Commercial Awareness and Business Decision Making Skills: How to understand and analyse company financial information

291 Pages·2007·1.31 MB·English

by  Paul Rodgers

Commercial Awareness and Business
Decision-Making Skills
How to understand and analyse company
financial information
Paul Rodgers
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Contents
Introduction to the book x
1 Why do Financial Statements Exist? 1
Theexpectationgap–donotbelievefirstimpressions 3
Thedivisionofownershipandhands-onmanagement 4
Management accounts vs. financial statements 6
The stakeholder concept 7
The owner-managed business 9
So much more than numbers 9
The things every manager must know 12
2 How are Commercial Transactions
Captured? 13
C
o
The corporate paper trail 15 n
te
Capturing the data 16 nts
The accounting equation 20
(cid:2)
The things every manager must know 24 v
3 The Balance Sheet: A Freeze Frame & The
Concept of Articulation Using the Profit
and Loss Account 25
Linking the separate legal entity concept to the
balance sheet 27
The purpose of the balance sheet 30
The purpose of the profit and loss account (also
referred to as the income statement) 31
The point of articulation 34
The real world 37
The things every manager must know 37
4 A Brief Look at the Accountants’
Phrase Book 39
Understanding the label 41
Debits and credits 41
Confusion arising from day-to-day usage 43
Mr Big Ltd revisted 44
The things every manager must know 47
5 Cash and Corporate Survival 49
Making profit does not mean you can pay
the bills 51
Cash accounting vs. accruals accounting 52
Accruals and prepayments 53
Satisfying the needs of stakeholders who want to
know about both profit and cash 56
Formalizing cash flow presentation 57
The things every manager must know 60
6 The Impact of International Harmonization 61
The concept of a single GAAP 63
What is the timetable for change? 63
Presentational differences 64
The things every manager must know 71
7 The Managers’ Analytical Toolkit 73
nts
e The lull before the storm 75
nt
o
C Commercial knowledge 75
Qualitative skills 77
(cid:2)
vi Quantitative measures 77
The things every manager must know 88
8 The Application of Knowledge 89
A basic approach to interpreting the numbers 91
Operational issues 91
Do not ignore the obvious 93
Case study 94
The things every manager must know 106
9 Investor Analysis 107
The investment decision and why it matters 109
Earnings per share 109
The price–earnings ratio 112
Dividend yields 113
Other useful indicators 115
The things every manager must know 116
10 Cash Ratios 117
The ability to pay 119
The cash recovery rate 119
Cash return on capital employed 119
Cash interest cover 120
Cash dividend cover 120
Looking beyond the financial pages 120
The things every manager must know 121
11 Getting to Grips with Accounting Choice 123
Why choice matters 125
The origin of choice 127
What has this business done? 128
The things every manager must know 131
12 Tangible Fixed Assets 133
What constitutes a tangible fixed asset? 135
Fixed or not? 135
Identifying cost 136
The concept of depreciation 137 C
o
n
Depreciation mechanics 138 te
n
ts
Depreciation – further choice 139
Depreciation ratios 142
(cid:2)
vii
Revaluation 142
The mechanics of revaluation 144
Historic cost vs. current cost 149
Impairment – taking bad news on the chin 151
Capitalization vs. expensing 155
The costs of financing construction 158
The things every manager must know 158
13 Hidden Value – Intangible Assets 161
What constitutes an intangible asset? 163
Goodwill 164
Negative goodwill 167
Research and development 167
Other intangibles 169
The things every manager must know 173
14 An Introduction to Investments 175
Parent company vs. group 177
What constitutes an investment? 178
The things every manager must know 180
15 Leasing and the Concept of Commercial
Substance Prevailing over Legal form 181
Why choose to lease an asset? 183
The concept of commercial substance prevailing
over legal form 183
Differentiating operating and finance leases 184
The transfer of risks and rewards 185
Accounting consequences of the lease decision 185
Analytical consequences of the lease decision 189
Off-balance-sheet finance 190
The things every manager must know 191
16 Current Assets 193
A quick recap 195
Stock valuation and its impact on financial indicators 195
Long-term contracts – an overview 199
nts Trade and other debtors 202
e
ont Bank and cash 203
C
The things every manager must know 204
(cid:2)
viii
17 Current Liabilities 205
Beyond the trade creditor/payable 207
Other creditors/payables 208
UK corporate taxation – a snapshot 209
What is deferred income? 209
Long-term contracts revisited 210
Have the days of big bath provisions really died? 211
The future of provisioning – a technical moment 215
Financial instruments – a warning shot 215
The things every manager must know 215
18 Company Financing 217
Debt vs. equity 219
Preference share capital 220
So much more than a loan 221
Welcome to the new world of financial instruments 222
Are the new rules necessary? 225
Convertible debt 226
The things every manager must know 227
19 Further Clues about the Future of the
Business 229
Contingencies 231
Post-balance-sheet events 232
Capital commitments 234
Multi-year analysis 236
Segmental analysis 239
The things every manager must know 245
20 Things You Always Wanted to Know But
Were Afraid to Ask 247
Related parties 249
Deferred taxation and associated tax issues 253
The things every manager must know 256
21 Group Financial Statements – The Basics 257
Problems associated with the veil of incorporation 259
C
o
Commercial substance prevails again 260 n
te
n
Gaining control 261 ts
Influence only 262
(cid:2)
The things every manager must know 262 ix
22 Putting your Skills to Use 265
The financial guru is born! 267
A systematic approach 267
The things every manager must know 269
Index 271