Lecture 4 Financial Accounts 2

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Whitewater LimitedConsulting Engineers & Scientists

FINANCIAL ASPECTS OF PROJECT ENGINEERING AND CONTRACTING

PROJECT APPRAISAL FOR BIOPROCESS

Richard Hill

FINANCIAL ACCOUNTS


MEASURING MONEY

“When you can measure what you are speaking, about and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, you knowledge of it is of a meagre and unsatisfactory kind: it may be the beginning of knowledge, but you have scarcely, in your thoughts, advanced to the stage of science.”

William Thomson, Lord KelvinPopular Lectures and Addresses (1891-1894)


MEASURING MONEY

�Engineers know about

�Measurement

�Monitoring processes

�Control systems

�Engineers therefore make excellent

�Project managers

�Contract managers

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MEASURING MONEY

To have control over money

… we have to be able to measure it and understand what the numbers mean.


SHAREHOLDERS

�Limited liability companies

� Ltd

�plc

�Shareholders own the company

�Shareholders earn

�Dividend

�Increased share price

�Increased share value


SHAREHOLDERS

�Shareholders may lose

�All of their investment in a limited liability company but have no obligation for further

investment

�Shareholding is a risk

�“the value of your investment may go down as well as up”

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SHAREHOLDERS


SHAREHOLDERS

�Joint Stock Companies Act 1844

�1860s growth of limited liability Cos

�Limited Liability Act 1862 – Cos with >7 members could register as Ltd

�Misguided and fraudulent promotions

�Easily available credit at low security from newly created finance Cos

�Overend, Gurney & Co registered as Ltd in 1865 but concealed its liabilities


SHAREHOLDERS

�On Thursday, 10 May 1866, Overend, Gurney suspended payments

�The following day a panic ‘broke like a

thunderclap over the City’

�The Bank Charter Act was suspended

�Overend, Gurney collapsed owing £11m

�Within three months, over two hundred companies including banks had collapsed

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FINANCIAL ACCOUNTS

�Shareholder protection

�Financial information

�State of the company

�Public information

� Independent Audit

�Chartered Accountant

�Available for inspection

�Companies House


FINANCIAL ACCOUNTS

� Introduction to financial (or fiduciary) accounts

�UK format

�Statements of Standard Accounting Practice

�Financial Reporting Standards

�Other countries do it differently


FINANCIAL ACCOUNTS

“When I use a word,” Humpty Dumpty said in a rather scornful tone, “it means just what I choose it to mean – neither more nor less.”

Lewis CarrollThrough the Looking Glass

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FINANCIAL ACCOUNTS

�Obfuscation

�holding companies

�groups

�subsidiaries

�operating company’s accounts may not be

filed

�ultimate parent company may be difficult

to identify


FINANCIAL ACCOUNTS

�Statement of Financial Position

�Balance Sheet

�Values the company at the end of the financial year

�Statement of Income

� “Profit & Loss Account” or “Trading Account”

�Shows what happened to the money


ASSETS & LIABILITIES

�The company is a virtual entity

�It cannot own anything of its own

�So its liabilities must equal its assets

�It belongs to the shareholders

�All the company’s assets that are not owed to creditors belong to the shareholders

�The company therefore owes its net assets to the shareholders

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Assets Liabilities


ASSETS

�Fixed assets

�Tangible (buildings, plant etc)

�Intangible (shares in JVs, IP)

�Current assets

�Stock (work in progress)

�Debtors (client/purchaser)

�Cash (money in the bank)


LIABILITIES

�Current�Loans and overdrafts

�Creditors (suppliers)

�Long term creditors �Loans due after 12 months

�Provisions

�Capital and reserves (owed to the shareholders)

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£'000 £'000

FIXED ASSETS

Tangible assets 3712

Investments 19

3731

CURRENT ASSETS

Stocks 3044

Debtors 3544

Cash 585

7173

TOTAL ASSETS 10904



CURRENT LIABILITIES

Bank loans and overdrafts 1147

Trade and other creditors 2807

3954

CREDITORS

Amounts falling due after more than one year 624

Provisions for liabilities and charges 245

869

CAPITAL AND RESERVES

Called up share capital 1183

Share Premium 95

Retained profit (from P & L) 4803

6081

TOTAL LIABILITIES 10904


ASSETS & LIABILITIES£'000 £'000

FIXED ASSETS

Tangible assets 3712

Investments 19

3731

CURRENT ASSETSStocks 3044

Debtors 3544

Cash 585

7173

TOTAL ASSETS 10904

CURRENT LIABILITIES

Bank loans and overdrafts 1147

Trade and other creditors 28073954

CREDITORS

Amounts falling due after more than one year 624

Provisions for liabilities and charges 245

869


Called up share capital 1183

Share Premium 95Retained profit (from P & L) 4803

6081

TOTAL LIABILITIES 10904

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�Purchase of materièl for a contract

�Current assets (stocks) increases

�Current liabilities (creditors) increases

�Payment of supplier

�Current liabilities (creditors) decreases

�Current assets (cash) decreases



�Purchase of fixed assets

�Fixed assets (tangible) increases

�Current assets (cash) decreases

�Depreciation

�Declining residual value

�Annual depreciation (linear)

�Decreasing asset value


BALANCE SHEET

�“Statement of Financial Position”

�A snapshot of the company’s value at the end of the financial year

�Format for presentation varies from

country to country

�Shows previous year’s results for comparison

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BALANCE SHEET

�To clarify the meaning of “stock”

� “Stock” in a balance sheet is short for “Stock-in-Trade” which means goods or services that have been purchased by a company for sale – hence “stock-taking”, “stock room” etc

� “Stock” can also be used to refer to an interest in a company and is virtually interchangeable with “share” hence “stockholders”, “stock exchange”

�This comes from the term “Joint Stock Company”which is pretty much interchangeable with “Limited Liability Company”


BALANCE SHEET

£'000 £'000 £'000 £'000

FIXED ASSETS

Tangible assets 3712 4055

Investments 19 193731 4074

CURRENT ASSETS

Stocks 3044 2523

Debtors 3544 3170

Cash 585 20347173 7727

TOTAL ASSETS 10904 11801

CURRENT LIABILITIES

Bank loans and overdrafts 1147 1826

Trade and other creditors 2807 3184

3954 5010

CREDITORSAmounts falling due after more than one year 624 624

Provisions for liabilities and charges 245 217

869 841


Called up share capital 1183 1183

Share Premium 95 95Retained profit (from P & L) 4803 4672

6081 5950

TOTAL LIABILITIES 10904 11801

2010 2009


BALANCE SHEET

£'000 £'000 £'000 £'000

FIXED ASSETS


Investments 19 19

(A) 3731 4074

CURRENT ASSETS

Stocks 3044 2523

Debtors 3544 3170

Cash 585 2034

(B) 7173 7727

CURRENT LIABILITIES



(C) 3954 5010

NET CURRENT ASSETS (D = B - C) 3219 2717

TOTAL ASSETS LESS CURRENT LIABILITIES (E = A + D) 6950 6791

CREDITORS

Amounts falling due after more than one year 624 624


(G = E - F) 6081 5950

2010 2009

}(E)}(F)

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BALANCE SHEET



Share Premium 95 95

Retained profit (from P & L) 4803 4672

H = G 6081 5950


BALANCE SHEET

£'000 £'000 £'000 £'000

FIXED ASSETS


Investments 19 19

(A) 3731 4074

CURRENT ASSETS

Stocks 3044 2523

Debtors 3544 3170

Cash 585 2034

(B) 7173 7727

CURRENT LIABILITIES



(C) 3954 5010

NET CURRENT ASSETS (D = B - C) 3219 2717

TOTAL ASSETS LESS CURRENT LIABILITIES (E = A + D) 6950 6791

CREDITORS

Amounts falling due after more than one year 624 624


(G = E - F) 6081 5950



Share Premium 95 95

Retained profit (from P & L) 4803 4672

H = G 6081 5950

2010 2009

}(E)}(F)


BALANCE SHEET

�Net current assets

�Current assets less current liabilities

�Working capital

�Liquidity

�Total assets less current liabilities

�Solvency

�Capital and Reserves

�Shareholders funds

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BALANCE SHEET

�Real and virtual money

�Accountants look at virtual money

�Bank managers are concerened with real money

�An invoice (debtor) is an asset but is not real money until it’s been paid


PROFIT & LOSS

LC

FLOW IN

FLOW OUT

LEVEL MONITOR

Flow in ≠ Flow outLevel will varyLevel at any moment is shown by balance sheetIncrease in level by comparison with last year is profitCumulative inflow and outflow is shown in P&LEmpty tank – no working capital


PROFIT & LOSS

�Statement of Income

�Shows how much cash flowed into the company during the financial year

�Shows how the cash was spent

�Shows the profit (or loss) made by the company during the financial year

�Shows how much profit has been accumulated

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PROFIT & LOSS

� Income

�Turnover (invoiced sales)

�Expenditure

�Cost of Sales (direct costs)

�Gross profit (contribution)

�Operating Expenses (indirect costs or

overheads)

� Interest

�Profit

�Dividends


PROFIT & LOSS

2010 2009

£'000 £'000

TURNOVER 25658 25323

Cost of Sales -18967 -18582

GROSS PROFIT 6691 6741

Net Operating Expenses -5624 -5223

OPERATING PROFIT/(LOSS) 1067 1518

Interest receivable 100 76Interest payable -242 -314

PROFIT/(LOSS) BEFORE TAXATION 925 1280

Tax on profit -370 -416

PROFIT/(LOSS) AFTER TAXATION 555 864

Dividends -424 -431

131 433

Retained profit brought forward 4672 4239

Retained profit carried forward 4803 4672


INTERPRETATION

(Op Prof + Interest receivable)Profit margin =

Turnover

(Op Prof + Interest receivable)Return on capital =

(Tot Assets - Current Liabilities)

Return on (Op Prof + Interest receivable)Shareholder’s = Funds (Capital and reserves)

(Bank loans + Long term creditors)Capital Gearing =

(Capital and reserves)

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INTERPRETATION

Current assetsCurrent Ratio =

Current liabilities

<1 illiquid >1 liquid>1.5 sufficient working capital>2 excessive working capital

(Current assets - work in progress)Liquid Ratio = (“acid test”) Current Liabilities

<0.5 potential problems ahead>0.75 adequate>1 secure


Share Trading

“STOCK EXCHANGE RATIOS”

Profit after taxEarnings per share =

Number of shares

Profit after tax

Dividend Yield =Share Capital

Share PriceP/E Ratio =

Earnings per share


INTERPRETATION

Wessex

Water

Foster

Wheeler Sainsbury M&S

Fixed assets £m 1900 600 8400 6000

Turnover £mpa 390 2500 17800 9000

Profit £mpa 95 200 330 820

Total Assets - Current Liabilities £m 1800 870 7510 5170

Share capital £m 81 600 1300 600

Shareholders equity £m 370 1600 4900 1900

Profit on TO 24.4% 8.0% 1.9% 9.1%

Return on Shareholders Funds 25.7% 12.5% 6.7% 43.2%

Dividend Yield 117.3% 33.3% 25.4% 136.7%

TO:Fixed Assets 0.2 4.2 2.1 1.5

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FINANCIAL ACCOUNTS

Fiddling the financial accounts is illegal (but you can often get away with

“creative accountancy” …


FINANCIAL ACCOUNTS

… and if you think accounts are boring

try this for Easter reading!


SUMMARY

�Stop thinking of accounts and accountants as boring

�Learn how to read what they seem to say

�Recognise where they might be misleading

�Management accounts must be prompt, informative and should not mislead

�The accounts department needs cooperation from everyone in the company to achieve these objectives

Documents

Lecture 4 Financial Accounts 2