This Session Preparation Assessment is looking at Chapter 4
of the Study Guide called ‘Analysing Financial Statements’ which has a number
of Key Concepts and Questions that I find confusing, difficult to understand or
believe, boring, exciting or surprising.
A concept I strong believe in is equity investors receive
from a firm are dividends this builds relationship with the investors and
customers. The purpose of dividends is to provide some reassurance of business
growth to the investors who invested into the business or the investors have
the option to purchase more shares into the company. My personally experience
of this is with Tatts; I have shares in Tatts and instead of receive dividends
I have decided to use re-invest into the business instead of accepting money.
Companies offer this option to keep the profits of the business so they can
re-invest, generator more money and financial security for the business. When
companies offer the dividend to the investors it is a measure of transfer of
value between a firm and its equity investors. The equity investors are
receives the benefits and value from investing into a business that is
successful. Equity investors are a necessary element for businesses to success
and make a profit in the world.
Another key concept that I find interesting and exciting to
learn about is the profit margin which focuses our attention on the
profitability of each dollar of sales. To me this means you are looking at
which items make the most profit and which items make the less profit. From
working at Dimmey’s my personal experience of this is when the manager or
employee looks at key items that have been on the shelf for a number of months
or of items that sell quickly and works out the profit margin on a specific
item. Profit Margin is a key to measure the target market of the business for
instead if you have a profit margin of 10% you will be aiming at low income
people whereas if you have a profit margin of 60% you will be aiming your items
for high income people.
A key concept I understand extremely well will be the
following:
- Operating activities of a firm are its interactions with the product and input markets, with its customers and suppliers
- Financial activities of a firm are its interactions with the capital markets, with equity and debt investors
- Operating and financial activities of a firm interact with each other
- Restating your firm’s financial statements for the first time can be a fascinating, infuriating and fun challenge
- Categorising the balance sheet into terms of operating activities and financial activities
- Purpose in restating the income statement is to clearly separate operating and financial revenue and expenses
- RNOA is after tax operating income (OI) divided by the net operating assets (NOA) invested in the business.
- The difference between operating revenue (OR) and operating expenses (OE) is operating income (OI)
The way I remember operating activities is anything that has
to do with the daily running of the business and financial activities is
anything that the business invests into. By using my definition of the terms I
was able to easily restate my company’s financial statements without much
drama. The only difficult I had with restating was when my Statement of
Financial Performance did not match but after half-an-hour of trying to figure
out where I had made a mistake I figured it out. The mistake was to do with
whether to add or subtract a number to get the comprehensive income. I believe
the purpose of restating is for the managers to actually gauge where they need
to increase their focus in and where the areas that are letting the company
down are. Another than the other two points are calculations-based and once I
have the figures for that component I can calculate the RNOA and Operating
Income – there is nothing hard about that. Mathematics is my strong area, I am
excellent when it comes to calculating and working out ratios.
A few key concepts I am finding difficult to understand
would be the following:
- Free Cash Flow (FCF) is driven by two things: cash flow from operations (C) and net cash invested into a firm’s operating assets (I)
- More a firm invests into its operating assets the less will be a firm’s free cash flow (FCF)
- Calculating Economic Profit.
When reading these concepts they seem easy to understand
however when trying to apply the theory behind these concepts I get
confused. For instance the whole cash
flow from operations and the net cash invested into the firm’s operating assets
I do not understand. This is because I have never dealt with a Cash Flow
Statement so I unsure how to calculate the Free Cash Flow for a company. I have
read about the benefits of knowing how to calculate the Free Cash Flow however
I am still confused with the concept because I have had nothing to do with this
concept in my life.
In summary my key concepts and questions would be the
following:
- Equity investors receive from a firm are dividends
- Measure of transfer of value between a firm and its equity investors
- Free Cash Flow (FCF) is driven by two things: cash flow from operations (C) and net cash invested into a firm’s operating assets (I)
- More a firm invests into its operating assets the less will be a firm’s free cash flow (FCF)
- RNOA is after tax operating income (OI) divided by the net operating assets (NOA) invested in the business.
- Operating activities of a firm are its interactions with the product and input markets, with its customers and suppliers
- Financial activities of a firm are its interactions with the capital markets, with equity and debt investors
- The difference between operating revenue (OR) and operating expenses (OE) is operating income (OI)
- Operating and financial activities of a firm interact with each other
- Statement of changes in equity shows how a firm’s income statement and balance sheet inter-connect
- The ‘bottom-line’ of a firm’s income statement is net profit after tax
- Restating our firm’s financial statements is a technical task that with practice can be done relatively quickly and easily, although there are a few ‘traps’ we need to be careful to avoid
- Restating your firm’s financial statements for the first time can be a fascinating, infuriating and fun challenge.
- Categorising the balance sheet into terms of operating activities and financial activities
- Purpose in restating the income statement is to clearly separate operating and financial revenue and expenses
- Calculating Economic Profit
- Understanding this relationship and maximising the interaction between profitability and efficiency is one of the keys to success in any business
- Profit margin focuses our attention on the profitability of each dollar of sales
- Efficiency is how well net operating assets (NOA) in a business are being used to generate sales or turnover
Above are my Key Concepts and Questions
about Chapter 4 – Analysing Financial Statements.
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