cash equivalents reported periodically

± The effects of exchange rate variations

= Cash and cash equivalents corrected

The cash is made up of funds availability. Cash equivalents are short term and extremely

liquid financial investments which are easily convertible into cash and at which the exchange

in cash is little.

The cash equivalents are kept with the purpose of fulfilling the short term commitments.

In general an investment can be considered the cash equivalent if it has a maturity date

smaller than 3 months from the acquisition date. Share investments aren’t considered cash

equivalents, with the exception of the case in which the preferred shares are bought earlier

than the maturity date and with a reestablished ransom date.

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Bank loans are considered financing activities. Nevertheless, overdrafts are included in

the category of cash and cash equivalents. This is why, those bank commitments can have a

positive or negative balance.

7.4.3.2. Indirect method of evaluating cash flows Cash flows can be emphasized on all three segments through the indirect method of

exploitation activities as follows :

A. Cash flows from exploitation activities

+ Net profit before taxation and extraordinary elements

± Adjustments for :

+ Amortization

+ Losses from exchange rate differences

- Incomes from financial investments

+ Bank interest rate expenses

+ = Profit from exploitation

+ Commercial receivables increase

- Inventories decrease

- decrease of debts to suppliers

+ = Cash generated by exploitation

- Paid interest rate

- Income tax spilled

+ = Cash flows before extraordinary elements

+ Insurance cashing

+ 0 = Net cash from exploitation activities

B. Cash flows resulted from investment activities

- The acquisition of a subsidiary without the acquired cash ( according to A )

- The acquisition of land, building and equipment ( according to B )

+ Cashing from the sale of equipment

+ Received interest rates

+ Received dividends

+ 0 = Net cash used for investment activities

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C. Cash flows from financial activities

+ Incomes from the issue of social capital

+ Cashing from long term loans

- Payments for financial leasing operations

- Paid dividends

+ 0 = Net cash used in financial activities

+ Net increase of cash and cash equivalents ( A+B+C )

+ Cash and cash equivalents at the beginning of the period ( C )

= Cash and cash equivalents at the end of the period ( C )

In order to compute the cash flows with the help of direct method it is necessary to

emphasize the profit and loss account of the analyzed period, which has the following

structure :

+ Sales

+ Gross cost

+ = Gross profit

- Amortization

- Administrative and sale expenses

- Interest rate expenses

+ Income from financial investments

- Losses from exchange rate differences

+ = Net profit before taxation and extraordinary elements

+ extraordinary elements ( cashing form earthquake insurances )

+ = Net profit after extraordinary elements

- Income tax

= Net profit

On the other side, the reevaluation of same assets and liabilities variations is made based

on the data from the balance sheet ( the beginning and ending of the period ) and has the

following structure :

I. Assets Cash and equivalents of it + +

Receivables + +

Inventories + +

Portfolio investments + +

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Land, building, plant and equipment evaluated at the

acquisition cost ( production )

+ +

Accumulated amortization - -

Land, buildings, plant and equipment evaluated at the

net value

+ +

Total assets + +

II. Obligations Suppliers + +

Accrued interest payable + +

Income tax that must be paid + +

Long term debt + +

Total obligations + +

III. Capital Social capital + +

Recapitalized profit + +

Total capital + +

IV. Total obligations

and capital

+ +

The profit from exploitation before capital modifications, can be determined, in the case

of the indirect method, as follows :

+ Incomes with the exception of investment incomes

- Operation expenses with the exception of amortization expenses

= Profit from exploitation before capital modifications

In conclusion, the emphasize is on components of the cash flow offers to the company’s

interest and extern users, the possibility to correctly understand the mechanisms, factors and

causes that contributes to the business boost or to its regression.

7.6. Internal and external utilization of the cash flow The cash flow is useful for the domestic management and for external investors and

creditors. The management uses cash flow to determine the level of liquidity of the company,

to establish the dividend policy and to evaluate the effects of some major strategic decisions

regarding investments and finances. In other words, the management can use the cash flow to

determine if it is wise to increase or decrease the number of dividends and to plan the needs

for investments and finances.

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For investors and creditors, this report is useful for determining the company’s capacity

of managing the cash flow, generating the future positive flows of liquidity, paying debts,

paying the dividends and interest rates and forecasting the additional needs of financing.

Also, the external beneficiaries could use the report to explain the difference between the net

profit recorded in the result account and net liquidity flows generated by the exploitation

activities. Moreover, the report shows not only the monetary effects but also non monetary

effects of the investment and financing activities developed during the year.

As a consequence, in approaching the cash flow problem we take into account two

aspects :

- Funds circuit

- The sources and destinations of the funds

7.7. Funds flow The liquidity flows from a business can be found under the shape of a permanent

circuit of money transformation.

Every business begins with a sum of money. The acquisition of goods and services

together with the production process transforms funds availability into inventories.

In turn, every sale operation transforms the inventories into receivables, which once

cashed, they becomes cash. If this system functions normally, the process continues to

repeat endlessly.

The financial resources of a company can be increased not only through auto finance

but also through external financing.

On the other hand, the financial resources can be diminished, in the case of fixed

assets acquisition or in the case of dividends payment.

In the same time, an acceleration in the rotation speed of inventories and receivables

generates additional financial resources, as a slowing down in their rotation speed, can

endanger the normal development of that business.

7.8. The sources and destinations of the funds The cash flow classifies money payments and cashing in three categories :

- Current exploitation activities

- Investment activities

- Financing activities

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1. Current exploitation activities include the monetary effects of the economic operation

and of other events that are taken into consideration when determining the net income.

In this category are included as money entries :

- Cashing from clients in the account of goods and services provided

- Interest rates and dividends received for the loans granted and investment made.

In the category of money discharges , are included the payments regarding salaries,

goods and services, interest rates and taxes, made on behalf of the employees, suppliers, the

state and other natural and legal persons.

2. Investment activities include the acquisition and sale of intangible assets and easily

negotiable securities ( others than the monetary equivalents ) and the granting and

recovering of loans.

Money entries include the received sums from the sale of intangible assets and easily

negotiable securities and from the granted loans recovery.

Money discharges include those sums spent for the acquisition of intangible assets

and easily negotiable securities and for the granting of loans.

3.Financing activities include obtaining and refunding of resources to or toward owners,

insurance of some incomes in accordance with their investments, obtaining resources from

creditors and refunding of the borrowed money or other modalities to pay debts.

The money entries include the cashing from the issue of shares and short and long

term debt.

The capital discharge includes the reimbursement of credits and payments toward

owners, including money dividends.

The operations regarding treasury shares ownerships are also considered financing

activities. The payment of suppliers and accumulated debts aren’t considered reimbursed

loans which are included in the financing investments area, but are classified as money

discharges in the current exploitation activities.

The evolution of cash flow at SC. AMIGO. S.A is present in the following table:

Table 7.1 Funds and Cash Flows

Indicators Previous Period Current period Cash FlowI.Cash provides from operations -1,778,650,118 -1,990,209,762 -211,559,644 II. Cash provides from investing -5,045,598,123 -4,914,258,063 131,340,060

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activities III. Cash provides from financing activities 7,992,793,488 7,500,707,896 -492,085,592 Total funds flow 1,168,545,247 596,240,071 -572,305,176 Cash and short term investments at the end of period 1,168,545,247 596,240,071 -572,305,176

The next cash flow evolution is given by its components, respectively :

- Cash flow from the exploitation activity was positive throughout the analyzed period

- Cash flow from the investment activity was negative throughout the analyzed period as

a result of the lack of investment resources, others than the profit and amortization

- Cash flow from the financing activity generated a monetary surplus throughout the

analyzed period as a result of the investment obtained by the company from banks.

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CHAPTER 8. BUSINESS RISK ANALYSIS8.1. Opinions regarding business risk Every entrepreneur, has to quantify together with the resource evaluation, the risk that

his commitment to a certain business implies.

On the other hand, with the end of the investment, the economic agent has to

permanently monitor the way the investment was recovered from the incomes, to prevent the

possible risk.

The risk in general, especially the business risk, is approached in papers in different

ways in the country as opposed to abroad.

So, according to the Explanatory Romanian Dictionary the term risk comes from the

French word risqué and means “ a possibility of getting in a dangerous situation, having to

face some kind of trouble or to bear some kind of damage : possible danger “.

Maria Mihalciuc and her collaborators think that the term risk in the economic activity

means a “ wide range of uncertainties regarding the future activity of an economic agent “.

Mihai Toma considers that “ every investment involves a risk “. As the risk increases the

claim on invested capital remuneration increases.7

Ion Stancu emphasizes the fact that the risk represents the profit variability towards the

medium profitability of the latest period….the risk is nothing more than the company’s

incapacity of adapting, in time and at the lowest cost, at the variations of the environment

conditions8.

Through risk, Aurel Giurgiu understands “ the probability of an undesirable event

happening.

Various finance management specialists think that an asset risk is defined as “ a likely

variability of assets’ future profitability “.

“ The risk equates with the company’s vulnerability, which can appear in all fields

( commercial, technique, human, financial, etc. ) so that its anlysis involves numerous

researches, which should emphasize the weakness of the financial and economical activities “

– Mihai and Anisoara Adochitei.

“ The risk, in a more general view means the variability of the obtained result under

medium pressure “ – thinks Ioan Mihai and his collaborators. “ More exactly we can

appreciate that risk represents the potential injury which is to expected by the patrimony,

interests and economic agent activity “

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Some French authors13 consider risk as “ an uncertainty element which can affect the

activity of an agent or the development of an economic operation.

Gheorghe Manolescu believes that the term risk “ is inseparably linked to those of

profitability and flexibility. The result of the company is submitted to unpredictable events

which accompany its activity in all fields. The risk is seen as the result of variability, affecting

the assets’ profitability and as a consequence, the invested capital.”14

The word risk claims Stere Popescu, has “ in the leading activity a special semnification,

because all management staff has to make decision, which implies certain risks…risk means

the uncertainty level of the apparition of a loss because of accidental or unexpected

circumstances “ 15

The risk, believes Nicolae Hoanta, is “ the probability of an unfavourable event which

can take place. The risk can be defined as the probability of success or failure, in which the

success means obtaining a profit and failure implies the financial loss of an investment.”16

“ In a synthetic significantion, the risk – inherent to any activity – means the variability of

the result put under medium pressure “ – Maria Niculescu

Even though the word risk or uncertainty are used many times to express the same thing,

a clear difference between them should exist, says Florea Radu.18 Uncertainty represents the

fact of not knowing what will happen in the future. Risk is the way in which we measure the

level of uncertainty. As uncertainty increases, the risk will increase and reverse. The risk

represents, a characterization of the uncertainty level.

In general, the risk is defined as the possibility of future income to be different from

what was estimated. So, the risk represents the income variability put under the medium

influence, involving the case of an unfavourable event occurance.

The risk represents one of the most vague and evasive concepts, which is hard to define

by the economists and even harder by investors.

The risk notion doesn’t have a meaning only when it is presenting the future and is trying

to forecast the possible fluctuations of profitability rate in the analyzed forecast.

Through risk analysis Richard Koch understands a systematic analysis of any business

risk, for example the one regarding a business with a new client, the entrance on a new market

or a big investment.22

The International Accounting Standards considers risk the description of a variety of

obtained results. The adjustment depending on risk can involve the increased value at which a

debt is estimated. In evaluating results and expenses affected by the uncertainty conditions, it

prudence principles must be applied in order to overevaluate assets and underevaluate debts.

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8.2. Methods for the analysis of the bankruptcy risk

The analysis of the bankruptcy risk can be done with the help of some methods that can be

grouped in the following categories, according to the relation between the phenomenon (the entity’s

solvency) and the influence factors:

- patrimonial methods;

- statistical methods.

8.2.1. The analysis of the bankruptcy risk through the patrimonial methods

The bankruptcy risk can be expressed through the equations of the financial equilibrium if the

mutual correspondence between the assets’ liquidity and the liabilities’ exigibility is realized.

In this sense, two financial rules must be respected:

1.

=

2.

=

Current assets include

current assets (rolling actives) and prepayments. Current debts include short term debts and accrued

income.

The first relation shows that the investment financing process is materialized into intangible assets,

tangible assets and financial assets, thus the entity does not dispose of sufficient working capital for

financing the current assets.

The second relation proves that the entity is solvent and its short term creditors are able to reclaim the

money invested in the respective company. Nevertheless, this equilibrium is fragile, and in case the

receivables are not cashed in due time, it will lead to the entity’s bankruptcy.

If:

<

then the entity is unable to meet its obligations, facing the risk of default.

Let’s assume the following situation (table 55):

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PERMANENT CAPITALFIXED ASSETS

CURRENT LIABILITIESCURRENT ASSETS

CURRENT ASSETS CURRENT LIABILITIES

8.2.2. Bankruptcy risk analysis by statistical methods

The evaluation of the risk the entity takes when entering on a competitive market and staying into business, implies using some statistical methods among which on a short-term we mention credit-scoring.

All the expectations are based on the data that is published in the financial statements. Among the most well-known models we recall: the Altman model, the Canon & Holder model, the Balancesheets’ Headoffice of the Bank of France model, Taffler model and Robertson model.

8.2.2.1. The Altman Model

The „Z” model is a statistic-mathematical model which forecasts the bankruptcy state of the entities, being developed in USA in 1968 and later on in 1977, by profesor Altman. The „Z” model comprises five variables that are considered to be the most representative financial understates of a company. With the help of this model, profesor Altman secceeded in forecasting aproximately 75% of the bankruptcies of some firms, approximately two years before their occurance.

The coefficients of the selected variables were established as an outcome of the financial and economical state analysis of a large number of firms, among which some went bankrupt.

The initial equation of the Z66 score is:

Z = 0,012 X1 + 0,014 X2 + 0,033 X3 + 0,006 X4 + 0,999 X5

The „Z” model, subsequently developed, is thus presented:

Z = 1,2 X1 + 1,4 X2 + 3,3 X3 + 0,6 X4 + 0,999 X5

where: the variable X1 is the measure of the entity’s flexibility and is determined as a ratio

between the working capital (current assets – current operating liabilities) (WC) and total assets (AT).

the variable X2 represents the total assets’ auto-financing rate, and is determined as a ratio between the retained profit (RPR) and total assets (TA):

the variable X3 represents the economical rate of return and is computed as a ratio between the earning before interest and taxes (EBIT) and total assets (TA):

66 B. Elliot, J. Elliot - Financial Accounting & Reporting,Pearson Education Limited,U.K,2002, p.729.

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the variable X4 underlines the entity’s borrowing capacity, and is computed as a ratio between the market value of shares (MVS) and total debt (TD) of the entity:

For the firms which are not listed on the stockmarket. The market value of shares will be equal to the social capital.

the variable X5 measures the assets turnover and is computed as a ratio between the turnover (T) and the total assets (TA):

Depending on the achieved score, the firms are differentiated on three levels, as follows:

- level I: sound firms for Z (3, +); the lower boundary of the interval can go down to

the value 2,7.- level II: firms with temporary financial distress (firms situated in the grey area) for Z (1,8; 2,7);- level III : bankrupt firms for Z (-, 1,8).

In the case previously mentioned, the situation is presented as follows (table 8.1):Table 8.1 Altman Model

Indicators Coefficients Previous period Current period Flexibility 1.20 0.13 0.22 Financing ratio 1.40 0.00 0.02 ROA 3.30 0.09 0.09 Borrowing capacity 0.60 0.66 1.04 Assets turnover 0.999 1.14 1.65 Z score 1.98786 2.86135

Thus, the analysed firm is situated in the grey area, having temporarly financial difficulties.

The model that was built by prof. Altman in 1968 was capable of forecasting the succes or failure of a company in the following two or three years, before the event occurrance. The model developed in 1977 forecasts an event five years before it is to happen:

Among the disadvantages of aplying this method we recall: using some „historical” information;

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the different recording of the patrimony; „creative” accounting; outdated accounting evaluation.Prof. Altman’s model can be applied with good results to the companies listed on the

stockmarket.

8.2.2.2. Conan & Holder Model

The model of the french analist J. Canon and M. Holder apply to the industrial entities with a number of 10 to 500 employees and is based on the „liquidity – exigibility” analysis. The model was built in the year 1978 by observing a number of 31 rates on a sample of 190 small and medium enterprises (SME), out of which half went bankrupt in the 1970-1975 period.

The “Conan & Holder” model is based also on a Z model with the following structure:

Z = 16 X1 + 22 X2 - 87 X3 - 10 X4 + 24 X5

in which: the variable X1 represents the quick ratio and is determined as a ratio between

receivables (R) and cash (TR) on one hand and current liabilities (CLB), on the other hand, meaning:

the variable X2 represent the entity’s financial stability and is determined as a ratio between the permanent capital (PC) and liabilities and equity (TP):

the variable X3 underlines the financing level of sales from external resources and is computed as a ratio between financial expenses (FE) and turnover (T):

the variable X4 shows the employees payment level, and is computed as a ratio between the salaries expenses (SE) and value added (VA) meaning:

the variable X5 reflects the weight of the operating profit (PO) in value added (VA):

Depending on the registered score of an entity, we observe that the bankruptcy probability decreases with the increasing of the score, as follows:

Score BankruptcyProbability

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Z < 0 > 80 %0 < Z < 1,5 75 - 80 %1,5 < Z < 4 70 - 75 %4 < Z < 8,5 50 - 70 %Z = 9,5 35 %Z = 10 30 %Z = 13 25 %Z = 16 15 %Z > 16 < 10 %

Grouping the entities according to the Conan & Holder „Z” score is done as follows: Z < 4 an entity with a difficult financial situation; 4 < Z < 9 an entity with an uncertain financial situation; Z > 9 an entity with a solid financial situation.In the case of the analysed entity the situation is presented as follows (table 8.2):

Table 8.2 Conan & Holder Model

Indicators CoefficientsPrevious Period

Current period

Quick Ratio 16 1.11 1.39 Financial stability 22 0.48 0.65 Financial sales level -87 0.01 0.02 Employees payment level -10 0.48 0.52 Weight of the operating profit (PO) in value added (VA) 24 0.27 0.12 Z score 29.13 32.48

We find out from the computations that the analysed entity has a solid financial situation, the bankruptcy probability being under 10%.

Among the disadvantages of aplying this model we mention the following: the only indicators used are financial indicators; the used indicators refer only to a part of the capital remuneration; financial stability can be realised through a high level of debt of the entity; intermediary liquidity can be realised by increasing the comercial loan granted to

clients.

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8.2.2.3. Robertson Model 67

Professor Robertson identified four elements that modify the financial health of an entity, as follows: market stability, drop of the profit, drop of working capital, rising of loans. Professor Robertson’s score function looks like:

Z = 3,0 X1 + 3,0 X2 + 0,6 X3 + 0,3 X4 + 0,3 X5

where:- X1 = ( Turnover – Total Assets) / Turnover- X2 = Gross Result of the Period / Total Assets- X3 = (Current Assets – Total Liabilities) / Total Liabilities- X4 = (Owners Equity – Loans) / Total Liabilities- X5 = ( Liquid Assets – Account Overdraft) / Loans

The Z function aims at the modifications that intercede in the financial statement of an entity from one period to another. If the Z score depreciates with 40% or even more than 40%, in one year, the analysis should automatically identify the causes of Z score reduction. If the reduction of the Z score is 40% or higher in two consecutive years, then the company cannot survive due to its financial instability.

A version of the scoring method, used especially by the banks, is the “normative comparison” of the credit-worthiness of the economic agents that take credits. This method is presented hereinafter.68

Table 8.3 Robertson ModelIndicators Coefficients Previous Period Current period X1 = ( Turnover – Total Assets) / Turnover 3 0.12 0.39 X2 = Gross Result of the Period / Total Assets 3 0.07 0.05 X3 = (Current Assets – Total Liabilities) / Total Liabilities 0.6 0.08 0.17 X4 = (Owners Equity – Loans) / Total Liabilities 0.3 0.27 0.69 X5 = ( Liquid Assets – Account Overdraft) / Loans 0.3 0.4 0.33 Z score 0.819 0.3822

67 J.Robertson-“Company failure-measuring change in financial health through ratio analysis” ,Management Accounting Review, U.K,November, 1983.

68 C. Stănescu, A. Işfănescu, A. Băicuşi - Op. cit., p.250.

158

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