Assessment 2
Step 1
Chapter 4: Analysing
Financial Statements.
The introduction of this chapter left me with the mix
feelings that come from delving into the unknown. While I have a basic
understanding of each of my companies financial statements, the main terms in
them and why they are used. My company Hunter PLC is enormous, with operations
running all over the world and dealing with over a billion in cash flow. I was
in no way able to look at my statements and understand how my company ticked,
but Martin's advising in the introduction that interpretation of these
statements may help us understand the past of the firm and predict it's future
left excited to learn to look past what my company highlights for me and see
the realities of the business.
4.1 How firms add
value
The beginning of 4.1 opens with a solid statement that to find
where the firm adds value, we must ignore dividends and focus on the firms free
cash flow (FCF) and economic profit, which is the transfer of value within a
firm. This FCF is pushed by two things cash flow from operations (C) and the
net cash that is invested into a firm's operating assets (I). The more that is
invested into operating assets the less FCF the firm will have, and the less
value the firm is worth according to the discounted cash approach. I found this
very difficult to wrap my head around. From what I gathered about my company
they were investing heavily into their operations to meet the oil demand.
Millions upon millions into operations that would vastly increase the assets
and value of the firm. However, reading on I found that the main factor when
looking at this cash flow is whether the profit from the investment will out
way the cost of that investment. The more my companies on hand free cash flow
that is invested in factories that produces mining equipment, the more it will
be rewarded with a high return on that investment, from the additions sales
they can make due to the increased assets. Therefore they are adding value by
taking capital from investors and using it to generate even more of a return
than the cost of the original capital.
4.2 Operating and financial
activities
I feel as though this section is starting to come together
for me. It reinforces the advantage of looking at your financial statements and
separating them into two activities; operating and financial activities. To be
honest when I look at my financial statements I have a general understanding of
the title and sub headings but no idea of the profit drivers behind them. To me
it's kind of like when I bought my car. Looking at it from the outside of my
new car is like looking at my financial statements. I look at them and I can
see what my company says what the financial worth is but it doesn't help me to
understand the car itself. Opening up the hood and studying the engine is like
looking at the operating activities. Only when you know how each part works
individually and together can you understand how and why this thing cost so
much as it did.
Coming to read about how I would restate my statement of
changes in equity caught me a bit off guard. I began to feel well unprepared
for what I had to do. For example I knew that the value of equity from the
previous periods balance sheet, plus the earnings for the current period from
the income statement should equal the value of the equity from the current
balance sheet, but mine did not add up. However using Martin's example I slowly
realised that the difference was made up from the consolidated statements of
comprehensive income, which my firm summarised under other comprehensive income
found in the statement of changes in equity.
4.3 Restate two key
financial statements
Having gone over the previous section and relating it to my
own statement of changes in equity, I felt a lot more confident entering this
new section and taking a look at my balance sheet and how I would restate it
into my restated statements of financial position.
Martins advising us to separate a firm's operating and
financial assets and liabilities by printing out the balance sheet and marking
an O for operating and F for financial next to each item was a well received. I
couldn't help be feel a little annoyed I didn't think of it first though, as it
is a organising tactic I use at work. Part of my job is to sort through lists
of residential and development sales and mark which we can use as sales
evidence. I print these lists off and mark the usable ones and whether it is
residential or development. This stops me from entering the same figures twice,
and saves a considerable amount of time.
Originally I thought that restating my cash and cash
equivalents into financial assets was the obvious move, I didn't really think
about it. However, Martin makes it obvious that it could either be financial or
operational. Firms need a portion of it's cash to use in it's day-to-day
operations, such as cash registers, in this case it is an operating asset. It
also needs to hold it's cash balances and store it with a bank, this makes it a
financing asset. The easiest way for me personally to look at it, is to compare
it to my own two bank accounts. The first one is my access account. I place a
small portion in it from my pay, to use for my operating use. Fuel for my car
so I can get to work. Stationary so I can work on my university assignments. It
operating, because I would not be able to continue with my day-to-day
activities without. The second is my savings account. This cash I do not use at
all and store it away for future use, a potential trip overseas most likely.
This is a finance asset.
4.4 Profitability and
efficiency.
The beginning of this section to me was interesting, and the
basics behind it made sense right away, which was a nice for change. I believe
this is because of my understanding of my work and it's competition. My work
charges a smaller fee than it's competitors at the same quality and with a
shorter turn around for a residential valuation report. Because we will earn a
lower amount for a single report, we make less profit for each dollar of sales.
However, because our clients will provide us with far more work and because we
are quicker at getting the report back to them we can handle more of it. Combined
with the resources we use are the same cost as our competition we make more
overall sales for each dollar we have invested in the company, making us far
more efficient.
I honestly started to get a bit confused from this point
onwards as it was unfamiliar. The advantage I had with the topics discussed
before this point was that I was comparing it with the relevant points of my
assessment I'm certain it will come
together when applying it to my statements.
Step 2
Overall I feel like I didn't have too much trouble
completing my financial statements. There wasn't many occasions where I was
stopped in my tracks. The original and restated balances match, so I feel mostly
feel confident. there is a small part of me that says that because it was
easier than I thought I must have missed something.
Separating the headings into operating and financial
headings was fairly straight forward. I found that the notes in my annual
reports help in some cases in which I struggled. When struggling I also
compared my statements to a large number of other examples of restated
financial reports. The exemplars, Martins chapter, week 6 lecture. The assessment
2 forum was a great resource to compare and ask for help. A few people where
very quick to respond to my post asking for help. Comparing the exemplars was a
great way to find the best option of laying out my statements, in a way that
made it easy to see the separate and compare the assists and also total them
together.
I did feel quite a bit of pressure working on my restated
statement of financial performance. It was a little more complicated than the
rest of the statements, and when I completed it my bottom line did not match
the bottom line from the original statement by a huge margin. After staring at
the these numbers for a couple of hours I finally came to realise it was
attributed by two small errors. The first was that I did not copy over the 'from
continued operations' heading from my income statement. For whatever reason I
assumed that 'from continuing operations' and 'from discontinued operations'
was simply a breakdown the 'profit for the year' heading. When I copied this
over the spreadsheet updated and came close to matching up my bottom lines. The
second mistake I made was in my taxation calculations. I calculated the correct
tax benefit, however when calculating the tax expense I added the tax benefit
to the tax reported instead of subtracting it. Which was silly because the
whole point was to distribute the tax between operating and financial. Once I
simply changed the plus to a minus in the calculation, the spreadsheet adjusted
and the bottom line matched the original bottom line (much to my relief).
I'm very stubborn and prefer to handle most problems on my
own, but after struggling with these two problems for a couple of hours I
relented and posted my woes on the forum. It was late so I ended up figuring it
out before my classmates had a chance. However, William and Beverly where both
kind enough to have a look anyway and confirm everything was in order.
