Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports Essay

investing AppraisalIntroductionQuestion 1 An investment appraisal is a designning process that is utilized in de limitining the prepargondness of a channel to undertake a great bound investments such as expansion, developing a new befuddle, getting new machinery among others (Les Dlabay, 2007). This is a complex process that requires the analysis of themes of pay, their consequences, computeing and fiscal statements.Sources of finance Coca-cola which is the world leading non-alcoholic beverage caller-out marketing their products in all over 200 countries worldwide get under ones skin the god foundation of assets, sh atomic subject 18s, brusque terminal liabilities, long-term loans and healthy volition as its ascendant of finance. The assets of the bon ton form the study mention of its finances accounting for $ 57,751 cardinal in 2013 and $ 55,849 one thousand thousand in 2012 (The Coca-Cola Company, 2013). These implicate tangible and non-tangible assets su ch as property, intendts, equipment, uprightness method investments and goodwill. This cigargont be summarized as sh cause in the table below.ASSETS(In millions) 2013$ 2012$Equity method investments 10,393 9,216Investment in bottling companies 1,119 1,232 different Assets 4,661 3,585Property, Plant and Equipment 14,967 14,476Trademarks with indefinite lives 6,744 6,527Bottles franchise rights with indefinite keep 6,415 7,408Goodwill 12,312 12,255Other intangible assets 1,140 1,150 rack up ASSETS 57,751 55,849 Long term and short(p) term liabilities argon other source of finance for the association. The caller-outs organic long term liabilities in the year 2013 were $ 90,055 million and $ 86,174 million in 2012 (The Coca-Cola Company, 2013). Their long term external sources of finance include debts, deferred income taxes and the fraternitys sh ar owners as halted in the table below.LONG term LIABILITIES(In millions) 2013$ 2012$Long term debts 19,154 14,736Other liabilitie s 3,498 5,468Deferred income taxes 6,152 4,981TOTAL ASSETS LONG TERM LIABILITIES 90,055 86,174 signifi spatet fellowship activities that generate turn a profits that are plowed tolerate to the argument as a source of finance include investments and new ventures. These are proceeds from the investments, acquisition of other business concernes, equity method investments, non-marketable securities, purchase and barter of property, plants and equipment and their associated proceeds. In 2013, the ac friendship realized a total of $ 10, 414 from the investment and operating(a)(a) activities as per their 2013 annual report. Internal short term sources of finance for the company are the on-going assets of hard currency and cash-equivalents such as marketable securities, inventories, trustworthy assets held for sale and the proceeds from the short term investment. Their relaxation sheet as at celestial latitude 31, 2013 shows a total of $ 17, 121 million current assets.Implicatio ns of the sources besides much the company had good fiscal sources in its assets, liabilities and shares, each of the sources whitethorn impact negatively or despoticly to the business. The straight forward implication of liabilities especially loans is the interest pass judgment and the obligation to repay them in good time. Failure to settle the debts and loans may lead to im bearing of fines and penalization. The characterors may go to the extent of stopping to supply the company with goods and run on credit and demand for cash on deli really. Use of shareholding as a source of finance for the company may akinly capture its own positive and negative implications. Shareholders are like investors in the business and therefore they must(prenominal)iness be paid their returns as dividends (Fardon, 2003). This efficacy be very intemperate in cases where the company makes losings. Sometimes, especially in a scenario where there are no strict policies on the maximum percen tage share that a shareholder scum bag buy, the ownership of the company may be transferred to a shareholder that buys majority of the Company shares.Question 2Importance of pecuniary planning finance is the driving force for a company like Coca-cola. After its mo enlightenary sources have been identified, accurate pecuniary planning is infallible for its success. pecuniary planning is the foundation from which all successful businesses are built. political campaign on a clear financial plan ensures that a company is well watchful to meet its anticipated expenses in terms of payroll, transport, colloquy any other day to day business ope ration expenses. The plan is important when the company is at the extremes of either profit making or suffering losses. It provides a stepping stone in which the company plenty take shape a way forward and plan for the future while at the same time handle the present. A good financial plan finds it usefulness when a company is preparing to deal with rising lives and change magnitude current and long term liabilities. It allows for these conditions to be anticipated early adequacy so as deal with them when they arise. Additionally, a financial plan is a critical tool in the organization of the various departments within the company. A well prepared and revised financial plan that considers every bum of the company is of valuable contribution to the smooth running of the company as a whole. Lastly, an estimate of network can be done by dint of a financial plan. Lack of these estimates sets a trap that the company might fall in due embezzlement of funds and misappropriations. A financial plan is very effective in making investments and profits into alter portfolios within the company. The process of making decisions requires the company channelors to be provided with the necessary in formattingion. These include financial reports that contain details of business transactions, profits, losses, expenses, revenues, assets and liabilities. This allows for simile of business cognitive operation in the previous financial year. The departmental estimates of expenditures and their estimated sources of revenue are besides part of this information. The factors that may affect the choices of decisions makers during financial planning are the number and wages of employees, on hand(predicate) cash at hand and cash indispensable to pay suppliers on time and to buy current assets such as equipment and stationeries. The possibility of expanding the business is also considered when such decisions are made (M. P. Narayanan, 2004). rightness of the sources of finance for a business project In order to get off the financial sources and make appropriate decisions, it is important that the directors analyze the costs of the sources, for example, the cost to be incurred to obtain the finance such as fees collectable to the financial institutions, commissions and interests, stock brokers among others. In t he Coca-Cola Company where the major sources are the hardened assets, liabilities, ploughed back profits, profits from investments and current assets, the appropriateness of the sources depend on the efficacy of the finances to run a business investment. Bank loans are the major long term source of finance for many companies. This source is very appropriate for Coca-Cola Company. The repayment is spread over a long transaction of time. The company is financially stable and can easily afford the essential securities to acquire a loan. Although the interest rates may be high making the process expensive, the merits outweigh the demerits and the risk is worth taking. Coca-cola is a limit company and therefore the use of stock shares as a source of finance is appropriate. The finances are not repaid although the profit is shared among the shareholders as dividends. The capacity of this company to make profit is unquestionable. The risk of change in company ownership due to sale o f major shares can be regulated by business policies that restrict such sales. Moreover, sale of assets such as the current assets to raise dandy is appropriate for this company. The trim assets can be sold off and the proceeds retained to run the business. thither is little, if any, risk associated with sale of surplus assets.Impact of finance and financial statements Finance and financial statements have positive and negative effects to the business depending on the financial position of the company. financial statements form the basis from which shareholders and potential investors prize the performance of the business. The statements also regulate accountability in the running of the business. The financial position of the business is portrayed in the financial statements. It used by the company to acquire loans from banks. Financial statements that directly sign instability of a business have a negative impact to the business by blocking potential investors, creditors and banks. Finance and financial statements have a direct effect on business transactions. It preys detailed information about the recur phases and peaks of a business. Such details include fluctuations in prices in comparison to competitors in the market (Ittelson, 2009). If, for example, Coca-Cola Company attachd the prices of their beverages by 1%, their quick competitor Pepsi may have an upper hand in the market. A balance sheet restrains information on the resources that the business has against its liabilities and the capacity of the business to settle its debts. hard currency fertilise statements are important in ratting the public about the money entering and leaving the business. All of these can negatively or positively influence the customers, suppliers, creditors and potential investors. Financial statements have a direct impact on the stock price. The information in the statements can be used by business managers to either amplification or decrease the price of prod ucts.Main financial statements In designing investment options and identifying their appropriateness, it is important to prepare financial statements. These statements have different formats depending on the size and type of the business. The statements are balance sheets, cash electric current statements and income statements. A balance sheet is a financial statement that reports a companys assets, liabilities and stock holders equity in a overstepn financial period. Current assets, fixed assets and investments are balanced against liabilities and stock holders equity. A balance sheet for Coca-Cola Company as at 31st December, 2013 is as follows (The Coca-Cola Company, 2013).THE COCA-COLA caller-upCONSOLIDATED BALANCE SHEETAS AT 31ST DECEMBER, 2013.ASSETTS(In Millions)Currentassets $ coin and cash equivalents10,414Short term investments 6,707 do cash, cash equivalents and short term investment17,121Marketable securities3,147Trade accounts receivable less allowances of $ 614,873I nventories3,277Prepaid expenses and other assets2,886 integral current assets31,304Fixed assetsEquity method investments10,393Other investments principally bottling companies1,119Other assets4,661Property, plant and equipment net14,927Trademarks with indefinite lives6,744Goodwill12,312Other intangible assets1,140TOTAL ASSETS90,055LIABILITIES AND EQUITY(In Millions)Current liabilities $Accounts payable and accrued expenses9,577Loans and notes payable16,901Current maturities of long term debt1,024Accrued income taxes 309Total current liabilities27,811Long term debts19,154Other long term liabilities 3,498Shareholders equity total33,440TOTAL LIABILITIES AND EQUITY90.055 The balance sheet is similar regardless of the size and type of the business. Its format does not change. Cash flow statements are prepared to assess the companys earnings and expenses. The quality of the earnings is particularised by comparison the cash flow from operating activities with the companys net income (R, 2 003). Income statements are financial put downs that show the sources of income in a business organization. Coca-cola Company had the avocation statement of ecumenical income as at December 31, 2013.THE COCA-COLA COMPANYCONSOLIDATEDSTATEMENT OF oecumenical INCOMEAS AT 31ST DECEMBER, 2013.$ (In Millions)CONSOLIDATED NET INCOME8,626OTHER complete INCOMENet foreign currency translation adjustment(1,187)Net gain (loss) available for sale of securities (80)Net gain (loss) on derivatives 151Net change in pension and other benefit liabilities1,066TOTAL COMPREHENSIVE INCOME8,576Less comprehensive income loss attributed to interests 39TOTAL COMPREHENSIVE INCOME ATTRIBUTED TOSHAREHOLDERS OF THE COMPANY8,537Note Figures in brackets indicate losses or reductionsInterpretation of the financial statements Financial statements are ordinarily prepared and interpreted towards the end of a financial year to give information about the business financial stability. The above financial statements can be interpreted by using appropriate financial ratios to friend compare them with the performance during the previous financial year or with another company. These ratios derived from a balance sheet are workings working metropolis, current ratio, energetic ratio (Pamela Peterson Drake, 2012). Financial statements provide rich information to investors and suppliers. This information are used to evaluate the performance of the company. The statements are also used as a communication tool by managers to interested parties about their achievement in the management of the company. There are different financial statements as discussed above that give unique business information on the company. Financial conditions of a company are the major detail and a occlusion of concern for some(prenominal) potential investors. Investors are the major with child(p) providers. They assert on the information contained in the balance sheet, income statements and cash flow statements for their sentry duty and certainty regarding a potential investment into a company. It enables the investors to understand their position in the companys capital regimen. The balance sheet is considered the chatter shot of a companys assets in comparison to liabilities and shareholders equity. This is considered the operating result of the company. These results are also an area of concern to investors. Income statement gives a report of operating results. This includes the sales, expenses and profit or losses in a given financial year. This information is critical in the evaluation of the companys past performances and to predict the future of the business. Profits or losses are usually provided by the income statement but this may contain non cash-equivalent or non-cash parameters. The information is not direct as to the companys cash transaction during the financial year. This leaves room for cash flow statements to give the details. It contains information about the cash that get into the business and those that leave the business thereby showing an exchange of cash. Shareholders equity shows the variations in the various equity components. This is usually work out by deducting total liabilities from the total assets of the company. A company with a good performance like Coca-Cola has a steady increase in its shareholders equity. This is associated with either a decreasing or constant shareholders base. works capital is calculated by deducting current liabilities from the current assets. The working capital for Coca-Cola Company for the year ended December 31, 2013 can be calculated as follows.Working gravid (in millions) =Current assets Current liabilities.= $ 31,304- $ 27,811= $3,493 The working capital for Coca-Cola Company is a positive figure of $ 3,493 million indicating that the company is at a better position to meet its current obligations such as paying workers, paying brokers, servicing short term loans among others. Current ratio is calculated by dividing the current assets by the current liabilities. It is related to the working capital. Another ratio is Quick ratio. It is also known as battery-acid test ratio and is calculated as followsQuick ratio = Cash + Temporary investment + Accounts receivableCurrent liabilities The Quick ratio is similar to the current ratio only that inventories, supplies and prepaid expenses are excluded. It is used to determine the add of assets that can be turned quickly into cash. Free or Discounted cash flow is a financial ratio that is derived from the cash flow statement. Free cash flow is calculated by deducting capital expenditures from total cash flow provided by operating activities (Fardon, 2003). Free cash flow for Coca-cola as at December 31, 2013 is calculated as shown.Free cash flow = Cash flow provided by the operating business metropolis expenditures.=10,542 (14,782+2,550+303)= -7,093 This statistically indicates that the company is at a deficit of $ 7, 093 million subsequent ly paying its capital expenditures. The income statement can be analyzed to give gross margin, profit margin, guide on Stoke holders equity and earnings per share. turn in on Stoke holders equity is important in bring out the percentage profit subsequently tax and therefore the dividends payable to shareholders. Return on stock holders equity for Coca-Cola Company as at December 31, 2013 is calculated as shown.Return on Stockholders equity = Net income after taxesAverage shareholders equity= 8,6228537=1.01% This reveals that the company earned 1.01% of profit after taxation on an average shareholders balance during the year.Suitable budget and appropriate decisions The roughly significant form of planning a capital investment budget is to make appropriate decisions and market well. Budgeting is the foundation of financial economics. Making decisions that have immensity long term effects is the basis of budgeting. In budgeting, policies are maximized so as to achieve the most positive net profit and returns. Making decisions should be principally governed by benefit analysis. The budgeting process is also governed by the future consequences and impact to the business Every financial source has an implication to the business. Financial statements help provide such implications and can be used in selecting a suitable budget. A company may decide to sell its shares after analyzing its effectiveness in raising capital for a new business venture (Pamela P. Peterson, 2004). The process of deciding on a proper capital investment for the expansion of Coca-Cola Company involves calculate the cost of investment, protection of cash flow from the investment, consideration of the inflation rates and the time value of the expansion. For example, if the investment will cost $ 10 million and generates $ 4 million annually, the investment is feasible because it provides a pay back within 2.5 years. A budget can therefore be prepared from this basis. An example of a suit able budget proposed for The Southeastern protactinium conveyance of title Authority (SEPTA) for the Fiscal year 2012 is as follows (SEPTA, 2011) .FISCAL YEAR 2012 cracking BUDGETProject FY 2012 FundingRequirementBus Purchase syllabus $59,209,593Capital Asset Lease course of instruction 28,720,862Congestion Relief 2,233,000Debt proceeds 52,654,545Infrastructure Safety Renewal Program 34,400,000Paratransit Vehicle Acquisition 5,000,000regional Rail Signal System Modernization 35,800,000Safety and Security Improvements 5,000,000 give tongue to of Good Repair Initiatives 15,200,000Station Accessibility 4,800,000Station and Parking Improvements Program 10,400,000System Improvements Program 5,000,000Vehicle Overhaul Program 53,100,000TOTAL FY 2012 Capital Budge$311,518,000 Marketing decisions are dependent on capital budgeting. The decisions to be made on long term investments are dependent on the income that will be generated from the project. It is important to know the duration that the project will take to mature. That is, the time it will take to generate income equivalent to the amount invested in the business. Modern finance theories equate the value of the assets to the discounted future income generation. The net profit value rule is therefore used by companies that descry venturing unto capital project if they adopt this theory.Assessing project viability The financial viability of a project is assessed using the investment appraisal techniques. This involves the use of tools such as Return on Investment (ROI), Debts aid Coverage Ratio (DSCR), rest scour Point (BEP) and Debt Equity Ratio (DER). In Return on Investment, the collections of the company are used to create assets and in the running of the business. The business must generate surplus on the collected capital for it to be considered viable. Borrowed and own capital is considered the cost of the project while the profits are the surplus generated. ROI should be greater than the cost of the investment for the business to be considered viable. Debt Service Coverage Ratio (DSCR) measures the ability of the project to meet its repayment obligations on loans acquired financial institutions (Pamela P. Peterson, 2004). It is calculated as follows.DSCR= Net profit + Interest on long term loans + DepreciationInterest on long term loan + Principal loan The cumulative DSCR during the repayment period should be at least 21 for the project to be considered viable. Break Even Point (BEP) measures the level of total contribution to the total fixed assets. constituent is usually the excess of sales over the multivariate cost. That isContribution = Sales Variable Costs.PEP is the point where both fixed and variable costs are recovered from the resources. It is calculated using the formulaTotal fixed cost selling price per social unitContribution per unit cost It indicates the risks involved in the business. If the PEP is achieved at a visit level of capacity utilization, it i s considered safer. In this case, the investment is viable. Debt Equity Ratio measures the level at which the investment project is leveraged to acquire loans from financial institutions. It is calculated by the formulaTotal long term debtsTotal funds in the investment The factors to be considered when assessing the viability of a project are the nature of the goods and services to be offered. Their level of complexity should be determined and the risks involved as well. The value of the procurement is another factor of concern. It involves the determination of the amount of capital that the procurement can cost. The financial viability assessment matrix group risks speculated into several levels. The low risk level contains low levels of complexity, low value and short term supplies. The moderate risk level contains moderate value, sensitivity and modal(a) term supply. The high risk level contains high strategic importance to agency, high complexity levels and sensitivity. When as sessing the risks, the likelihood of a financial feasibility should not be ruled out while making budgeting decisions.ReferencesFardon, C. D. (2003). Management of Finance. unseasoned york Osborne Books.Ittelson, T. R. (2009). Financial Statements A Step-by-Step Guide to Understanding and Creating Financial Reports. pertly York Career Press, Incorporated.Les Dlabay, J. B. (2007). Business Finance. Stamford Cengage Learning.M. P. Narayanan, V. K. (2004). Finance for Strategic Decision-Making What Non-Financial Managers Need to Know. New Jersy butt Wiley & Sons.Pamela P. Peterson, F. J. (2004). Capital Budgeting Theory and Practice. New Jersey John Wiley & Sons.Pamela Peterson Drake, F. J. (2012). Analysis of Financial Statements. New Jersey John Wiley & Sons.R, D. J. (2003). Accounting for Non-Accounting Learners. New York Pitman.SEPTA. (2011, Aril). The Southeastern Pennsylvania Transportation Authority. Retrieved April 2014, from Finance http//www.septa.org/reports/pdf/budget-pr oposal-cb12.pdfThe Coca-Cola Company. (2013, December). The Coca-Cola Journey. Retrieved April 2014, from Annual Financial Report http//www.coca-colacompany.com/our-company/company-reportsSource document