LESSION 1

Chapter 1: Introduction to Financial Statements and Report

The conflict between manager – shareholder: risk managerment

I, The concept of Financial Analysis

- Characters of analysis
o Descriptive character: presentation of quantitive and qualitative characteristics
o Exploratory character: relationships, correlations, laws and tendencies of the
objects. Relationship can be right or wrong, normal, abnormal.

- Financial analysis is an important tool used in making decisions related to a company’s

o The process of examining a company’s performance in the context of its
industry and economic environment to make decisions, recommendation.
o The calculation of special indicators, often in the form of coefficients, which
characterize one/another aspect of the financial, economic activities.

- The popular relationship

o Ratio of capital and total capital of the company, coefficient of financial
dependencies
o Current ratio: current asset-current liability
o Rapid liquidity ratio
o Return on capital
o Ratio of profit from sales

- Aim of financial analysis

o Evaluate the company’s ability to earn a return on its capital, at least equal to
the cost of that capital, to profitablely grow its operation, to generate enough
cash to meet obligations, opportunities.
o Assess company’s past achievements

- Goal
o Permanent ability to pay
o Ability to finace
o Ability to invest
o Ability to increase assets of company owner
o Ability to satisfy the financial interest of actors inside and outside the company.

- Type
o Analysis of funds and sources of funds
o Liquidity analysis
o Analysis expenditure and revenue
o Analysis the business performance
- Subjects
o Balance Sheet
o Income statement
o Cash Flow
o Statement of changes in equity

- Tools
o Ratio analysis:
o Cash flow analysis: evaluate liquidity, management
 Chapter 1: Financial Statement And Reporting

I, Review of accounting

- Purpose:
o organize the financial details of business
o Identify the financial transactions
o Organize financial data into useful information
o Measure the value of these information in terms of money
o Analyze, interpret and communicate the information to persons/groups, both
inside and outside business.

- Difference financial reporting and financial reports

o Reporting: process
o Report: final documents, product of reporting

- Scope and role of financial statements

o Objective of financial statement:
 provide information abt the financial position, performance,
 changes in financial position
o Financial statement are an important source of information to the capital
markets (long term instrument) and business analysis.

o Why financial statement is important for capital market

 For debt: investor can see “fixed income” – coupon from bonds
 For stock: investor can see “dividend, price” from stock
o Analyzing financial statements: address a number of issues of interest to
external stakeholders and company insiders.
 Share holders:
 Regulator: tax
 Manager: revenue, profit, debt,…
 Customer: comply with laws, regulations or not
 Employees: salary
 Supplies: able to pay or not,
 Credit providers:
 General public:
o Debt (short-term: bonds) + Equity (long-term: stock) = Capital. Use this capital
to raise fund for asset to generate more profits.

- The role of financial statements

- Types of financial statement

o Financial position (Balance sheet)
o Financial performance over a period of time (Income statement- P/L)
o Cash receipts and payment (Cash flow)
 o Provide further details (Note)

1. Balance Sheet
- Present financial position of an entity at given date – a point in time.
o Asset
o Liability
o Equity = Capital = Net worth (when firm sell all asset and fullfill all obligations)
 Min equity to joint industry depend
- Marketable

2. Income statement – Profit and Loss statement

- Report fianancial performance in terms of net profit or loss over specific period.
- Compose
o Income: sales revenue, dividend income
o Expense: salaries, wages, depreciation, rental charges.
 Operational cost:
o Income – expense = Netprofit/loss
o Who care aboue Income statement: investor, shareholders,..

3. Cash flow statement

- The movement in cash and bank balances over a period.
- Classified into the following segments
o Operating activities: from primary activities
o Investing Activities: from the purchase, sale of assets other than inventories.
o Financing Activities: from generate, spent on raising and repaying share capital
and debt together with the payments of interest and dividends.

4. Statement of Retained Earning

- Reconcile the net income earned during a given year, and any cash dividend paid, with
change in retained earning between start – end of year.

5. Account system
- Liabilities + Contributed Capital + Retained Earning = Asset
- Liabilities + Contributed Capital + Beginning Retained Earning - Dividend – Expense =
Asset

- Fiancial Reporting Mechanics

o Double entry accounting: a transaction must be recorded un at least 2 accounts
to keep the accounting equation in blance.
o
 CHAPTER 2: UNDERSTANDING THE BALANCE SHEET
I, Introduction to balance sheet

- Balance sheet report company’s financial position on specific time

- Comprehensive overview of total asset, total resource financing the assets of an
enterprise at the point time
- Principle of the balance sheet
- Networth maybe have different meaning for different firms.

Components of th balance sheet

- Current assets: items can be converted into cash within 1 year

- Non-current asset: more permanent nature
- Current liabilities
- Non-current liabilities
- Shareholders’s equity

Types of security

- Marketable securiy
- Tradable security

Bank, financial firms don’t have inventory

Overdraft can be offered from bank to demand deposit account

II, Balance sheet analysis

1. Asset
- Economic resource are controlled by a company and expected to provide probale
economic benefits in the future
- Assets can be recognized
- Current assets
o Cash and cash equivalent
o Marketable securities: financial assets that are traded in public market and
whose value can be readily determinded
o Account receivables: reported at net realized value that based on bad debt
expense
 Deferred risk/ credit risk: risk that you cant get payment from customer
 A contra-asset account is used to reduce the value of its controlling
account.
o Prepaid expense: long term contract,..
o Deffered tax asset: tax payable > income tax expense in income statement.

2. Liability
- Current liabilities
o Accounts payables
o Note payables
 o Current portion of long-term debt: principlal portion of debt due within one
year or operatin cycle, which ever is greater
o Accrued liabilities
o Unearned revenue
- Non-current liabilities
o Long-term financial: bank loans, notes payable, bond payble, derivatives
o Deferred tax liabilities: amounts of income tax payble in future period as a
result of taxable temporary differences.

3. Shareholders’s equity
- Stockholders’ equity is classied into
o Contributed capital
o Preferred stock
o Treasury stock
o Retained earnings
o Non-controlling interest
o Accumulated other comprehensive income

- Measurement bases of assets and liabilities

o Historical cost: the value that was exchanged at the acquisition date
o Fair value: is the amount at which an asset can be bought or sold.
- Inventories
o LIFO
o FIFO
o WAC
 CHAPTER 3: UNDERSTANDING THE INCOME STATEMENT

1. Components of the income statement

- Revenues
- Net revenues: Revenue less adjustment for estimated returns and allowances (eg:
estimated returns or amount unlikely to be collected)
- Expense
- Gains and losses
- Gross profit
- Operating profit
- Net profit
- Minority owners’s interest

- 2 types of income statement

o Multiple-step
o Single-step

2. Revenue recognition
- Revenue should be recognize in F.S when
o It is earned: earning process is completed
o It is realized (measurable): when cash is received

- 4 types of revenue transactions

o From selling product: is recognized at the date of sale/date of delivery
o From service: is reconized when service are performed and are billable.
o From the use of enterprise’s asset by others is recognized as time passes or as
the assets are used up.
o From disposal of assets: reconized at the point of sales as gain or loss.

- Revenue reconition: before delivery

o Percentage of completion method
 Terms of contract must be certain, enforceable
 Certainty of perfomance by both parties
 Estimates of complation can be made relaibly
o Complete contract method
 Use when the percentage method is inapplicable
 Short-term contract.
o Formula
 Total revenue to recognize = total revenue from contract x % complete
 Revenue recognized in current period = total revenue to recognize –
revenue recognized in prior periods.

- Revenue recognition at delivery

o
 3. Expense recognition
- General princial: matching principle
- Method to recognize expense
o Direct matching:
 revenues and expense is directly related to each other.
 Eg: COGS, sales commissions, warranty expense
o Sytematic and rational allocation:
 expense can be allocated to the accounting period benefited in a
systematic and rational manner
 Eg: depreciation, amortization, prepaid expense
o Immediate recognition
 Eg: administrative expense, R&D expense, advertising costs.
- GAAP: LIFO, FIFO, WAC
- IFRS: FIFO, WAC
- Doubtful accounts: estimate is recorded as an expense in the IS, not direct reduction of
revenue: allowance,..
- Warranties: recognize estimated warranty expense in the periods of sales, and update
the expense as indicated by experience over the life of the warranties.
- Bad debts can consider as expense.
- SG&A

4. Depreciation methods

- Straightline method
- Accelerated method: declining balance, double declining balance.
- Units-of-production method: based on usage rather than time.

5. Non-recurring items
- Unusual, infrequent items
o Gains, loss from sale of asses, part of asset
- Extraordinary items:
o eventd or transactions that is both unusual and infrequent
- Other comprehensive income
o Foreign currency translation gain and loss
o Adjustments for minimum pension liability
o Unrealized gains and losses from cash flow hedging derivatives
o Unrealized gains and losses from available-for-sale securities.

6. Earning per share

- Khi tính EPS, chú ý tỷ lệ của shares, thời gian phát hành

- Stock dividend: distribution of additional shares to each shareholder in an amount

proportional to their current number of shares.

=> change number of share, not shareholder’s equity

 - Stock split: divide old share into specific number of new share. => share price reduce
to be affordable for ppl to buy.

- Diluted EPS
- Dilutive securities are stock option, warrants, convertibe debt, or convertible
preferred that would decrease EPS if exercise or converted to common stock.
- Antidilutive securities are stoc options, warrants, convertible debts, or
convertible preferred stock that would increase EPS if exercise or converted to
common stock.
 CHAPTER 4: UNDERSTAD THE CASH FLOW

1. Classification of Cash Flows

- Change in assets opposite direction with change in cash
- Change in liabilities and equities is same direction with change in cash.
2. Cash Flows
a. Cash from Operating Activities
- Cash recevied from sales
- Use of company-owned intellectual property
- Commission for sales on behalf of other entities
- Cash paid to supplier
- EBIT + Depreciation = Cash from Operating Activities
b.