IFC Media Training
The story behind the figures
David Anderson, Managing Director
Deloitte Vietnam
April 1, 2010
Content
1. Introduction
2. Understanding key information in a company’s Annual Report
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Financial Statements
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Audit Report
3. Financial Statement Analysis
4. Limitations in analyzing financial information
5. References
Introduction
About the speaker
Tel :
+84 (0)4 2211 9541
Mob.: +84 (0)913 207 924
E-mail: [email protected]
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Managing Director of Deloitte Vietnam
Member of AICPA, ICAS
CPA of Illinois and Iowa CPA Societies
Holder of the MBA by the University of Chicago
Over 40-year experience in public accounting services
Serving a diversified client portfolio across the United States,
Canada, Europe, and Asia
About the workshop materials
1. Slides
2. Handout 1: Annual Report of PVD
3. Handout 2: Example of Audit Report
a. Handout 2a: with Unqualified Opinion
b. Handout 2b: with Qualified Opinion
c. Handout 2c: with Disclaimer Opinion
d. Handout 2d: with Adverse Opinion
Annual Report:
Key information
Business activities at a glance
Components of Financial Statement
Financial Statements generally consist of:
• Balance Sheet
• Income Statement
• Statement of Cash Flows
• Statement of Stockholders’ Equity
• Notes to Financial Statements
Financial Statement
Balance Sheet
• Presents Assets, Claims on those assets and residual assets (or
Equity)
• Provides useful information on working capital, liquidity, sources of
funding and where those funds have been deployed
• Is generally regarded as the statement that allows the reader to
assess an entity’s ability to continue into the future as a “going
concern”.
Balance Sheet - Assets
• Listed in order of liquidity and reported at historical cost
• Current Assets
Cash & cash equivalents
Short-term investments
Receivables
Inventories
Prepaid expenses
• Non-current Assets
Long-term investment
Property, plant and equipments (PPE)
Goodwill and intangible assets
Other assets
Balance Sheet - Liabilities
• Listed in order of maturity
• Current Liabilities
Accounts payable
Trade notes payable
Dividends payable (when declared)
Advances, deposits, unearned revenue
Current portion of long-term debt
Accrued expenses
• Non-current Liabilities
Notes and bonds payable
Long-term debt
Mandatory redeemable preferred shares
Pension and post-retirement
Other non-current liabilities
Income Statement
• Presents Revenues and
Expenditures
• Provides useful information
on revenue growth, gross
margin, expenses and net
income changes
• Is generally regarded as the
statement that allows the
reader to assess an entity’s
ability to generate
operating profits.
Income Statement (cont’d)
• Operating expenses are the usual and customary costs that a
company incurs to support its main business activities
• Nonoperating expenses relate to the company’s financing and
investing activities
• From the financial analyst’s perspective, it is not a good sign if
the company relies too much on nonoperating activities.
Income Statement (cont’d)
Operating and Nonoperating components in the Income Statement
Statement of Cash Flows
• This is probably the most important statement
• Operating cash flows show how much of the ―net income‖
got converted to cash.
• Remember accrual accounting bridges the timing of when a
transaction occurs to when it gets converted to cash
Statement of Cash Flows
• Cash flows are reported based on the three business
activities of a company:
• Cash flows from operating activities
• Cash flows from investing activities
• Cash flows from financing activities
Statement of Stockholders’ Equity
• Is the reconciliation of the beginning and ending balances of
stockholders’ equity accounts
• According to Vietnamese Accounting Standard, stockholders’
equity is shown in Balance Sheet and explained in the Notes
to Financial Statements, and is not presented in a separate
statement
• Main equity categories are:
• Contributed capital
• Retained earnings
• Treasury stock
Additional information
To analyze a company’s performance, information beyond
Financial Statement can be found in:
• Management Discussion & Analysis (MD&A): highlights
of key information of the year and plans for next
period(s);
• Independent Audit Report: opinion from an independent
party;
• Notes to Financial Statements : details and/or
explanations of some items in the Balance Sheet, Income
Statement, Cash Flows, such as accounting policies,
inventory, investments, assets, taxes, EPS etc.
Appointment of auditor
Audit report
• Audit report: a written document prepared and issued by the
auditor and the audit firm to express their independent opinion on
the financial statements if an entity being audited;
• Financial statements are management’s responsibility. Auditor’s
responsibility is to express an opinion on those statements only;
• Auditing involves a sampling of transactions, not investigation of
each transaction;
• Audit opinion provides reasonable assurance that the statements
are free of material misstatements, not a guarantee;
• Auditors review accounting policies used by management and the
estimates used in preparing the statements; and
Types of Audit Opinions
Unqualified opinion — This opinion has no reservations concerning
the financial statements. This is also known as a clean opinion
meaning that the financial statements appear to be presented fairly.
Qualified opinion — This means that the auditor has taken
exception to certain current-period accounting applications or is
unable to establish the potential outcome of a material uncertainty.
Disclaimer of opinion — This means that the possible effect of a
limitation on scope is so material and pervasive that the auditor
cannot obtain sufficient audit evidence, so cannot provide an
opinion on the financial statements.
Adverse opinion — This is a type of audit opinion which states that
the financial statements do not fairly present the financial position,
results of operations, and changes in financial position, in
conformity with generally accepted accounting principles.
A sample of Audit Report (Handout #2a)
VSA700 – Unqualified opinion
• Full report sample in Handout #2a.
• The unqualified opinion does not mean that the financial statements are
completely accurate, but means that they may have certain
misstatements, which, in the auditor’s judgments, are not materials.
• Content as per VSA700:
Opinion (Unqualified)
In our opinion, the accompanying financial statements give a true and fair
view of the financial position of ABC Company as at 31 December 20xx,
and of the results of its operations and its cash flow for the year then
ended in accordance with the Vietnamese Accounting Standards and
system and comply with relevant statutory requirements
VSA700 – Qualified opinion
• General part and Basic of Opinion: As in Handout #2a
• Full report sample with qualified opinion: Handout #2b
• Content as per VSA700:
Opinion (Qualified)
We did not observe the counting of the physical inventories as of 31
December 20xx, since that date was prior to the time we were initially
engaged as auditors for the company. Owing to the nature of the
company’s records, we were unable to satisfy ourselves as to inventory
quantity by other audit procedures.
In our opinion, except for the effects (if any) on the financial statements of
the matters referred to above, the accompanying financial statements five
a true and fair view of the financial position of ABC Company as at 31
December 20xx, and of the results of its operations and its cash flow for
the year then ended in accordance with the Vietnamese Accounting
Standards and system and comply with relevant statutory requirements
VSA700 – Disclaimer of opinion
• General part and Basic of Opinion: As in Handout #2a
• Full report sample with qualified opinion: Handout #2c
• Content as per VSA 700:
Opinion (Disclaimer)
Due to the limitation imposed by the management, we were unable to
examine the total revenue and failed to obtain adequate confirmations of
accounts receivable from debtors, and in view of the materiality of these
effects, we do not express an opinion on the financial statements.
VSA700 – Adverse opinion
• General part and Basic of Opinion: As in Handout #2a
• Full report sample with qualified opinion: Handout #2d
• Content as per VSA 700:
Opinion (Adverse)
The cost of fixed assets of VND XXX and a loan due to Company B of
VND XXX disclosed in the balance sheet are neither recorded in the books
of account nor supported by any accounting documents...
In our opinion, because of the material effects on the financial statements
of the matters referred to above, the accompanying financial statements do
not give a true and fair view of the financial position of ABC Company as at
31 December 20xx, or of the results of its operations and its cash flow for
the year then ended in accordance with the Vietnamese Accounting
Standards and system and do not comply with relevant statutory
requirements.
Other notes and discussions
Refer to Handout #1, information in Notes
Going concerns:
The accompanying financial statements [for the year ended December 31,
20xx] have been prepared assuming that the Company will continue as a
going concern. As discussed in Note [X] to the financial statements, the
Company's recurring losses from operations and net stockholders' capital
deficiency raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also
described in Note [X]. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Financial Statements
Analysis
Financial Statement Analysis
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Standardize financial information for comparisons
Evaluate current operations
Compare with past performance
Compare performance with industry standard or with
another firm in the same industry and if possible, with the
same size
• Study the efficiency of operations
• Study the risk of operations
Financial ratios
• Companies have access to resources
• Those resources are used for operations by producing and selling
goods and services
• Ratios help measure relationship in how efficiently and effectively
the company uses those resources as compared to the past and
as compared to peers
• There are many ratios to examine an organization’s health. The
most simple and handy ratios which an non-finance background
investor can easily find are:
Liquidity ratios
Profitability ratios
Activity ratios
Financial leverage ratios
Liquidity ratios
Liquidity ratios provide a measure of a company’s ability to
generate cash to meet its immediate needs. The commonly used
liquidity ratios are:
• Current ratio
• Quick ratio
Liquidity ratios (cont’d)
• Current ratio: indicates a company’s ability to satisfy its current
liabilities with its current assets:
Current ratio = Current Assets/Current Liabilities
• From Handout #1:
Unit: VND
Balance sheet
Current Assets
Current Liabilities
Current ratio:
31 December 2008
31 December 2007
2,065,294,939,509
1,659,412,238,630
3,892,009,691,143
672,053,506,293
0.53
2.47
Liquidity ratios (cont’d)
• Quick ratio: is the ratio of quick assets (generally current assets
less inventory) to current liabilities, and indicates a company’s
ability to satisfy current liabilities with its most liquid assets
Quick ratio = (Current Assets – Inventory)/Current Liabilities
• From Handout #1:
Unit: VND
Balance sheet
Current Assets
Current Liabilities
Inventory
Quick ratio
31 December 2008
2,065,294,939,509
31 December 2007
1,659,412,238,630
3,892,009,691,143
672,053,506,293
174,461,359,251
45,689,923,892
0.49
2.40
Profitability ratios
• Gross profit margin: It is a measure of how well each dollar of a
company's revenue is available to meet expenses and profits
after paying for the goods or services that were sold:
Gross profit margin = Gross Profit/Revenue
= (Revenue – COGS)/Revenue
• From Handout #1:
Unit: VND
Income Statement
Unit: VND
Sales
Gross Profit
Gross Profit Margin
31 December 2008
31 December 2007
3,728,745,990,771
2,738,605,347,000
1,208,395,135,347
706,675,297,000
0.32
0.26
Profitability ratios (cont’d)
• Earnings per share (EPS): is considered one of the most
significant statistic presented by a company:
EPS = Earnings for the purpose of basic EPS/Weighed Average
No. of shares of common stock outstanding
• From Handout #1: EPS is shown on page 27 of the Consolidated Financial Statements,
point #24 of Footnotes.
Unit: VND
Foot notes
Earnings
Weighted average No. of ordinary
shares
EPS
31 December 2008
31 December 2007
907,211,655,135
571,901,164,896
122,089,043
92,360,384
7,431
6,192
Activity ratios
• Inventory turnover: is the ratio of Cost of Goods Sold (COGS) to
inventory. It indicates how fast inventory is created and sold
during the period and company’s effectiveness in producing a
benefit from its investment in assets.
Inventory turnover = COGS/Inventory
• From Handout #1: Inventory information is showed on Balance Sheet and COGS is in
Income statement. However, the details of the figures are stated in Footnotes under
points # 6 and #20.
Unit: VND
31 December 2008
Inventory (Balance Sheet)
COGS (Income Statement)
Inventory turnover
31 December 2007
174,461,359,251
45,689,923,892
2,520,350,855,424
2,031,930,050,000
14.45
44.47
Activity ratios
• Total asset turnover: indicates the extent that the investment in
total assets results in sales .
Total asset turnover = Sales/Total Assets
• From Handout #1:
Unit: VND
31 December 2008
31 December 2007
Sales (Income Statement)
3,728,745,990,771
2,738,605,347,000
Total assets (Balance Sheet)
8,632,862,725,032
4,329,914,123,416
0.43
0.63
Total asset turnover
Financial Leverage ratios
• Total debt to asset ratio: indicates the proportion of assets
which are financed with debt (both short-term and long-term).
This ratio conveys how reliant a company is ton debt financing.
Total debt to asset ratio = Total debt/Total assets
• From Handout #1:
Unit: VND
Balance sheet
31 December 2008
31 December 2007
Short-term borrowings and liabilities
1,983,809,569,154
109,174,332,022
Long-term loans and liabilities
Total debt (short-term + long-term
loans and liabilities)
1,878,918,456,000
1,294,047,113,324
3,862,728,025,154
1,403,221,445,346
Total assets
8,632,862,725,032
4,329,914,123,416
0.45
0.32
Total debt to asset ratio:
Financial Leverage ratios (cont’d)
• Total debt to equity ratio: indicates the relative uses of debt and
equity as sources of capital to finance the company’s assets..
Total debt to equity ratio = Total debt/Total equity
• From Handout #1:
Unit: VND
Balance sheet
31 December 2008
31 December 2007
Total debt
3,862,728,025,154
1,403,221,445,346
Total equity
2,113,823,567,404
1,830,445,769,483
1.83
0.77
Total debt to equity ratio:
Limitations of
Ratio Analysis
Limitations of Ratio Analysis
• Any ratio is only as sound as the financial data upon which it is
built;
• Computation of Net Income is based on variety of accounting
policies;
• Availability of industry information in Vietnam is questionable, so
benchmarking is not always feasible;
• Industry averages are only guidelines and based on a mix of
various companies in various geographies and various stages of
development;
• Accounting practices differ across companies and countries;
• Sometimes difficult to interpret deviations in ratios;
• Industry ratios may not be desirable targets;
• Seasonality affects ratios
Other tools for analysis
• Comparative financial statements provide the opportunity to
determine trends and analyze the progress an entity has made
over a specific period of time.
• Percentage/common-size analysis:
• The items in Income Statements are analyzed as a percentage of
sales or cost of sales
• The items in Balance Sheet are analyzed as a percentage of total
assets
• Comparing horizontally the company’s financial period help
evaluating trend situations
References
References
• Financial & Managerial Accounting for MBAs, 1st edition
by Peter D. Easton, Robert F. Halsey, Mary Lea McAnally and Al
Hartgraves, published by Cambridge Business Publishers LCC. in
2008
• http://www.investopedia.com/university/ratios/
• http://www.pvdrilling.com.vn/uploads/files/reports/27-012010_BCTN_2008_VN.pdf
• http://www.pvdrilling.com.vn/uploads/files/reports/27-012010_BCTN_2008_ENG.pdf
• http://www.pvdrilling.com.vn/uploads/files/statements/27-012010_Financial-Statement-English.pdf