Financial Statement

Analysis
Sibat Al-Nistas
LECTURER

D E P T. O F A I S , B U P
 Reformulation &
Viewing business Analysis of
Investor & the
Course Introduction through the lens of Statement of
Analyst
financial statements Changes in Owners
Equity

Reformulation of
Reformulation &
Reformulation of Statement of Profit &
Analysis of SFP & Analysis of
Statement of Loss, and Other
SPLOCI Statement of
Financial Position Comprehensive
Cashflows
Income

Contents
Reformulation & Analysis
of Statement of
Cashflows
Purpose: Determining Free
Cashflow

C-I = d + F C-I = OI - ∆NOA

C-I = d + NFE - ∆NFO C-I = OI - (NOAt - NOAt-1)
C-I = d + ∆NFA - NFI

F = NFE - ∆NFO d = CSEt-1 + OI – NFE – CSEt

F = ∆NFA - NFI d = CSEt-1 + OI + NFI – CSEt
 IFRS REFORMULATED
COMPANY NAME COMPANY NAME
STATEMENT OF CASH FLOWS – INDIRECT METHOD STATEMENT OF CASH FLOWS
PERIOD COVERED PERIOD COVERED

$ Cashflow from Operating Activities C

Cashflow from Operating Activities
Cash Investments (I)
Net Profit After Tax XXX
Free Cashflow C-I
Adjustments: Equity Financing Flows

Dividends & Share Repurchase XX

Changes in Working Capital
Share Issue (XX) d
Net Cashflow from Operating Activities XXX
Debt Financing Flows
Net Cashflow from Investing Activities XXX XX
Net Purchase of Financial Assets

XXX Interest on financial assets (after (XX)

Net Cashflow from Financing Activities tax)

Net Increase (Decrease) in Cash XXX Net Issue of Debt (XX)

Interest on debt (after tax) XX F

Total Financing Flows d+F

 > Reclassifying cash transactions to
Issues in properly identify cashflow from
Reformulation operations, investing & financing
activities.
 Cash & Cash Equivalents
IFRS Cashflow statement does not specify which portion of cash is operating asset & which portion is
financing asset.

Cash Investments
IFRS considers some cashflows from/in investment as cashflow from operations
E.g.: Purchase of Inventory is cash investment, but it is adjusted in cashflow from operations.

Transactions in Financial Asset

IFRS Reformulation
Specifies as investing activities Should be specified as financing activities

Transactions in Financial Assets as disposition (or satisfaction of shortfall) of free cashflow, not
reduction of free cashflow.
 Net Cash Interest & Tax on Net Interest
IFRS Reformulation
Specifies as operating activities Should be specified as financing activities

Non-Cash Transactions
IFRS Reformulation
Not included in IFRS cashflow statement Treated as if two cash transactions happened.

Non-cash transaction (e.g.: exchange of asset), affects composition of NOA & NFO. So,
reformulation treats them as if there was a sale of something for cash and an immediate purchase
of something else on cash.
Discrepancy in FCF Calculations
> FCF calculated using other reformulated statements vs cashflow
statement may differ due to incomplete disclosures on transactions.
◦ Failure to properly classify other assets & liabilities
◦ Failure to properly identify some cash & non-cash transactions
◦ Foreign currency translations
Importance of Accurate
Analysis & Valuation
> Value you fail to identify, is value you fail to capture.
◦ Results in overstated/understated valuation, and mispricing.
 > RSCSE – Calculate actual common equity
◦ Value of firm is value of equity

> RSFP – Understand contribution of different

activities, strategic differences, and form
bases for valuation/further analysis
◦ NOA, NFO
Summary of All ◦ Value of firm is value of its net assets

Reformulations > RSPLOCI – Understand contribution to profit

from different activities.
◦ Operating Income, Net Financing Expenses,
Residual Income
◦ Value of firm is value of its earnings

> RSCF – Understand source & usage of cash

◦ Value of firm is value of its cashflows
 > How Financial Statements are Used in
Valuation
◦ Cashflow based Valuation
◦ Accrual Accounting & Valuation

Linkage to ◦ Pricing Book Values

Rest of the ◦ Pricing Earning

◦ Valuation & Investing
Syllabus
> Analysis of Profitability
> Analysis of Growth & Sustainability
> Analysis of Liquidity, Solvency, and
Credit Risk