You are on page 1of 3

Financial Analysis and Decision Making

Introduction
1. Accounting is about professional judgement; to make judgement within the
scope of regulations and practices of accounting to correctly describe a
company.
. !e could make different statements based on different accounting policies
according to different situations
". Foundation of decision making for all sectors is financial data.
#. $he course discusses the %alue mgmt. of the whole company& its resource
allocation& strategic positioning and strategy implementation and so on
Financial 'tatements
1. " types %i(. )alance 'heet& Income 'heet and *ash Flow 'tatement.
. +eed, to describe the economic acti%ities of a company.
a. Financial, firm needs money-borrow money from bank-pay its dues-accept in%estments
b. In%estment, open new branch& enter new bi(.& de%elop new product line
c. .peration, mf. /roduct- 'ale of products- *ollect 0ecei%ables
". 'tarting pt. of all companies is a sum of in%ested funds.
#. All companies can be abstracted to a continuous repeating cycle, 'tarts with in%ested cash and
ends with recei%ed sales proceeds in cash
1. $he purpose of balance sheet is to know the standings of the principle of your initial in%estment
Assets Items
A typical e2ample of a balance sheet
)alance 'heet *omponents,
1. *urrent Assets, $hese are li3uid assets that can be con%erted into cash in a single cycle. $hey
are ranked in the order of how fast they can be turned into cash. It is further di%ided into,
a. *ash and *ash e3ui%alents, It simply is money 4deposited in bank or retained by
company5
b. Accounts 0ecei%able, $he right to recei%e a payment 4an agreement between buyer and
seller5 for a product sold within6on a stipulated time.
c. .ther 0ecei%able, 0ecei%able obtained without the selling of a product 4someone
owing; not an in%estment or loan5. It is a temporary working capital with no return. $his
kind of recei%able is a *hinese characteristic.
d. /repayments, 0ecei%e all money in ad%ance from a %endor. It is also a right and hence
an asset.
e. In%entory, 0aw materials& !ork in /rogress& Finished /roducts.
f. Deferred 72penses, Any cash outlay which appears to be asset initially& but becomes an
e2pense gradually during normal bi(. .perations.
72, stationery& ad%ance rent payment& prepaid ad%ertising costs.
8ong term deferred e2penses, Deferred e2penses that are consumed during a relati%ely
long period of time. 72, 'tart-up costs used for the establishment of an enterprise.
. +on-*urrent Assets, $hese are assets that take many cycles to be con%erted into cash.
a. Fi2ed Asset, 9as to be of a substantial %alue and ne%er a durable. It depreciates o%er
time 4All e2cept land5
72, *ars& *omputers& /roperties
b. Intangible Asset, copyrights& land rights& goodwill& patents& proprietary technologies&
land usage4In *hina only& no ownership of land- only the right to use a piece5
c. 8ong term In%estments, 9old any in%estment for long term 473uity6Debt in%estment5
72, .wnership of a subsidiary& holding of :o%t. )onds& ; shares in a company.
Figure showing outline of a business framework
8iability Items
1. 'hort $erm )orrowings, )ank loans to be paid < 1year
. Account /ayable, $he right to recei%e money that a customer has signed to the %endor.
". .ther payable, 'ame as .ther recei%able from the borrower=s /.>
#. Ad%ances from customers, $he liability that a good=s pro%ider has to the customer after a
customer has made the prepayments 4an upfront deposit5
1. *urrent liabilities, Accrued payroll 4wages to employees for the period in which financial
statements is to be made but not paid5& $a2es /ayable 4ta2 payable for the month in which the
financial statement is to be made but not paid5.
?. +on-*urrent 8iabilities, due for a period @ 1 year.
a. )onds /ayable 4not in *hina, can be done iff bi(. is capable of issuing bonds5
b. 8ong term /ayable, related to some specific kind of transactions. 72. 8ease
i..perating 8ease, !hen we pa
ii.y rentals for something we do not own. It has a relati%ely shorter term and
relati%ely less sum of money
iii.Financial 8ease, /aying off a loan in term of rentals for an asset.
'hare-holders 73uity, this is ne%er paid& since share-holders ne%er lea%e the company.
ways to in%est money into a firm, 72ogenous 473uity and *ap. 0eser%e5 A 7ndogenous 4'urplus
0eser%e and 0etained 7arnings5.
1. 73uity and *apital 0esere, 0elates to the organi(ational form of the firm. For incorporated
firms, 73uity. For limited liability firm, /aid in capital.
Aside from *hina& Actual moneyB reg. capital C *apital reser%e
8isted companies which sell out shares must ha%e capital surplus. 73uity6*apital stock is a
measure of the firm=s legal liability and a reflection of the di%ision of interest between the
company=s shareholders 4not in proportion of their capital contributions but in proportion of
their e3uity holdings5.
. 0etained 7arnings and 'urplus 0eser%e, '0, /rofit that cannot be distributed by the law.
0etained 7arnings, /rofit a company doesn=t want to distribute 4for further in%estment
purposes5.
". /rofitB '04a minimum amt. re3uired by the law5C 0esource allocation by shareholders 4money
spent5 C 07

You might also like