Financial Analysis And Reporting

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are securities (tradable financial assets, such as equities or fixed income instruments) that are purchased in order to be held for investment.

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Investment securities

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which are purchased by a broker-dealer or other intermediary. for quick resale (i.e. trading account securities).

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securities,

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can be found on the balance sheet assets of many banks, carried at amortized book value (defined as the original cost less amortization until the present date).

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Investment securities

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defined as the original cost less amortization until the present date).

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amortized book value

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often purchase marketable securities to hold in their portfolios, these are usually one of two main sources of revenue, along with loans.

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Banks

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Two main sources of revenue,

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•Marketable securities

•Loans

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are generally acquired through a process of direct negotiation between the borrower and lender

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loans

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is typically through a third-party broker or dealer.

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investment securities

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are subject to capital restrictions.

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Investment securities at banks

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provide banks with the advantage of liquidity in addition to the profits from realized capital gains when these are sold

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Investment securities

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these investment securities are often able to help banks meet their pledge requirements for government deposits.

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investment-grade

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held by banks as collateral can take the form of equity (ownership stakes) in corporations or debt securities.

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investment securities

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can be in the form of preferred or common shares although it is critical that they provide a measure of safety in this case.

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Equity stakes

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such as IPO allocations or small gap growth companies might not be appropriate for investment securities.

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High risk, high reward securities

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Some companies offer _________, which differ based on distinct voting rights and dividend payments.

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dual class stock

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can take the common forms of secured or unsecured corporate debentures (secured can be backed by company assets, such as a mortgage or company equipment).

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Debt securities

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are also options for a bank's investment securities portfolio

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•Treasury bonds or T-bills and

•municipal bonds

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such as mortgage-backed securities, whose value is derived from the asset(s) underlying the financial instrument),

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derivative securities

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these are higher risk and not often encouraged to be part of a bank's investment securities portfolio.

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derivative securities

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Other types of _________ can include money-market securities for quick conversion to cash.

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investment securities

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is an accounting technique used by a company to record the profits earned through its investment in another company.

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equity method

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With the ____________, the investor company reports the revenue earned by the other company on its income statement, in an amount proportional to the percentage of its equity investment in the other company

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equity method of accounting

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is the standard technique used when one company, the investor, has a significant influence over another company, the investee.

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equity method

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is defined as an ability to exert power over the other company.

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Significant influence

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is used to value a company's investment in another company when it holds significant influence over the company it is investing in.

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equity method

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The threshold for "significant influence" is commonly a ________ ownership.

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20-50%

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are made to the value based on the investor's percentage ownership in net income, loss, and dividend payouts.

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adjustments

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is essentially an event or transaction where an acquirer acquires control of either one or over one business.

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business combination

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can be defined as a set of integrated assets and activities which are capable of being managed and conducted with an intention of offering a return to the investing members or other participants, owners and members.

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business

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refer to transactions in which one company gains control, or at least controlling interest, in another company.

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business combinations

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As per this particular model, two entities operating in similar area combines their assets with an intention to set up a new entity, which is very strong and efficient in handling competition than would they could have accomplished on their own.

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merger.

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enables a the newly formed entity in retaining existing customers whereas it also gets an opportunity to position itself in a manner that it is able to acquire new customers.

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merger

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Different types of Business Combinations

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1. Vertical combination

2. Horizontal combination

3. Circular combination

4. Diagonal combination

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This is a business combination wherein various departments of large industrial units come together under single management.

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Vertical combination

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Under this business combination all the stages, from purchase to selling of product, are linked by units.

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Vertical combination

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Also referred as voluntary combination, it is an association of two or more business units of same nature under a single management.

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Horizontal combination

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Both the business units involved in combination are engaged in same activity and their combination is, therefore, referred as________.

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horizontal combination.

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This business combination type involves different business units coalesce themselves under a single management.

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Circular combination

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The key objective of this benefit is securing the benefits of administrative ability by the way of common management.

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Circular combination

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are reported at the present value of future cash flows using the effective historical rate of interest at the issue date.

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notes payable

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provides the book values of the note at each year-end.

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interest amortization table

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A __________ business combination involves two or more business entities performing subsidiary services combining themselves under a single management.

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Diagonal combination

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The key objective of this amalgamation is making the business unit large and self sufficient.

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Diagonal combination

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is a financial security with a value that is reliant upon or derived from, an underlying asset or group of assets a benchmark.

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derivative

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is a contract between two or more parties, and the derivative derives its price from fluctuations in the underlying asset.

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derivative

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The most common underlying assets for derivatives are

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stocks

bonds

commodities

currencies

interest rates

and market indexes.

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can trade over-the-counter (OTC) or on an exchange

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Derivatives

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constitute a greater proportion of the derivatives market.

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OTC derivatives

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generally have a greater possibility of counterparty risk.

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OTC-traded derivatives,

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is the danger that one of the parties involved in the transaction might default.

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Counterparty risk

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can be used to hedge a position, speculate on the directional movement of an underlying asset, or give leverage to holdings.

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Derivatives

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Their value comes from the fluctuations of the values of the underlying asset.

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Derivatives

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Common derivatives include

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futures contracts,

forwards,

options, and

swaps.

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like futures or stock options are standardized and eliminate or reduce many of the risks of over-the-counter derivatives

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Exchange-traded derivatives

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are usually leveraged instruments, which increases their potential risks and rewards.

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Derivatives

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also known simply as futures are an agreement between two parties for the purchase and delivery of an asset at an agreed upon price at a future date.

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FUTURES / Futures contracts

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will use a futures contract to hedge their risk or speculate on the price of an underlying asset.

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Traders

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are similar to futures, but do not trade on an exchange, only over-the-counter.

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FORWARD / Forward contracts

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carry a greater degree of counterparty risk for both buyers and sellers.

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forward contracts

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are a kind of credit risk in that the buyer or seller may not be able to live up to the obligations outlined in the contract

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Counterparty risks

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are another common type of derivative, often used to exchange one kind of cash flow with another.

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Swaps

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can be a useful tool for businesses and investors alike. They provide a way to lock in prices, hedge against unfavorable movements in rates, and mitigate risks often for a limited cost. In addition, derivatives can often be purchased on margin-that is, with borrowed funds-which makes them even less expensive.

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Advantages of Derivatives

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derivatives are difficult to value because they are based on the price of another asset. The risks for OTC derivatives include counter-party risks that are difficult to predict or value as well. Most derivatives are also sensitive to changes in the amount of time to expiration, the cost of holding the underlying asset, and interest rates. These variables make it difficult to perfectly match the value of a derivative with the underlying asset.

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Downside of Derivatives

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This is the more conventional approach used by accountants and most of the business enterprises adopt this method.

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Income Measurement Approach #1. The Transaction or the Operation Approach to Income Measurement:

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This approach indicates that the changes between asset and liability valuations arise as a result of transactions.

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Income Measurement Approach #1. The Transaction or the Operation Approach to Income Measurement:

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These transactions relate mainly to revenues for the sale of goods and/or services and the various costs incurred in achieving these sales.

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Income Measurement Approach #1. The Transaction or the Operation Approach to Income Measurement:

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These transactions include the receipt or payment of cash in some way or other.

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Income Measurement Approach #1. The Transaction or the Operation Approach to Income Measurement:

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This approach differs from the previous approach, viz. the transaction approach, in the sense that it expresses a description of the activities of a firm rather than on the reporting of transactions alone.

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Income Measurement Approach # 2. The Activities Approach to Income Measurement:

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In other words, income is believed to arise when certain events or activities take place and not as a result of certain transactions.

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Income Measurement Approach # 2. The Activities Approach to Income Measurement:

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This approach is also known as capital maintenance approach, Increase in assets is the result of income.

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Income Measurement Approach # 3. The Balance Sheet Approach:

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Under this approach, the opening assets of a business constantly bring a change. As soon as a transaction occurs, there is a change in assets, either in their shape or in their nature

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Income Measurement Approach # 3. The Balance Sheet Approach:

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measured with the help of the value added by the firm during a particular period and the same is determined by the differences between the value of the product/output over the cost of raw materials including stores and necessary components which are purchased from outside and are used in this production process of the concern.

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Income Measurement Approach # 4. Value Added Approach:

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is defined as any item with monetary value that a commercial bank will accept for deposit plus any amount currently on deposit with a bank.

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Cash

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is a report that firms use to explain changes in their cash balances over a period of time by identifying all of the sources and uses of cash for the period spanned by the statement.

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The Statement of Cash Flows

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revenue should be recorded when they are earned, regardless when cash is received.

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Revenue Recognition Principle

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should be recorded in the same period when revenue is recorded.

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Matching Principle expenses

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include cash flows from day-to- day operations of the business. It involves the buying and selling of goods or providing services to other businesses.

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Cash flow from Operating activities

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Cash flow from Operating activities (INFLOWS)

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- Sale of goods and services - Interest earned- Dividends received

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Cash flow from Operating activities (INFLOWS)

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- Sale of goods and services - Interest earned- Dividends received

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Cash flow from Operating activities (OUTFLOWS)

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- Payments for inventory acquisition

- Payments for salaries and wages

- Payments for interest expense

- Payments for tax expense

- Payments for other cash expenses

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include cash flows that arise out of of the purchase and sale of long-term assets such as property, plant and equipment.

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Cash flow from Investing activities

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Cash flow from Investing activities (INFLOWS)

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- Sale of investments

- Sale of plant assets

- Principal of loans

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Cash flow from Investing activities (OUTFLOWS)

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- Purchase of investments

- Purchase of plant assets

- Loans to other entities

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represent changes in the firm's use of debt and equity.

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Cash flow from Financing activities

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represent changes in the firm's use of debt and equity.

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Cash flow from Financing activities

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Cash flow from Financing activities (INFLOWS)

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- Sale of capital and treasury shares- Taking out loans

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Cash flow from Financing activities (INFLOWS)

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- Sale of capital and treasury shares

- Taking out loans

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Cash flow from Financing activities (OUTFLOWS)

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- Purchase of treasury shares- Payments for dividends or withdrawals - Repayment of principal of loans

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It presents the income statement on a cash basis, instead of accrual basis.

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Direct Method

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Sometimes referred to as the reconciliation method, It adjusts net income for items that affected net income but did not affect cash.

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Indirect Method

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This ratio indicates a firm's ability to meet its current obligations. The higher this ratio, the better the firm's ability to meet its current maturities of debt, thus better liquidity.

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1. Operating Cash Flow / Current Maturities of Long-Term Debt and Current Notes Payable

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This ratio indicates a firm's ability to cover total debt with the yearly operating cash flow. The higher the ratio, the better the firm's ability to carry its total debt.

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Operating Cash Flow/ Total Debt

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This ratio indicates the funds flow per common share outstanding. It is usually substantially higher than earnings per share because depreciation has not been deducted.

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Operating Cash Flow Per Share

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This ratio indicates a firm's ability to cover cash dividends with the yearly operating cash flow. The higher the ratio, the better the firm's ability to cover cash dividends.

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Operating Cash Flow / Cash Dividends