Financial Assessment
The basic financial statements are the primary means to provide information about the company and is prepared from the stock of the company’s accounting records on a given date. Classification and summary of the accounts are properly structured financial statements and these are:
1. Balance Sheet;
2. Profit and Loss;
3. Statement of Changes in Equity, and
4. Cash Flow Statement.
1.2 Objectives of Financial Statements
The financial statements have, mainly the following objectives:
1. Information fairly present the financial position, results of operations and cash flows of an enterprise;
2. Management support in planning, organization, direction and control of business;
3. Provide a basis for investment decisions and financing;
4. Represent a management tool to assess the management and the company’s ability to generate cash and cash equivalents;
5. Permit control over the operations conducted by the company;
6. Be a basis to guide policy management and shareholders on corporate matters.
A. BALANCE SHEET
The company’s balance sheet includes the accounts of assets, liabilities and net worth. Asset accounts should be presented in decreasing order of liquidity, and liability as the enforceability of declining payment, which is shaped such that present fairly the financial position of the company at a given date.
B. STATEMENT OF PROFIT AND LOSS
The Profit and Loss Account includes the revenues, costs and expenses, presented in the spending function method. In its formulation should be observed:
You must include all items representing income or gains or losses and expenses incurred during the period.
You should only include items that affect the determination of net income;
C. STATEMENT OF CHANGES IN EQUITY
The Statement of Changes in Equity companies shows the changes occurring in the different equity account, such as capital, additional capital investment shares, revaluation surplus, reserves and retained earnings for a specified period.
D. CASH FLOW STATEMENT
The Cash Flow Statement shows the effect of changes in cash and cash equivalents in a given period, generated and used in operating activities, investment and financing.
The cash flow statement must show separately the following:
1. Cash flows and cash equivalents from operating activities. Operating activities are primarily derived from the principal revenue-producing activities and distribution of goods or services of the company.
Cash flows from this activity are usually a result of transactions and other events that enter the effective determination of profit (loss) for the year.
2. Cash flows and cash equivalents from investing activities.
Investing activities include the provision and collection of loans, the purchase or sale of debt or equity instruments and that may be made available investment vehicles, buildings, machinery and equipment and other productive assets that are used by the company in production of goods and services.
3. Cash flows and cash equivalents from financing activities.
Financing activities include obtaining resources from the shareholders or third parties and the return of profits made by them, and the repayment of amounts borrowed, or the cancellation of obligations, collection and payment of other creditor’s resources and long-term credit.
MAIN FORMULAS TO ASSESS FINANCIAL COMPANIES
A. Liquidity Index
(1) GENERAL LIQUIDITY
Measures the performance of the company to meet its commitments promptly short-term. Ie shows the current availability of funds the company for each sol of debt.
Current Assets
Current Liabilities
(2) ACID TEST
Measures the immediate ability to pay the company to cancel its debts shortened term, ie the availability of liquid assets of the company to meet its liabilities over due.
Current Assets – Inventories – Prepaid Expenses
Current Liabilities
(3) EFFECTIVE CASH LIQUIDITY
Measure the period during which the company can operate with highly liquid assets without recourse to their sales pipeline.
Marketable Securities Fund Banks
Bank overdrafts
(4) CASH LIQUIDITY
It indicates the actual availability to meet their short-term commitments
Banks cash Marketable Securities Accounts Receivable Trade
Trade accounts payable Bank overdrafts
B. MANAGEMENT INDEX
(1) ROTATION CASE – BANKS
It is a measure of the middle period in which the company can meet its current commitments, using highly liquid resources including the time factor, the result indicates the number of times that rotates in the period.
(Marketable Securities Cash and cash equivalents) x 360
Net Sales
(2) SALES TURNOVER
Shows the number of times that a sale is reflected in accounts receivable, ie, the average term of loans granted to customers.
Net Sales
Accounts Receivable Trade Subsidiaries and Affiliates
(3) ROTATION OF CHARGES
Indicates the period when the company was running late or effectuate a collection.
Accounts Receivable Trade Subsidiaries and Affiliates
Net Sales
(4) INVENTORIES ROTATION
Let’s look at the number of times that inventory changes each year.
Cost of Sales
Final Inventory
(5) IMMOBILIZATION OF INVENTORIES
Displays the days that stocks remain motionless during the period prescribed
Inventory x 360
Cost of Sales
(6) Fixed Asset Turnover
Indicates the number of times at a given level of sales, fixed assets are used.
Net Sales
Net Fixed Assets
(7) Total asset turnover
Measures the number of times at a given level of sales, total assets are used.
Net Sales
Total Assets
(8) COST OF SALES
Reflects the proportion of sales that are absorbed by the cost, is used to make decisions regarding sales policies.
Cost of Sales
Net Sales
(9) FINANCE COSTS
To get an idea of the relative importance of financial expenditure in total expenditure.
Financial Expenses
Total Expenses
C. Solvency Index
(1) DEBT EQUITY
Evaluate the relationship between the total resources provided by creditors and those provided by the owners of the company, besides this ratio is used to estimate the level of financial lever pressing.
Total Liabilities
Heritage
(2) DEBT ASSETS
Measures the level of total assets of the company, financed with resources provided short and long term creditors.
Total Liabilities
Total Assets
(3) DEBT FIXED ASSETS
Sets the use of long-term financial resources in the acquisition of fixed assets.
Long-Term Debt
Net Fixed Assets
D. CAPITALIZATION RATES
(1) CAPITALIZATION OF PROFITS
The indices of this group measured the effects on social capital have the capitalization of profits, reserves and new contributions.
Capitalized Inverted Utilities
Capital Increase
(2) CAPITALIZATION OF RESERVES.
Capitalized Reserves
Capital Increase
(3) NEW CAPITAL CONTRIBUTIONS
New Contributions
Capital Increase
E. RATES OF RETURN
(1) NET RETURN OF CAPITAL
Determines the ability to generate profits to capital.
Net Income
Capital
(2) RETURN ON NET ASSETS
Measures the ability to generate profits with the investment of shareholders, partners or owners, according to the book value.
Net Income
Heritage
(3) Return on Equity
Determine net income for each common share
Net Income
Number of Shares
(4) NET SALES PERFORMANCE
Show the firm’s profits per unit sold.
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