Step 1
Chapter 4: Analysing Financial Statements
What is the Author Trying to Say?
My understanding of what the
author is trying to say is that financial statements help us to ‘understand’
the past to help us better ‘predict’ the firm’s future. When the author
discussed the two writer’s understandings of the need to ‘consult’ or not be ‘wrong’
about the past to be able to ‘foresee’ or ‘predict’ the future I sat back and
thought about it for a little bit. It sounds a bit like trying to find where
you went wrong so you can fix it or improve for next time. I believe I will
know how to restate a financial statement as it is not just rewriting it in the
same way but instead writing it in an easier form. Then finally, discussing the
return on net operating assets (RNOA) by breaking it down into two parts: profitability
and efficiency.
Key Concepts (KC) that Occur to me
KC#1: It is mentioned by Turner
(2014) that financial statements are used to record the history of the firm. Using
these statements to look back at the past, the future can then be predicted.
The statements are put into practice for others to understand or make sense of
the firm’s economic and business realities.
KC#2: I was unaware that
dividends and free cash flow (FCF) were connected in a firm’s financial
statements. Cash flow I have found, is not a measure of creation of value but
instead a transfer of value as well as dividends. Dividends are a transfer of
money between the firm and equity investors whereas cash flow is a transfer of
money within a firm.
KC#3: Return on Net Operating
Assets (RNOA) is after tax operating income (OI) divided by the net operating
assets (NOA) invested in the business. E.g. RNOA = OI / NOA
KC#4: Economic Profit is RNOA
less the opportunity cost of capital times the amount of net operating assets
(NOA). E.g. Economic Profit = (RNOA – cost of capital) x NOA
KC#5: By earning revenue on RNOA
greater than the opportunity cost of capital, firms create value for their
equity investors. The greater investments in NOA at returns above its cost of
capital, the more value a firm can create.
KC#6: Operating Activities is the
‘inside of the Kinder Surprise egg’. It is the part that everyone is eager to
get to, meaning that everyone wants this part the most. Financial Activities
are the ‘chocolate layer in a Kinder Surprise’, this is the ‘distractions’ of
how it is financed.
KC#7: Statement of Changes in
Equity shows how a firm’s balance sheet and income statement are joined. Restating
a firm’s statement of changes in equity helps clearly identify all of a firm’s
earnings and make sure its equity only includes genuine equity.
KC#8: Balance Sheet shows all the
assets and liabilities of a firm under the categories current and non-current
assets or liabilities. Restating the balance sheet shows a clear separation of
operating and financial assets and liabilities in the firm. It also shows net
operating assets (NOA) and net financial assets (NFA) or more known as net
financial obligations (NFO).
KC#9: When restating the Income Statement,
it helps to separate the operating and financial revenue and expenses. Also, to
identify comprehensive operating income after tax (OI) and net financial
expenses after tax (NFE) or more commonly known as net financial income after
tax (NFI).
NC#10: Profitability is how much
profit a firm makes for each dollar of sales. Efficiency is how much sales it
makes for each dollar it has invested in its business.
What do I find confusing?
To begin with I found restating
my financial statements quite hard because to change it from looking like a
normal statement to all of a sudden clearly displaying operating and financing
activities was difficult. I got through that step by talking to the others in
my accounting class and hanging out with one of them on campus more. I can remember from last year when doing
accounting in grade 12 sitting down in the classroom and being taught a new
concept. At first it is extremely daunting and quite confusing but slowly as
the teacher related it back to our previous knowledge and showed us carefully
we began to understand it. Working through this with the other girl on campus
reminded me of this because it slowly began to clear up for us.
What do I find difficult to understand?
KC#6: At first I didn’t quite understand the difference
between operating and financing activities but going over the study guide a few
times, discussing them with class members and then also answering some
questions on Peerwise it slowly became clearer to me.
KC#9: The Income Statement was the hardest to restate, it
just didn’t come easily to me at all. I found I had to ask a lot of questions
to my fellow peers on campus and also had to look back at the restated example
many times to relate it to my firm’s statement. In the end I did figure it out
and was quite happy with the result.
What do I find exciting?
I find exciting the moment I have been able to differentiate
between Operating and Financing activities in both the Balance Sheet and the
Income Statement. To be able to clearly identify the different activities and
fill out the restated statements is a really joyous feeling.
What do I find frustrating?
The thing I found the most frustrating was not being able to
match up or work out the Operating and Financing activities. To look at the
accounts in the statements and just blank is not the best feeling. It just took
so much time up which meant other parts of the assignment had to fall behind
because it just wasn’t working properly for me.
Summary of my Key Concepts and Questions for Step 1
Looking back at reading this chapter and completing step 2
alongside it, I have realised that restating my financial statements for my
firm has really opened my eyes about it. I now understand more about my company
than I had when I originally completed assignment 1 with the financial
statements. With some major setbacks on the restating, I have decided to
reshuffle my time management and allow for any more interruptions and have my
assignment and SPA layout done beforehand so less time will be spent on that.
