Section 4
Analytical income statement and
balance sheet
1
Learning objectives
After studying this chapter, you will understand
• Elements of the published financial reports
• How published financial reports confuse core activities
with financial activities
• How to adjust published financial reports so that core
activities can be isolated from financial activities
• How to create analytical income statement and balance
sheet
2
Elements of financial reports
Beginning
stocks
Flows
Ending
stocks
Statement of Cash Flows
Beginning
Balance Sheet
Cash
+ Other Assets
Cash from operations
Cash from investing
Cash from financing
= Net change in cash
Statement of
Shareholders’ Equity
Total Assets
- Liabilities
+ Investments by owners
- Dividends
+ Earnings
= Equity
= Net change in Equity
Income Statement
Revenues
- Expenses
= Net income
3
Ending
Balance Sheet
Cash
+ Other Assets
Total Assets
- Liabilities
= Equity
Understanding accrual accounting
• Accrual accounting decouples measured earnings (net
income) from the amount of cash generated from
operations
• Accrual accounting revenues generally do not
correspond to cash receipts for the period, nor do
accrual expenses always correspond to cash outlays for
the period
• Accrual accounting can produce large discrepancies
between measured earnings and the amount of cash
generated from operations
• Accrual earnings is a more accurate measure of the
value creation during the period than is operating cash
flow
4
Income statement
• Income statement reports the accumulation of costs and
revenues during the fiscal year
• Must contain as minimum information (IAS 1.82)
–
–
–
–
–
Revenues (Sales)
Finance costs
Share of the profit or loss of associates and joint ventures
Tax expense
Total of discontinuing operations
• Statement of profit or loss and other comprehensive
income
• Income attributable to controlling and non-controlling
owners
5
Case (cont.): Statement of income, Kone
2013
Case (cont.): Statement of comprehensive
income, Kone 2013
Some firms report IFRS and non-IFRS
numbers: Nokia 2015/Q2
Some firms report IFRS and non-IFRS
numbers: Nokia 2015/Q2
“2. Non-IFRS to reported reconciliation (unaudited)
In addition to information on our reported IFRS results, we provide certain
information on a non-IFRS, or underlying business performance, basis.
Non-IFRS results exclude certain non-recurring items (special items)
for all periods. In addition, non-IFRS results exclude intangible asset
amortization and other purchase price accounting related items
arising from business acquisitions. We believe that our non-IFRS
results provide meaningful supplemental information to both
management and investors regarding Nokia’s underlying business
performance by excluding the above-described items that may not be
indicative of Nokia’s business operating results. These non-IFRS
financial measures should not be viewed in isolation or as substitutes to
the equivalent IFRS measure(s), but should be used in conjunction with
the most directly comparable IFRS measure(s) in the reported results.”
Some firms report IFRS and non-IFRS
numbers: Nokia 2015/Q2
521 - 508 = 13
Balance sheet information
ASSETS
Helps
LIABILITIES
+
EQUITY
assess
Rates of return
ROA and ROCE
Capital structure
Debt vs. Equity
Liquidity
Cash conversion
Solvency
Ability to pay debt
Working capital
Balance Sheet
11
Efficiency
Case: Balance sheet of Kone (Consolidated
statement of financial position)
12
Case: Balance sheet of Kone (Consolidated
statement of financial position)
13
Case: Balance sheet of Kone (Consolidated
statement of financial position)
14
Statement of cash flows
Cash inflows and outflows from
transactions and events that affect
operating income
Operating Activities
Cash inflows and outflows from
loaning money to others, investing in
securities, or in assets (e.g.,
equipment) used to produce goods
and services.
Investing Activities
Cash inflows and outflows from
borrowing money, selling stock,
and paying dividends
Financing Activities
Δ Cash
15
Case: Statement of cash flows of Kone
16
Case: Statement of cash flows of Kone
873,4 - 774,6 = 98,8
These two numbers
must be the same.
17
Case: Statement of cash flows of Kone
18
Statement of the changes in equity
• Describes how equity and its component have changed
during the fiscal year
• These changes occur e.g. due to
–
–
–
–
Earnings generated during the fiscal year
Profit distribution (dividends)
Purchases of own shares
Option-based compensation
19
Case: Statement of the changes in equity
of Kone
20
Footnotes and other small-printed facts
• Footnotes are an integral part of companies’ financial
reports.
• These “notes” help users better understand and
interpret the numbers presented in the body of the
financial statements.
• Important notes include:
1. Summary of significant accounting policies
2. Subsequent event disclosures
3. Related party transactions
21
Analytical income statement and balance
sheet
• Ability of the firm to generate value is the main issue
• We need to reformat balance sheet and income statement
to highlight the distinction between
– Operating items
– Financial items
• For non-financial companies, operating activities are the
source of value, not financial activities!
– That is, ordinary firms do not create value from financial activities
We need to focus on operating activities, because they
create value
22
Analytical income statement and balance
sheet
• We need to reformate I/S and B/S to separate operating
activities from financing activities
• This distinction is not always easy to make due to several
factors
– The definition of operations is not clear-cut
– The specifications in the income statement and the balance sheet
do not clearly distinguish between operating and financing activities
– The notes are not sufficiently informative
• Reformation depends on the business model and the
characteristics of the firm
– Items that are sometimes categorised as belonging to ‘operations’
may at other times be classified as belonging to ‘financing’
23
Analytical income statement
• Adjust non-operating items, if needed
– Do these adjustements consistenty for all firms you are
analyzing
• Focus on Net Operating Profit After Taxes (NOPAT)
– Distinguish between profit from operations and financial income
• Taxes are deducted from EBIT
– Taxes are calculated using the corporate tax rate or the effective
tax rate of a given company
24
Reported vs. analytical income statement
Reported I/S
Reformatted I/S
Sales (Revenues)
− Cost of sales
= EBITDA
− Depreciations and amortizations
= EBIT
− Financial expenses, net
= Earnings before taxes
− Taxes
= Net earnings
Sales (Revenues)
− Cost of sales
= EBITDA
− Depreciations and amortizations
= EBIT
Operating taxes:
− Operating taxes - Effective tax rate?
- Corporate tax rate?
= NOPAT
− Financial expenses, net
+ Tax savings from debt financing
= Net earnings
25
Case: Analytical income statement of
Kone, 2013
SALES
+ Other income of business
- Materials and services
- Wages and salaries
- Other expences
+Share of associated companies' income
+/- Increase / decrease of inventory
EBITDA
- Depreciation and amortization
EBIT (OPERATING PROFIT)
- Taxes on operating profit
NOPAT
-/+ Net financial costs/income
-/+ Taxes on net financial costs/income
-/+ Net financial costs/income after taxes
NET INCOME
26
6 932,6
55,9
-3 416,4
-1 983,8
-584,8
1,1
28,6
1 033,2
-78,5
954,7
-233,9
720,8
5,9
-1,5
4,4
725,2
See next slide
See next slide: 2839 + 577,4
See next slide
See next slide: 95,5 + 489,3
See I/S
See next slide
See next slide
= 0.245×954,7
See I/S: 36,8-42,7 = 5,9
= 0.245×5,9
= 5,9 -1,5 = 4,4
Note: corporate and effective
tax rates are different
Case: Analytical income statement of
Kone, 2013
This was reported
in income statement
27
Reported balance sheet
Assets
Liabilities and Equity
Non-current (fixed) assets
Equity
 Intangible assets
 Tangible assets
 Financial assets, long maturity
Non-current liabilities
 Debt, interest-bearing
 Non-interest bearing
Current assets




Inventories
Receivables
Financial assets, short maturity
Cash, operating and excess
Current liabilities
 Non-interest bearing
• Financial liabilities
• Accounts payable
• Tax liabilities
 Interest-bearing
28
Reported balance sheet
1st step: Remove non-operating items
Assets
Liabilities and Equity
Non-current (fixed) assets
Equity
 Intangible assets
 Tangible assets
 Financial assets, long maturity
Non-current liabilities
 Debt, interest-bearing
 Non-interest bearing
Current assets




Inventories
Receivables
Financial assets, short maturity
Cash, operating and excess
Current liabilities
 Non-interest bearing
• Financial liabilities
• Accounts payable
• Tax liabilities
 Interest-bearing
29
Reformatted balance sheet
1st step: Remove non-operating items
Assets
Liabilities and Equity
Non-current (fixed) assets
Equity
 Intangible assets
 Tangible assets
Non-current liabilities
 Debt, interest-bearing
 Non-interest bearing
Current assets
 Inventories
 Receivables
 Cash, operating
Current liabilities
 Interest-bearing
Note: This balance sheet is NOT in balance!!!
30
Reformatted balance sheet
2nd step: Deduct items from the other side
Net Operating Assets
Invested Capital
Equity
Non-current assets:
• Tangible and intangible
– Interesting bearing net debt:
+ Current assets:
+ Non-current liabilities, interest• Inventories
bearing
• Receivables
+ Current liabilities, interest-bearing
• Cash, operating
– Financial assets, all maturities
– Current liabilities, non-interest
– Cash, excess
bearing
– Non-current liabilities, non= Invested capital
interest-bearing
= Net Operating Assets
= Net Operating Assets
Working capital (net)
= Invested capital
Note: This balance sheet is (again) in balance!!!
31
Example: Outotec, Interim report Q2/2015
32
Case: Creating the analytical balance
sheet of Kone
Analytical Balance
Sheet:
Intangible assets
1332,5
Tangible assets
269,6
Investments in associated
companies
4,3
Deferred tax asset
218,9
NON-CURRENT ASSETS 1825,2
33
Analytical Balance
Sheet:
Inventories
Receivables
CURRENT ASSETS
1103,9
1410,6
2514,5
FINANCIAL ASSETS
1003,7
Case: Creating the analytical balance
sheet of Kone
Analytical Balance
Sheet:
EQUITY
34
1724,6
Case: Creating the analytical balance
sheet of Kone
Analytical Balance
Sheet:
Deferred tax liabilities
Accounts payable
Provisions
Advanced payments
Other non-interestbearing liabilities
NON-INTERESTBEARING DEBT
Analytical Balance
Sheet:
Long-term liabilities
Current liabilities
INTEREST-BEARING
DEBT
35
191,3
511,2
139,4
1397,5
1105,5
3344,9
155,8
118,1
273,9
Case: Analytical balance sheet of Kone
NET OPERATING ASSETS
INVESTED CAPITAL
Intangible assets
Tangible assets
Investments in associated companies
Deferred tax asset
(A), NON-CURRENT ASSETS
1332,5
269,5
4,3
218,9
1825,2
(A), EQUITY
Inventories
Receivables
(B), CURRENT ASSETS
1103,9
1410,6
2514,5
(C), FINANCIAL ASSETS
1003,7
(B-C), INTEREST-BEARING
NET DEBT
-729,8
Deferred tax liabilities
Trade payables
Provisions
Advances received
Other non-interest-bearing liabilities
(C), NON-INTEREST-BEARING DEBT
191,3
511,2
139,4
1397,5
1105,5
3344,9
(A+B-C), NET OPERATING ASSETS
994,6
36
Long-term liabilities
Current liabilities
(B), INTEREST-BEARING DEBT
(A+B-C), INVESTED CAPITAL
1724,6
155,8
118,1
273,9
994,6
Case: Analytical balance sheet of Kone
SUMMARY
2012
2013
Average
1833,7
1 724,6
1779,2
305,7
273,9
(C), FINANCIAL ASSETS
1019,4
1 003,7
(B-C), INTEREST-BEARING NET DEBT
-713,7
-729,8
-721,8
(A+B-C), INVESTED CAPITAL
1120,0
994,6
1057,3
(A), EQUITY
(B), INTEREST-BEARING DEBT
37
Summary
• Statement of cash flows links the cash in the opening
balance sheet to the cash in the closing balance sheet
• Statement of the changes in equity links the equity in the
opening balance sheet to the equity in the closing
balance sheet
• Accrual accounting items generally do not correspond to
cash receipts and outlays for the period
• Analytical income statement and balance sheet
distinguishes operating and financial items in the
reported income statement and balance sheet
38