REVIEW OF BASIC UNDERSTANDING AND ANALYSIS OF FINANCIAL STATEMENTS

Transcription

1 REVIEW OF BASIC UNDERSTANDING AND ANALYSIS OF FINANCIAL STATEMENTS Payear Sangiumvibool, Ph.D., CPA (US) ดร. พเย ย เสง ยมว บ ล Webster University Thailand Faculty, Accounting and Management สภาว ชาช พบ ญช อน กรรมการด านการพ ฒนาว ชาช พบ ญช อน กรรมการด านงานต างประเทศ

2 AGENDA Part I: Report on the financial statements Understanding the components Previewing the audited reports Part II: Financial analysis Ratio analysis for beginners How to use financial ratios to analyze any business or stock investment PAYEAR S. 2

3 FINANCIAL STATEMENTS Transactions are economic interchanges between entities that are accounted for and reflected in financial statements. PAYEAR S. 3

4 ACCOUNTING EQUATION PAYEAR S. 5

5 FINANCIAL STATEMENTS Statement of position Balance sheet Income statement Statement of operations Statement of comprehensive income Statement of changes in shareholders equity Cash flow statement Notes to financial statements PAYEAR S. 6

6 TIME-LINE MODEL PAYEAR S. 7

7 PAYEAR S. 8

8 ANNUAL REPORT The annual report is distributed to shareholders (and others). It contains the financial statements, together with the report of the external auditor s examination of the financial statements. It also contains Management s Discussion and Analysis (MD&A). PAYEAR S. 9

9 REPORT AND CONSOLIDATED FINANCIAL STATEMENT 1. Independent Auditor s Report 2. Statement of Financial Position 3. Statement of Comprehensive Income 4. Statement of Changes in Shareholders Equity 5. Cash Flow Statement 6. Notes to Consolidated Financial Statements PAYEAR S. 10

10 INDEPENDENT AUDITOR S REPORT Opinion Key Audit Matters Responsibilities of Management Responsibilities of Auditor What When Why (and How) PAYEAR S. 11

11 BASIS FOR OPINION What When Why (and How) I conducted my audit in accordance with Thai Standards on Auditing. My responsibilities under those standards are further described in the Auditor s Responsibilities for the Audit of the Financial Statements section of my report. I am independent from the Group in accordance with the Code of Ethics for Professional Accountants as issued by the Federation of Accounting Professions under the Royal Patronage of His Majesty the King as relevant to my audit of the financial statements, and I have fulfilled my other ethical responsibilities in accordance with the Code. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion. PAYEAR S. 12

12 KEY AUDIT MATTERS Key audit matters are those matters that, in auditor s professional judgement, were of the most significance in the audit of the financial statements of the current period. PAYEAR S. 13

13 RESPONSIBILITIES OF MANAGEMENT Management is responsible for the preparation and fair presentation of the financial statements in accordance with Thai Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Group s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. PAYEAR S. 14

14 RESPONSIBILITIES OF AUDITOR to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes my opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Thai Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with Thai Standards on Auditing, I exercise professional judgement and maintain professional skepticism throughout the audit. I also PAYEAR S. 15

15 STATEMENT OF FINANCIAL POSITION Assets Current assets have future benefit to the company within one year Non-current assets have future benefit to the company several years Liabilities Current liabilities (obligation) that will be repaid within one year Non-current liabilities that will not be repaid within one year Shareholders equity Share capital Accumulated other comprehensive income Retained earning PAYEAR S. 16

16 EXAMPLE OF ASSETS Current assets: Cash and cash equivalents Current investment Trade and other receivables Short-term loans to related party Inventories Advance payments Non-current assets: Restricted bank deposits Investments in subsidiaries Investment in associate Investment property Property, plant and equipment Intangible assets Goodwill Patents Deferred tax assets PAYEAR S. 17

17 EXAMPLE OF LIABILITIES Current liabilities: Bank overdraft Short-term loans Trade and other payables Current portion of long-term loans Income tax payable Non-current liabilities: Long-term loans from financial institutions, net of current portion Provision for long-term employee benefits PAYEAR S. 18

18 EXAMPLE OF SHAREHOLDERS EQUITY Share capital: Registered Issued and fully paid Retained earnings: Appropriated Unappropriated Accumulated other comprehensive income items: Non-controlling interests of subsidiary at price higher than book value Non-controlling interests in subsidiary at price lower than book value Change in the interest in subsidiaries Capital reserve for share-based payment transactions of the associate PAYEAR S. 19

19 ASSETS = LIABILITIES + SHAREHOLDERS EQUITY Net worth = Assets - Liabilities Assets Liabilities Shareholders equity Current assets: Cash and cash equivalents Current investment Inventories Advance payments Non-current assets: Restricted bank deposits Investments in subsidiaries Investment property Property, plant and equipment Intangible assets Deferred tax assets Current liabilities: Bank overdraft Short-term loans Trade and other payables Income tax payable Non-current liabilities: Long-term loans from financial institutions, net of current portion Provision for long-term employee benefits 20 Share capital: Registered Issued and fully paid Non-controlling interests of subsidiary at price higher/lower than book value Change in the interest in subsidiaries Capital reserve for share-based payment Retained earnings: Appropriated Unappropriated

20 Assets Current Assets Non-current Assets

21 Liabilities Current Liabilities Non-current Liabilities

22 Shareholders equity Share capital Accumulated other comprehensive income Retained earnings 23

23 Assets = Liabilities + Shareholders equity PAYEAR S. 24

24 INCOME STATEMENT Revenues Sales and service income Other income Expenses Cost of sales and services Selling and Administrative expenses Other expenses Other comprehensive income (OCI) Earning before interest and tax (EBIT) Earning after income tax (EAT) PAYEAR S. 25

25 STATEMENT OF COMPREHENSIVE INCOME PAYEAR S. 26

26 Revenues Expenses 27

27 EBT EAT PAYEAR S. 28

28 OCI 29

29 EPS EPS = Net income = 703,777,987 Baht = 1.46 Baht per share number of issued shares 482,579,640 Shares 30

30 PAYEAR S. 31

31 STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY This financial statement shows the detail of stockholders' equity and explains the changes that occurred in the components of stockholders' equity during the year. PAYEAR S. 32

32 Consolidated

33 STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY Separated 34

34 CASH FLOW STATEMENT Provides relevant information about cash and cash equivalent changed during the reporting period. There are three activities: PAYEAR S. 35

35 CASH FLOWS FROM OPERATING ACTIVITIES PAYEAR S. 36

36 Operating Activities Step 1: Adjustment of non-cash items in income statement to profit before income tax, for example Depreciation Change in fair value of assets Unrealized gain or loss Interest income or expenses 37

37 Operating Activities Step 2: increase and decrease in operating assets and liabilities including cash flow from interest and corporate income tax PAYEAR S. 38

38 CASH FLOWS FROM INVESTING ACTIVITIES Investing activities Sale or purchase of operational assets Sale or purchase of investments Collections of loans or loans to others PAYEAR S. 39

39 CASH FLOWS FROM FINANCIAL ACTIVITIES Financial activities Issuance of stock Issuance of bonds and notes Payment of dividends Repurchase of stock Payment of debt PAYEAR S. 40

40 PAYEAR S. 41

41 NOTES TO THE FINANCIAL STATEMENTS Summary of Significant Accounting Policies Typical accounting policies that are disclosed in the notes to the financial statements include: 1. Depreciation method used. 2. Inventory valuation method used. 3. Basis of consolidation of subsidiaries. 4. Reconciliation of taxes paid to tax expense. 5. The cost of employee benefit plans. 6. Treatment of goodwill and intangible assets. 7. Earnings per share information. 8. Stock option and stock purchase plans. PAYEAR S. 42

42 Notes to the Financial Statements OTHER DISCLOSURES 1. Accounting changes. 2. Business combinations. 3. Contingencies and commitments. 4. Events subsequent to the balance sheet date. 5. Impact of inflation. 6. Segment information. PAYEAR S. 43

43 PAYEAR S. 44

44 LIMITATIONS OF FINANCIAL STATEMENTS Financial statements report only quantitative economic data. Qualitative economic variables are usually subjective in value and cannot be quantified in terms of Bahts that can be verified. They do not reflect qualitative economic variables, such as the value of the management team or the employees morale. How do the terms quantitative and qualitative differ? PAYEAR S. 45

45 LIMITATIONS OF FINANCIAL STATEMENTS Historical Cost Concept Assets are usually valued at the cost of the Asset when acquired. Matching Concept Estimates are acceptable provided there is a basis for them. The balance sheet does not report market values or replacement cost of the assets. Many estimates are used, such as warranty costs, depreciation, and pension expense. PAYEAR S. 46

46 PAYEAR S. 47

47 RATIO ANALYSIS ALLOW BUSINESS TRAITS FROM THE FINANCIAL STATEMENTS: Allow you to more easily spot: strengths or success of a business and weakness or warning signs of a business Allow you to ask more astute questions Guides you on where to conduct your next business investigations for clarifications Ultimately, allows you to make better business and investment decisions PAYEAR S. 48

48 WHAT IS RATIO ANALYSIS? Ratio Analysis is a Financial Statement Analysis Technique Balance sheet Income statement PAYEAR S. 49

49 WHAT IS RATIO ANALYSIS? The assumption: we as business managers or investors want to make decisions on buy, sell or hold this stock? What strategy or actions should my business undertake? We have access to financial statements (accounting information) to help us make these decisions: Income statement, Balance sheet and Cash flow statement PAYEAR S. 50

50 THE RELATIONSHIP IN PREDICTABLE WAYS PAYEAR S. 51

51 LEVERAGE RATIO ANALYSIS: ASSESSING FINANCIAL RISK Leverage is related to long-term liabilities and debts of the business Leverage ratio analysis useful for prospective creditors, investors or managers themselves to Assess the strain on the business from long-term liabilities, include gauging the level of future obligations Assess the ability to repay all debt with today s assets Assess the ability to service the debt Used to assess financing strategy, debt service ability and financial risk PAYEAR S. 52

52 TWO OF THE MAJOR LEVERAGE RATIO ANALYSIS: Balance sheet analysis Debt Ratio = Liabilities Assets Income statement analysis Time Interest Earned Ratio = EBIT interest expense PAYEAR S. 53

53 Balance sheet analysis Debt Ratio = Liabilities Assets What is the Debt ratio telling us? Proportion of assets financed by debt (the financing strategy) General level of future cash obligations tied up in interest and principal repayment How comfortably all liabilities could be paid off if all assets were liquidated PAYEAR S. 54

54 Income statement analysis Time Interest Earned Ratio = EBIT interest expense What is Time Interest Earned Ratio telling us? Number of times over earnings can cover the interest payments Indirectly testing the proportion of earning consumed by interest How comfortably the business can service its debts (the higher the ratio the better) PAYEAR S. 55

55 MEASURES OF LIQUIDITY Liquidity refers to a firm s ability to meet its current obligations and is measured by relating its current assets and current liabilities as reported on the balance sheet. Liquidity is measured in three principal ways: Working Capital Current Ratio Solvency Ratios (Liquidity Ratios) Acid-Test Ratio PAYEAR S. 56

56 WORKING CAPITAL Current assets - Current liabilities Working capital Working capital is the excess of a firm s current assets over its current liabilities. PAYEAR S. 57

57 CURRENT RATIO Current ratio = Current assets Current liabilities This ratio measures the ability of the company to pay current debts as they become due. As a rule of thumb, a current ratio of 2.0 is considered indicative of adequate liquidity. PAYEAR S. 58

58 ACID-TEST RATIO (AS KNOW AS QUICK RATIO) Acid-test ratio = Quick assets Current liabilities Quick assets are cash (including temporary cash investments) and accounts receivable. Generally, current assets less inventory This ratio provides information about an almost worst-case situation the firm s ability to meet its current obligations even if none of the inventory can be sold. As a rule of thumb, an acid-test ratio of 1.0 is considered indicative of adequate liquidity. PAYEAR S. 59

59 Assets Current Assets Non-current Assets 60

60 QUICK ASSETS TOTAL QUICK ASSETS 778,109, ,693, ,241, ,424,907 PAYEAR S. 61

61 ACID-TEST RATIO The acid-test ratio is also known as the quick ratio. Acid-test ratio = Quick assets Current liabilities Quick assets are cash (including temporary cash investments) and accounts receivable. Generally, current assets less inventory This ratio provides information about an almost worst-case situation the firm s ability to meet its current obligations even if none of the inventory can be sold. As a rule of thumb, an acid-test ratio of 1.0 is considered indicative of adequate liquidity. PAYEAR S. 62

62 LIQUIDITY RATIOS (AKA SOLVENCY RATIOS) PAYEAR S. 63

63 PERFORMANCE RATIOS (AKA PROFITABILITY RATIOS) What we are looking for in the company financial statements ROA (return on asset) = Net income average total asset This ratio describes the rate of return management was able to earn on the assets that it had available during the year. An informed judgment about the firm s profitability requires relating net income to the assets used to generate that net income. PAYEAR S. 64

64 PERFORMANCE RATIOS (AKA PROFITABILITY RATIOS) What we are looking for in the company financial statements ROE (return on equity) = Net income average total equity Owners are interested in expressing the profits of the firm as a rate of return on the amount of stockholders' equity. PAYEAR S. 65

65 Average Total Assets = (Beginning + Ending) 2 = (6,808,820, ,938,429,246) 2 = 6,873,625,109 Average Total Equity = (Beginning + Ending) 2 = (4,442,434, ,370,616,210) 2 = 4,406,525,347.5 PAYEAR S. 66

66 ROA (RETURN ON ASSET) What we are looking for in the company financial statements ROA = Net income average total asset = 703,777,987 6,873,625,109 = % This ratio describes the rate of return management was able to earn on the assets that it had available during the year. An informed judgment about the firm s profitability requires relating net income to the assets used to generate that net income. PAYEAR S. 67

67 ROE (RETURN ON EQUITY) What we are looking for in the company financial statements ROE = Net income average total equity = 703,777,987 4,406,525,347.5 = % Owners are interested in expressing the profits of the firm as a rate of return on the amount of stockholders' equity. PAYEAR S. 68

68 PERFORMANCE RATIOS (AKA PROFITABILITY RATIOS) PAYEAR S. 69

69 The DuPont Model PAYEAR S. 70

70 THE DUPONT MODEL Return on Net income investment = Sales Margin Sales Average total assets Turnover The DuPont model is an expansion of the basic ROI calculation. The developers of the model reasoned that profitability from sales and utilization of assets to generate sales revenue were both important factors to be considered when evaluating profitability. PAYEAR S. 71

71 THE DUPONT MODEL Return on Net income investment = Sales Sales Average total assets Margin Emphasizes that from every dollar of sales revenue, some amount must work its way to net income. PAYEAR S. 72 Turnover Relates efficiency with which the firm s assets are used in the revenuegenerating process.

72 THE DUPONT MODEL Return on Net income investment = Sales Margin Sales Average total assets Turnover A rule of thumb useful for putting ROI in perspective is that average ROI, based on net income PAYEAR S. 73

73 DRAWBACKS (LIMITATION OF THE RATIOS) FS only show absolute numbers in their results and thus some valuable accounting information can be disguised from the circumstance differences (non-financial information) must be accounted for, i.e., company sizes, brand reputations You would need to adjust absolute numbers for scale both within and across business You cannot see relationships across the statements and across time within absolute number alone PAYEAR S. 74

74 FINAL WARNING: Don t use a single ratio in isolation ratios are contextual You must benchmark all ratio analysis time-series or cross-sectional Ratio results very often vary across industries compare like with like PAYEAR S. 75

75 REFERENCES ANALYSIS-BASICS-2017.PDF PAYEAR S. 76

76 PAYEAR S. 77