Financial Statement

- Why a company analyse its financial statement? Keep track of their performance, all the shareholders have to
review about the company, strategically think and plan to outsmart other companies
- A company can sue and be sued
- What is a financial year (FY)? A 1-year period for companies to prepare their financial statement
companies don’t all have to have a financial year
- The summary of all the financial information that is accumulated and reported in all transactions
- 4 general purposes (BRIC)
 B – Balance sheet
 R – Retained earnings
 I – Income statement
 C – Cash flow statement
- However, they are actually in this order: I – R – B – C because you need the figures from the former statement to
prepare the next one
1. Income statement (a ruler that measures things)
 Báo cáo kết quả kinh doanh của doanh nghiệp, cho biết doanh nghiệp hoạt động như thế nào, có đem lại lợi
nhuận không
- It measures the performance of a company, how well they have done in a given period (usually in a year)
- Recording Revenue (vốn) and Expenses (chi phí)
 This will decide whether you have Income (R>E) or Net loss (E>R)
- Cost of Sales: total direct costs involved in making a product (cost that directly related to the unit produced)
- Gross profit: the total cost before you take off all the taxes
Gross profit = Sales revenue - Cost of sales
- Overheads: the cost that are related to the day-to-day running of the business
- Finance costs: the interest and other costs incurred by the company while borrowing funds (bank loan)
- Profit before tax = Net profit
- If a company activity not come from trading activities they cannot be counted as revenue
2. Retained Earnings (a big pie -> the distribution of profit to owners and dividends)
 Lợi nhuận giữ lại của doanh nghiệp -> Là thu nhập ròng (sau thuế) còn lại cho doanh nghiệp sau khi họ đã trả
cổ tức cho cổ đông
- How much is left within the company to grow -> You can use this amount of money to invest
- Some companies decide to retain all the earnings and don’t pay out any dividend if you have shareholders’
return or the company is the growth stock (a company may retain all their income and then reinvest it in things
like assets and equipments to grow quicker)
 Retaining -> Growth
3. Balance sheet (a snapshot of the financial position of your company)
- Give reflection of the business assets and liabilities on a particular day – usually the last day of a financial period
-> what the company owns (assets) and owes (liabilities)
- Báo cáo tài chính cung cấp thông tin sơ lược về tài sản, nợ và vốn chủ sở hữu
- Inventory/Stock (a type of asset) -> hàng tồn kho
- Depreciation: a way for businesses to spread the cost of physical assets (such as a piece of machine or cars) over
a period of years for accounting and tax purposes. For example, rich people don’t usually carry a lot of money
with them, they would rather invest in other things and that still counts as assets.
- Portfolion of assets = A collection of assets
- Non-curent assets = fixed assets (tài sản có vốn đầu tư lớn, thời gian sử dụng lâu dài)
- Look at
 Assets (tài sản): nguồn lực doanh nghiệp kiểm soát và có thể thu được lợi ích kinh tế trong tương lai
 Liabilities (nợ): An economic sacrifice you have to take to receive or purchase assets
  Equity (vốn chủ sở hữu): Shareholders’ capital (how much they pay for their shares)
4. Cash flow statement (veins and arteries carry blood from the heart to other organs)
- Look at the sources and uses of cash
 Sources (cash coming in)
 Uses (cash coming out)
- Cash is constantly coming in and out of the company. If the veins act up -> problem (called cash crunch) -> have a
shortfall of cash that creates problems for their operation -> issue bonds or get a loan from the bank to continue
operating
5. Costs
- What is cost? The amount the business incurs in order to make service/good
- Variable cost: change as the output varies (raw materials, stocks, wages – you pay workers based on their hours
of working, marketing costs)
 There is a linear relationship btw variable cost and output. Increase output by 10%, variable cost will
increase by 10%
- Fixed cost: not change in relation to output (rent and rates, salaries, advertising cost, software and IT systems,
insurance)
- Direct cost: costs that are clearly identifiable with a unit of production.
If you produce 5 units, the direct cost will not equal when you produce 10
Example: raw materials - For McDonalds, the cost of the meat for the burgers is a direct cost
 If the cost increase as the unit of production increase -> direct cost
 Rent is usually called period cost because it is fixed during a specific amount of time
- Indirect cost: costs that are not identified with units of production.
For a garage, the rent of the garage premises is an indirect cost
- Mixed cost are those that have both elements of fixed cost and variable cost (electricity – fixed cost: pay daily
charge, as long as you use the account, you still have to pay that + variable cost: at the end of the month, if you
use 15 kWh, you have to pay the amount of money for 15kWh)
- Selling price = Total cost + profit
If selling price = total cost -> break even
- Liquidation -> a company dies
- Labour costs are not necessarily variable/direct costs. It depends on the job role – production staff in a factory is
a direct cost but management and administration salaries are indirect costs (it is only called direct cost if it
relates to the output. For example, you have a bakery and hire a guard, the salary of the guard would be fixed
cost because it doesn’t change and the guard cannot produce bread, which is an additional unit of output)
- Not all direct costs are variable costs. For example, if a cafe/bar buys a juicing machine, it is a direct cost, but the
cost of the machine does not vary with the number of juices served
 Ratio Analysis
1. Definition
- They take information from the balance sheet and income statement to make up an analysis of ratio
- Involves the comparison of financial data to gain insights into business performance
- There are 4 steps
 Gather data
 Calculate the ratio analysis
 Interpret the data
 Take action
- Why is it important? Understand liquidity (the amount of working capital – is what enable the company to
function, take its debts. Example: if you come to Kaplan and there is no electricity -> can’t do anything -> the
business will collapse -> The money/funds that a business needs in order to function)
- The purpose of ratio analysis is to compare between businesses (if you compare liquidity -> speak to their
strengths, going concerns – business are not supposed to die, they are expected to continue in the expected
future. This is only possible if the business can meet its obligations and liquidity)
- In order to make comparison, these businesses have to be in the same industry
2. Types of ratio analysis
- Profitability --- how effective the firm is at generating profits given sales and or its capital assets
- Liquidity — the ability of the firm to pay its short term liabilities
- Efficiency— the rate at which the company sells its stock and the efficiency with which it uses its assets
- Leverage/Gearing — information on the relationship between the exposure of the business to loans as opposed
to share capital
- Investment/shareholders — information to enable decisions to be made on the extent of the risk and the
earning potential of a business investment
3. Uses
- When you compute ratio analysis, the minimum is 2 years. More than 5 years -> trend analysis (the way it
happens)
- Provide information of the company in respect of the liquidity, profitability, use of assets and capital structure
(combination of different assets of finance that a company employ to carry out its activities)
- When you compare a business ratio for several years -> movement, and input for you to predict what is going to
happen in the future
- Decision making? When you have multiple choices and you choose one of them
What do you need to make decision? Information -> Priority -> Take decision
 Ratio analysis provides information about what has happened in the past so that you can predict what could
happen in the future
- The norm: what the company was before doing the ratio analysis
4. Limitations
- It is historical and not current (it is the data from the past). Do we have guarantee that what happened in the
past will happen in the future?
5. Profitability ratios
- Gross margin
- Operating margin
- Return on Capital Employed Ratio (a profitability ratio that measures how efficiently a company uses its capital to
generate profits)
Capital employed = Shareholder's Equity + Non Current Liabilities
A ROCE of 20% = For every 1 pound of capital to generate 20p in profit
- At the beginning of the year, the company have to set a target/standard and trying to achieve that target.
6. Liquidation ratios
- Credit rating: what enable you to borrow money in the country
- Liquidity ratio -> the ability of a company to pay their debts as it dues (liquidity is all about cash flow)
- See the relationship btw 2 types of assets (current assets and current liabilities)
+ Current assets: cash (in the bank), stock/inventory (warehouse, working progress, materials), amount that are
owed to business by customers (debtors)
+ Current liabilities: amount that are owed to suppliers (creditors), overdraft (amount that are owed to the bank)
- Evaluating:
+ 1.5 -2.5: acceptable liquidity and efficient management of working capital
+ <1: struggling to pay its current liabilities
+ high ratio: far too much capital tied up in investories or debtors
- Ratio varies in different industries. In some companies, customers can have a long time to pay their debts ->
increase the company’s debtors
- Stakeholders – Shareholder
Stakeholders are those who either affect or are affected by a project or company
Example: Community members who are impacted by the company's decisions and actions
7. Types of Liquidity ratio
- Current ratio (current assets : current liabilities)
A ratio of 2:1 would imply the firm has £2 of assets to cover every £1 in liabilities (what you have in company is
twice able to pay your liabilities) -> help investors to be confident to invest in your company
What the investors care about is the guarantee of the company to pay them the obligations
- Quick ratio/ Acid test: (Current assets – Stock) : Current liabilties -> Indicates the ability of the business to meet
its short-term liabilities from its quick assets.
Why stock is excluded? For example, you are a supermarket selling water. You have 1 bottle of water in stock
(this bottle is either you paid for the supplier or not). Then at the end of the period, the supplier ask you to pay
them, and you can only pay them by cash, not a tangible bottle of water. This bottle of water is counted as stock,
and it is not included in the current assets.
- What is the difference between current ratio and acid test?
Acid test exclude the type of assets that is the hardest to turn into cash, which is inventories/stocks. With stocks
and inventories, you have to sell them then wait for that sale to be paid for you -> hard to turn into cash
8. Leverage/Gearing ratio
- Leverage/Gearing Ratio provides information on the relationship between the exposure of the business to loans
as opposed to share capital.
- When assessing the financial position of a business the main focus is its stability and exposure to risk. This is
typically assessed by considering the way the business is structured and financed. This is referred to as gearing.
- Assume you want to buy a house in this country. They require you to take the mortgage (loan for home). Before
the bank give you that, they have to look at credit ratings + you have to tell them how much you earn monthly +
financial commitment (how much is going out from you monthly – affordability)
- Loan security: if you want to borrow money from the bank. If it’s a secure loan, the bank acquires you to give
documents. If you cannot pay the mortgage, they will take the house
 It’s important for investors to know if the company can pay its debt.
- A company is highly in debts -> A geared company
- Types:
 Debt-to-Equity ratio
- Dividend per share