Financial Statements
Class 2
Interlude: Uber Press Release Aug 2, 2022
Uber Accounting Numbers
Chart of Accounts
Understanding the Business
To understand amounts appearing
on a company’s balance sheet we
need to answer these questions:
What
business
activities cause
changes in
the balance
sheet?
How do
specific
activities
affect each
balance?
How do
companies
keep track of
balance sheet
amounts?
Elements of the Balance Sheet
A = L + SE
(Assets)
Economic
resources with
probable future
benefits owned or
controlled by the
entity. Measured by
the historical cost
principle.
(Liabilities)
(Stockholders’ Equity)
Probable debts or
obligations (claims
to a company’s
resources) that
result from a
company’s past
transactions and
will be paid with
assets or services.
Entities that a
company owes
money to are called
creditors.
The financing
provided by the
owners and by
business operations.
Often referred to as
contributed capital.
Assets
Class 2
Assets
• An asset is a resource that entitles the company
to future economic benefits
• An entity should have acquired the right to those
future economic benefits
• An asset should be controlled by the enterprise
• The future economic benefits should be
measured reliably
Examples of “future benefits” that are
not assets (for accounting purposes)
• Singapore Airlines “brand” name (internally
generated asset)
• Value of human resources (e.g., Ma Huateng – CEO
of Tencent)
• Why are these not assets for accounting purposes?
Examples of reliably valued assets
Some assets have “reliably” determinable market values
– they will be accounted for at market values
Example 1 – Alibaba purchased 100,000 shares of Singtel
on September 13th 2021, when the shares were trading at
$2.35 a share. On December 31st 2021 shares in Singtel
were trading at $2.32 per share. What will be the value of
the Singtel investment on Alibaba’s Balance Sheet on
December 31st 2021? Why?
Value of Singtel Shares
• Scenario 1:
– September 13th 2021: 100,000*2.35 = 235,000
– December 31st 2021: 100,000*2.32 = 232,000
• Scenario 2:
– If instead the value of Singtel shares is $2.42
– December 31st 2021: 100,000*2.42 = 242,000
• Revaluing the asset leads to a gain or loss due to revaluation.
• This gain or loss impacts owners equity:
– Scenario 1: 3,000 Decrease
– Scenario 2: 10,000 Increase
Current assets
Class 2
Recap - Definition of an asset
• Yields future economic benefits
• Future economic benefits owned by firm
• Asset controlled by the firm
• Future economic benefits should be measured reliably
Cash
• Current assets: Expected to be used up or
converted into cash within one year
Cash:
– Cash in hand, in the bank
– Short term highly liquid investments (cash equivalent)
– Sheng Siong (SGD Millions)
• 253,962 (Mar 31, 2022)
• 246,642 (Dec 31, 2021)
Accounts receivable
• Amounts due from customers
• Customers have purchased products or services
on credit
• Have not yet paid the company by the end of the
year.
• Is there a way to convert accounts receivable into
instant cash?
Inventory
• Raw Materials – shown at purchase price
• Work-in-Process - (not fully finished goods)
– cost of raw materials
– costs of manufacturing unfinished product
• Finished Goods
– cost of raw materials
– costs of manufacturing the finished product.
Short term investments
• Investments that are unrelated to its main line
of business.
• Company can invest in other companies
– make a loan to other companies
– buy shares of other companies
Prepaid expenses
• Expenses paid in advance
• Example: rent paid for 12 months at beginning
of the lease
Long term assets
Class 2
Property, Plant & Equipment (PP&E)
• PP&E:
– Land, Buildings, Furniture and other equipment,
– Vehicles, and Plant and Machinery.
• Provide economic benefit over a number of years.
• Mgt assesses: Useful life of asset
• Sheng Siong (Millions SGD)
– 299,420 (March 31, 2022)
– 341,950 (March 31, 2021)
Valuation basis
• Shown on the balance sheet at book value (or net
book value):
• BV or NBV = cost of the asset less accumulated
depreciation. Net Book Value
• IFRS Treatment:
– cost basis
– revaluation to fair value
Computation of Cost
• Purchase price paid by the company
– Includes incidental charges to put the asset in
operation.
• XYZ Company buys a machine for $340,000 on
1/1/2022.
• $10,000 to transport the machine to the factory
• $20,000 to install the machine.
• The total cost of the machine is $370,000.
Depreciation
All fixed assets except land
Over their useful lives.
“Allocating” the cost over the useful life
Popular method: straight-line method (SLM)
Depreciable cost
o cost less estimated salvage value
• Estimated salvage value: estimated price recoverable at the
end of its useful life.
•
•
•
•
•
Calculation of depreciation
• Assume that the machine has an estimated
useful life of seven years
• Salvage value $20,000.
• What is the depreciation expense per year?
• 370,000 – 20,000 = 350,000 Depreciable value
• Useful life = 7 years
• Depreciation per year = 350,000/7 = 50,000
Where to find depreciation number?
• Depreciation and amortization from the cash
flow statement
• Some D&A are shown in cost of sales in
Income statement and some in SG&A
• Look in the depreciation footnote for details
Accumulated Depreciation
•
•
•
•
Sum of depreciation expense every year
BV = Cost - accumulated depreciation
NBV shown in balance sheet till it is discarded
Accumulated Depreciation: contra asset
– reduces the value of the related asset
• Not a liability
– company does not owe this money to anybody
Calculation of accumulated
depreciation
• What is the net book value of the machine on
December 31, 2025? - 4 years from purchase
• How will this be shown on the balance sheet?
• Cost
370,000
• Less Accumulated Depreciation
200,000
• Net book value on balance sheet
170,000
Intangible Assets
Do not have physical form
Provide future benefits to the company
Only purchased Intangibles show up on B/S.
Examples, purchased patents, trademarks,
copyrights and goodwill.
• Amortized (similar to depreciation for tangible
assets) over their useful lives.
• Sheng Siong: No Intangible Assets
•
•
•
•
Financial Leases: On Balance Sheet
• Lease provides the firm the right to control the
asset
• Control and Benefits
– The asset is well identified
– Right to direct use of the asset (e.g. lease of truck for
a delivery company)
– Obtain the economic benefits of the asset through out
period of use
Patents: Group Analysis
• Patents are tangible
• Patents awarded by Country patent offices
• 3 Arguments
– Why not on balance sheet
– Why should be on the balance sheet
Liabilities
Class 2
Liabilities
• Future payment for buying goods and services
now.
• Current liabilities: Due within one year.
• Valued at the cash payment to be made
• Long term liabilities: Due in more than one year
• Valued at net present value of future cash flows
• Marked to market at year end
Current Liabilities
• Obligations to be paid for within the next year
–
–
–
–
Bank Borrowings
Accounts Payable
Accrued Payroll
Taxes Payable
• Net working capital (NWC)
– Current assets Less current liabilities
– Sheng Siong
• Current Assets = $356.6 m
• Current Liabilities = $270.5m
• NWC = $86.1 m
• Most firms would like to have positive NWC
Current liabilities - I
• Accounts Payable: Merchandise (finished goods
or raw materials) bought by the company on
credit
• Expenses Payable: E.G. salaries payable, rent
payable.
– Employee has worked but not yet been paid
– Premises taken on rent but rent has not been paid
– Similarly, interest payable, tax payable etc.
Current liabilities - II
• Short-term borrowings:
– All borrowings that have to be repaid within the
next year.
– Installments on long-term loans to be repaid
within the next year.
Provisions or Other Liabilities
• Liabilities of uncertain timing or amount
• Example: restructuring of business, litigation
• Recognized when there is a past event and
future cash flows are reliably estimable.
• Based on facts known at balance sheet date
Long term liabilities
• Loans which mature after the next year.
• Long-term bonds and other borrowings.
• Lease Liabilities
– Shin Siong
• 2021: 48.9 million
• 2020: 23.1 million
Shareholders Equity
Class 2
Stockholders’ Equity
• Buy shares and contribute equity.
• Extent of ownership: % shares owned.
• Authorized Shares: The maximum number of
shares that can be issued by the company.
• Issued Shares: The number of shares actually
issued by the company.
• Cannot exceed the authorized number of shares.
In issued shares same as authorized shares.
Share capital structure of Nestle
• Each share has one vote
• Each shareholder has a right to dividend
• Ordinary shares quoted on the Nasdaq Global
Select Market
• 2,994 holders of record (excludes shares in street
accounts)
• What are street accounts?
Components of shareholders equity
• Contributed Capital: Amount received by the
company when they sell shares directly to the
public in a stock offering.
• Stock offering: IPO (initial public offering) or
SEO (Secondary equity offering).
• Secondary trades (between stockholders)
have no effect on shareholder equity.
Treasury stock
• Buy back of shares by company.
• Number of shares and value held by firm on
balance sheet date.
• Why would a company buy back its own
shares?
Retained Earnings
• Sum of net income since inception less
dividends paid to shareholders.
• Dividends are distributions of earnings to
stockholders.
• Retained earnings owned by shareholders
• So form part of shareholder equity
Par value of shares
Class 2
History of raising capital
• Dutch and British East India Company
– Start a journey (Ship to the orient)
– Pitch to rich people who became investors in the
voyage
– They were sold shares whose value is say £1,000
for each share, called the par value
Calling capital
• The promotor of the voyage say calls up as
first call of capital £250
• The investor still “owes” the voyage £750
• The par value defined the maximum liability
that the investor has towards the voyage for
their share of capital for holding one share.
Current context
• Par value is merely a legal definition
• Defines what is the maximum liability of the
shareholder
• Since capital markets determine prices, there
is no need for a high par value.
• These days par value is 1 cent or even 0 cent
Johor Corp’s Palm Oil Arm: Group Analysis
• You are an analyst at Nomura and tasked by your boss with
analyzing the potential Palm Oil Arm offering.
– List 10 variables about the Palm Oil Arm offering that you would
be interested in examining to help Goldman Sachs analyze the
Palm Oil Arm as a business to take it public.
– What is the biggest problem that the POA faces in having an
IPO?
– What is your recommendation on taking POA public? Explain
• How should we interpret the valuation target in the bid
solicitation process?
Income statement
Class 2
Components of the income statement
• Revenues or sales
• Revenues are “recognized” when
– Earnings process is substantially complete
– Whether cash is received or not
• “Earned” means
– The activity has happened
– collectivity is assured
Cost of sales
• The cost of producing the product for the units sold.
• Non production cost is defined as selling and general
administrative expenses.
• Revenue less Cost of sales and restructuring charges =
Gross profit
Sheng Siong: 1.37 Billion – 0.98 Billion =
393.3 million (in 2021)
• Gross Margin = Gross profit / Sales = 28.7%
Net income
• Sheng Siong made a net profit of 133.1 m (in 2021),
and 139.1 (in 2020)
• Net margin = Net income / sales
• This translates to 9.72% (in 2021) and 9.98% (in
2020) of sales.
• This is a nice net margin for grocery business (typical
is something like 2%)
Cash flow statement
Class 2
Cash Flow Statement
• Explains how the company's cash balance
changed over the year.
• Classifies items based on the nature of the
cash transaction
• 3 basic classifications
• Operating, investing and financing activities.
Why is there a need for cash flow
statement
• Income statement prepared based on the accrual
method
• Income statement can include sales without
receiving cash
• Accrual accounting is based on estimates
• Abuse of the accrual method is possible
• The cash flow statement acts as a check
Cash Flow from Operations (CFO)
• It is an income statement on a cash basis.
• Cash flows from operations negative past several
years
– Sheng Siong 2021: (172.7 m)
– Sheng Siong 2020: (274.1 m)
– Sheng Siong 2019: (117.3 m)
• CFO more than doubled with Covid
Cash Flow from Investing (CFI)
• Includes all cash purchases and cash received from sales of
– fixed assets
– “non-operating” assets
• CFI for 2021; 2020; 2019:
• -30.3 m; -16.1 m; and -52.1m respectively.
• What do these numbers tell us?
– Neg Cash Basis of firm from investing
– Using Cash to invest in PPE
• Buying assets
• Slow pace in 2020 but picking up in 2021
Cash Flow from Financing (CFF)
• Cash received from
– Sale of stocks, bonds,
– Taking loans
• Cash paid for
– Repayments of debt
– Payment of dividends
• Payment of interest can be CFO or CFF under IFRS
• CFF for 2021, and 2019 are:
• (149.9), (80.9), and (75.9m) respectively
– mostly dividends to shareholders
– 2021 numbers driven by slight increase in dividend and 25 million debt pmt
Practice Problems
• Chapter 3
– QS: 7, 11
– Exercises: #5, #7, #8, #9,
– Problem Set A: 1A, 3A, 5A, 6A
– BTN: #2, #3