Tips on Financial Analysis

8/12/2019 Tips on Financial Analysis

1/3

Financial Analysis and Decision Making

Introduction

1. Accounting is about professional judgement; to make judgement within the

scope of regulations and practices of accounting to correctly describe acompany.

. !e could make different statements based on different accounting policies

according to different situations". Foundation of decision making for all sectors is financial data.

#. $he course discusses the %alue mgmt. of the whole company& its resource

allocation& strategic positioning and strategy implementation and so on

Financial 'tatements

1. " types %i(. )alance 'heet& Income 'heet and *ash Flow 'tatement.. +eed, to describe the economic acti%ities of a company.

a. Financial, firm needs money-borrow money from bank-pay its dues-accept in%estments

b. In%estment, open new branch& enter new bi(.& de%elop new product linec. peration, mf. /roduct- 'ale of products- *ollect 0ecei%ables

". 'tarting pt. of all companies is a sum of in%ested funds.

#. All companies can be abstracted to a continuous repeating cycle, 'tarts with in%ested cash andends with recei%ed sales proceeds in cash

. $he purpose of balance sheet is to know the standings of the principle of your initial in%estment

Assets Items

A typical e2ample of a balance sheet

)alance 'heet *omponents,


2/3

1. *urrent Assets, $hese are li3uid assets that can be con%erted into cash in a single cycle. $hey

are ranked in the order of how fast they can be turned into cash. It is further di%ided into,

a. *ash and *ash e3ui%alents, It simply is money 4deposited in bank or retained bycompany5

b. Accounts 0ecei%able, $he right to recei%e a payment 4an agreement between buyer and

seller5 for a product sold within6on a stipulated time.c. ther 0ecei%able, 0ecei%able obtained without the selling of a product 4someone

owing; not an in%estment or loan5. It is a temporary working capital with no return. $his

kind of recei%able is a *hinese characteristic.d. /repayments, 0ecei%e all money in ad%ance from a %endor. It is also a right and hence

an asset.

e. In%entory, 0aw materials& !ork in /rogress& Finished /roducts.f. Deferred 72penses, Any cash outlay which appears to be asset initially& but becomes an

e2pense gradually during normal bi(. perations.

72, stationery& ad%ance rent payment& prepaid ad%ertising costs.

8ong term deferred e2penses, Deferred e2penses that are consumed during a relati%elylong period of time. 72, 'tart-up costs used for the establishment of an enterprise.

. +on-*urrent Assets, $hese are assets that take many cycles to be con%erted into cash.

a. Fi2ed Asset, 9as to be of a substantial %alue and ne%er a durable. It depreciates o%ertime 4All e2cept land5

72, *ars& *omputers& /roperties

b. Intangible Asset, copyrights& land rights& goodwill& patents& proprietary technologies&land usage4In *hina only& no ownership of land- only the right to use a piece5

c. 8ong term In%estments, 9old any in%estment for long term 473uity6Debt in%estment5

72, wnership of a subsidiary& holding of :o%t. )onds& shares in a company.


3/3

Figure showing outline of a business framework

8iability Items

1. 'hort $erm )orrowings, )ank loans to be paid < 1year. Account /ayable, $he right to recei%e money that a customer has signed to the %endor.

". ther payable, 'ame as ther recei%able from the borrower=s />

#. Ad%ances from customers, $he liability that a good=s pro%ider has to the customer after acustomer has made the prepayments 4an upfront deposit5

. *urrent liabilities, Accrued payroll 4wages to employees for the period in which financial

statements is to be made but not paid5& $a2es /ayable 4ta2 payable for the month in which thefinancial statement is to be made but not paid5.

?. +on-*urrent 8iabilities, due for a period @ 1 year.

a. )onds /ayable 4not in *hina, can be done iff bi(. is capable of issuing bonds5b. 8ong term /ayable, related to some specific kind of transactions. 72. 8ease

i.perating 8ease, !hen we pa

ii.y rentals for something we do not own. It has a relati%ely shorter term and

relati%ely less sum of moneyiii.Financial 8ease, /aying off a loan in term of rentals for an asset.

'hare-holders 73uity, this is ne%er paid& since share-holders ne%er lea%e the company. ways to in%est money into a firm, 72ogenous 473uity and *ap. 0eser%e5 7ndogenous 4'urplus

0eser%e and 0etained 7arnings5.

1. 73uity and *apital 0esere, 0elates to the organi(ational form of the firm. For incorporated

firms, 73uity. For limited liability firm, /aid in capital.

Aside from *hina& Actual moneyB reg. capital C *apital reser%e

8isted companies which sell out shares must ha%e capital surplus. 73uity6*apital stock is ameasure of the firm=s legal liability and a reflection of the di%ision of interest between the

company=s shareholders 4not in proportion of their capital contributions but in proportion of

their e3uity holdings5.. 0etained 7arnings and 'urplus 0eser%e, '0, /rofit that cannot be distributed by the law.

0etained 7arnings, /rofit a company doesn=t want to distribute 4for further in%estment

purposes5.". /rofitB '04a minimum amt. re3uired by the law5C 0esource allocation by shareholders 4money

spent5 C 07

Documents

Tips on Financial Analysis