REFORMULATION OF FINANCIAL STATEMENTS ACC 3350 Financial Statement

Analysis
LEARNING OBJECTIVES
To explain why reformulated financial statements are desirable

To apply the knowledge of the business is incorporated in reformulated statements

To identify operating and financing components of Income Statement and Statement of Financial
Position

To distinguish assets and liabilities that fall into operating and financing categories
To discuss the challenges of formulation and other factors to be considered

To discuss about what information is revealed by selected ratios calculated based on Statement of
Financial Position and Income statement

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SEPARATION OF OPERATING ITEMS FROM
FINANCIAL ITEMS
What elements are really found in FSs
Significance of separating Operating Items from financial items
operating

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CLASSIFICATION OF ASSETS AND LIABILITIES
Financial Assets • Financial Liabilities
 Cash Equivalents • Short term Borrowings
 Marketable securities
• Short term Borrowings
 Short Term Notes Receivables
 Long term non marketable • Notes Payables
Investments • Lease Obligation
 Long Term Debt Securities
• Preferred Stock

Operating Assets
 All else
• Operating Liabilities
• All else
• Equity

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BASICS NOTATIONS USED IN REFORMULATING
THE STATEMENT OF FINANCIAL POSITION

NOA = OA – OL

NFO = FO – FA

CSE = NOA – NFO

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ISSUES IN REFORMULATING BALANCE
SHEETS
Cash: working cash and excess cash ?
Short term notes receivable: trade receivables or investment of cash?
Trade/Finance receivables: Can it be an operating asset?
Investments: financial assets or equity?
Short-term equity investments: excess cash or trading securities?
Short-term notes payable: trade notes or borrowing?
Lease liabilities: financial obligation or operating Liability?
Deferred tax assets and liabilities: operating or financial?
Deferred revenues and accrued expenses: operating or financial?
For financial firms, many “financial items” are operating assets and
liabilities

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JKH PLC

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JKH PLC

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AFTER REFORMULATION
2,022 2,021
OA 159,468,945 114,289,277
OL 4,608,086 1,355,086
NOA 154,860,859 112,934,191

FA 87,055,697 69,202,158
FO 72,136,338 47,196,641
NFO (14,919,359) (22,005,517)
Equity 169,780,218 134,939,708
NFO + Equity 154,860,859 112,934,191
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REFORMULATION OF INCOME STATEMENT

1. Operating items are separated from financing items.

2. Operating income from sales is separated from other

operating income.

3. Tax is allocated to components of the statement, with

no allocation to items reported on an after-tax basis

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 REFORMULATION OF INCOME STATEMENT
±Other operating income (expense) requiring
tax allocation 50
Net sales 500
Restructuring charges and asset
impairments xx
– Expenses to generate sales -300
Operating income from sales Merger expenses xx
(before tax) 200
Gains and losses on asset sales xx
– Tax on operating income from
sales Gains and losses on security transactions xx

− Tax on other operating income -15

+ Tax as reported 66
+ Tax benefit from net ± After-tax operating items 175
financial expenses 9
– Tax allocated to other Equity share in subsidiary income
operating income -15 -60
Dirty-surplus operating items
Operating income from sales (after
tax) 140 Operating income (after tax) 175

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THE REFORMULATED INCOME STATEMENT
Net Financial Expenses After tax -21
Interest Expense -40
Interest Income 10
Net Interest Expense -30
Tax Benefit from net Interest Expense 9
Coprehensive Income 154

Reconciliation
Net sales 500
– Expenses to generate sales -300
Operating income from sales (before tax) 200
other operating income 50
Net Interest Expense -30
profit before tax 220
Tax -66
Profit after tax 154
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 INCOME STATEMENT RATIOS
Revenue composition ratios
 Operating Revenue Composition Ratio:

Revenue from an Activity

Total Sales Revenue
 Financial Income Composition Ratio:

Financial Income from a Source

Total Financial Income

Profit margin ratios

OI (after tax)
 Operating Profit Margin:
Sales

 Sales Profit Margin: OI (after tax) from Sales

Sales

 Other Items Profit Margin: OI (after tax) from Other Items

Sales
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 BALANCE SHEET RATIOS
Composition Ratios
 Operating Asset Composition Ratio
Operating Asset
Total Operating Assets
 Operating Liability Composition Ratio

Operating Liability
 Financial Asset Composition Ratio Total Operating Liabilities

Financial Asset
 Financial Liability Composition Ratio Total Financial Assets

Financial Obligation
Total Financial Obligation s

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 BALANCE SHEET LEVERAGE RATIOS
Financial Leverage Ratios

 Capitalization Ratio: NOA

CSE

 Financial Leverage Ratio (FLEV)

NFO
CSE Operating
It is always the case that Liabilities
Net Operating Assets

Capitalization Ratio - Leverage Ratio = 1.0

Operating Liability Leverage Ratio

 Operating Liability Leverage (OLLEV) =
 GROWTH RATIOS
Change in Sales
Growth Rate in Sales =
Prior Period's Sales

Change in Operating Income (after Tax)

Growth Rate in Operating Income =
Prior Period's OI

Change in Net Operating Assets

Growth in NOA =
Beginning NOA

Change in CSE
Growth in CSE =
Beginning CSE

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SUMMARY- PROFITABILITY MEASURES
Operating Profitability:
OI t
RNOA t =
1
( NOA t +NOA t-1 )
2

Financing Profitability:
NFE t
NBC t =
1
( NFO t +NFO t-1 )
2
or
NFI t
RNFA t =
1
( NFA t +NFA t-1 )
2

All measures are after tax.

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OPERATING LEVERAGE JOHN KEELLS HOTELS

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ACL CABLES PLC

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 DIPP INCOME STATEMENT

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 STATEMENT OF FP _DIPP

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 STATEMENT OF FP _DIPP

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PROFITABILITY OF DIPP
2017 2016

Returns on TA 5% 3%

profit Margin 19% 10%

Assets Turnover Ratio 0.28 0.29

Margin x ATO 19% x0.28 10% x 0.29

5% 3%
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OPERATING EFFICIENCY _ DIPP
Operating Cycle 2017 2016

Inventory Holding Period 99 78

Debt Collection period 204 166

Crs Payment period 97 92

Operating Cycle 303 244

Cash Cycle 205 153

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HOMEWORK 5%
Reformulate financial statements of a public company
Provide your justification as to why you have treated items which were doubtful
Provide the financial statements both in excel and pdf formats

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