Restated Financial Statements & Ratios

Accounting, Leaning & Online Communications

Grace Lynam 10011279

Step 1:

As I first began printing off this weeks chapter. I was excited to begin my KCQs and hopefully take on board feedback from my assignment 1. It felt like the printer just kept printing and all I could think was, Oh my God! this is going to take forever to read! But here we go

4

The first thing we talked about was Capital Markets. Capital markets from my understanding are not fresh nor do they have immediate success; they are sometimes jumping in the deep end with the little knowledge they might have about the firm. Capital Markets will try to predict the firms success and will use the firms current expectations to forecast its future.

This section talked about how consulting the past of a firm can foresee the firms future. I found this very interesting as this is something I enjoy doing, I get some kind of thrill out of going though financial statements and seeing how the firms position changes over the years and what areas it has either improved or worsened. Hopefully one day I will be doing this for real!

This chapter continued with restating the firms financial statements. I did not fully understand this part of the section, from what I understood, restating the firms financial statements is just another step we can take that can help us better understand what is going on within the firm? And yes, I will defiantly be printing of that glossary!

4.1

To begin with, the chapter discussed equity investors and stated, When a firm pays its equity investors a dividend, this does not in itself add value to them. It is a simply a transfer of value between a firm (which the equity investors already own) and its equity investors. Well, this section just confused me. From what I understand dividends are just yearly amounts paid by the firm to its equity investors depending on their share; and because they already own there share, it is simply just a transfer from the firm to the share owner. I am not sure though.

As u continued to read though section 4.1, I felt like I spent most time checking the glossary for what each shortened term meant. This was quite frustrating for a while but after I begun to have an understanding about different terms, it really started to help me. I loved that the glossary had formulas beside them to better understand how we calculate different things, such as - OI (Comprehensive operating income after tax);

OI = OR OE This really helped me!

I am honestly so confused with this Ryman Healthcare free cash flow (FCF) section. From what I understand the firms was negative in (FCF) $55.3m in 2016 because it had invested $368.6m in developing new retirement villages. While, cash flow from operations was only $313.3m. It continued with what if we had only invested $200m instead of $368.6m, this would change (FCF) to a positive $113.4m. I am not too sure if only investing $200m is a good thing or a bad thing or whether it would even make a difference overall. To me it just seems like it is just a transfer within the firm.

4.2

In this section we looked at restating our firms financial statements, I still do not fully understand why we do this, Although I gathered from this section that it was to give a better understanding of all the firms earnings and to separate our equity, to only genuine equity (with no debt); this gives the balance sheet a more accurate reading.

Continuing this section, we begun learning to separate the firms operating activities from its financial activities, this clearly distinguishes activities between customers, suppliers (NOA), (OR), (OE), and Equity investors, Debt investors, (NFA), (d), (f). By separating O & F activities this gives us two sides to the financial story, and helps us understand each side better without of course ignoring the other.

I then took a little bit of time, to view and understand the following tables 4-3 and 4-4. But in the end they were really easy to understand and gave me a much better understanding on the topics discussed, then the actual readings did.

4.3

In this section we learn about how to restate the balance sheet and income statement and then use this knowledge to restate our own firms statements. I found this quite exciting as I have never done this before, and I am keen to learn how and why we restate the balance sheet and income statement and what I will get out of doing it.

Looking at Ryman Healthcares Balance Sheet and also their restated balance sheet has given me a great example of how a restated balance sheet is set out. I can see the difference it makes to separate operating and financial activities, this has also provided me with some great ideas and suggestions for when I have to construct my own restated balance sheet; such as, put an O (for operating) and an F (for financial) on the original balance sheet to clearly identify whether its and operating or financial activity.

I found it interesting that if a firm has a large amount of cash, that your advice would be to allocate a small amount to operating assets (up to 0.5%-1% of sales). In contrast, you also said that if there is an overdraft of $1.0m you would allocate it to operating liabilities. I thought this was a great tip!

We then moved on to the income statement and begun separating revenue and expenses as either an operating or financial activity.

The income statement also had a few additional steps to restate it, these included:

Include other comprehensive income items

Allocate tax to the operating and financial components of the income statement

Calculate OI (OI=OR-OE) and NFE

I found that if a firm increases its borrowing and thus pays more interest it will increase its interest expense, and reduce its tax expense. Alternatively, if a firm reduces it borrowings and thus pays less interest, it will reduce its interest and increase its tax expense. How interesting!

4.4

This section discussed how some companys may make 3cents in a dollar while others make 15 cents and which option is preferential. I think everyone would have first picked 15 cents if all things where equal. However, what are the factors that would make me choose 3 cents instead? Someone that makes 15 cents a dollar might do so, but this occurs less often then someone that makes 3 cents. The frequency of how often you are making 15 cents as opposed to 3 cents has a big impact.

The firms profitability and efficiency; breaking things into bits.

(How much profit we make for each dollar of sales)

(How much sales we make for each dollar invested in the business)

RNOA = PM x ATO

Where, PM = OI/sales and ATO = Sales/NOA

Wow, I just cannot seem to stay away from my glossary, I wonder why? Continuing on with the section on page 21, it was all about the breaking down our financial statement in order to analyse our performance. Oh, by the way my growth stopped years ago too!

We then continued to page 22 with comparing OI and NOA to calculate RNOA; It also explained why we might change our balance sheet dates to help make a more accurate RNOA. I found the explanation given of why we might change our dates very easy to understand. I also found the formulas/calculations below very helpful as they made it simpler to grasp the concepts.

NOA = (opening NOA + closing NOA)/2

= (1,513.1m + $1,881.7m)/2

= $3,394.8m/2

=$1,679.4m

Using above NOA

RNOA = OI/NOA

= $313.3m/$1.679.4m

=18.5%

Economic profit = (RNOA cost of capital) x NOA

= (18.5%- 10.0%) x $1,697.4m

= 8.5% x $1,677.4m

= $144.3m

This helped me understand the calculation side of this a lot better. I can imagine this is going to help me while doing my own restated Financial statements!

When the moved on and discussed profitability and I myself I like think I have a very good grasp of the idea of profit. I love thinking about profit and the journey we go on to make it excites me. I think that is it is in some way the reason I am really enjoying my course, because it is laying everything out on the table, all the facts, and working with what we have, to pin point underlying success and failure.

When then moved on ATO which is asset turn over and to begin with I had no idea what this meant if I had to guess I would have said how often we use up our assets?

I can now understand that ATO is calculated into order to see how efficient our NOA are being used in order to make sales. ATO can be calculated by ATO = Sales/NOA.

After reading the weeks chapter I am still very confused with the idea of restating our financial statement although, I do not learn by reading! I am very keen to get into Excel and begin preparing my Restated Financial Statements and I cannot wait to see the results it will provide for me with regards to my company!!

Step 2:

6

From the introduction of Chapter 6, I gathered that throughout this weeks chapter we will be looking at how important it is for managers to understand the cost of products and services within the firm; whether they complement the product or service, how they determine the cost and whether the cost of the product is appealing to the consumer in the long run.

6.1

The first thing that I found interesting in this section was the example that linked allocating the costs of a business to cleaning up your bedroom. It stated, It is also a bit like tidying up your bedroom, by putting away various stray and loose thing lying around your room into those places where they belong. This can make your bedroom feel a lot tidier. My