Financial Reporting Guide

Financial Reporting

• Covers financial activities and performance over specific time periods (quarterly or yearly)
• Companies use to organize accounting data and report on current financial status
• Essential in projections of future profitability, industry position and growth
• Many reports are available for public review

Essential Objectives

• Tracking cash flow
• Evaluating assets and liabilities
• Analyzing shareholder equity
• Measuring profitability

Importance of Financial Reporting

• Monitors income and expense and ensures debts are tracked regularly
• Provides document methods to track current liabilities and assets
• Measures debt-to-asset ratios, which evaluate how effectively companies pay down debt and generate revenue

Ensuring Compliance

• Encompasses processes to comply with mandatory accounting regulations
• Makes accurate documentation crucial to comply with tax guidelines
• Simplifies tax, valuation and auditing processes, which further validates financial compliance

Communicating Essential Data

• Key shareholders, executives, investors and professionals rely on the information for decision-making
• Open communication and transparency is required to support funding and investments
• Many investors and creditors rely on companies' financial data to assess profitability, risk and future returns

Supporting Financial Analysis

• Using financial statements improves accountability and decision-making
• Provides real-time information such as in income statement and balance sheets
• Improves performance tracking and forecasts more accurately

Regulation

• SEC is responsible for investment activities on the stock market
• The FASB monitors the standards of GAAP which supports efficiency in reporting and ensures regulatory compliance

Capital Markets

• A place where the prices of businesses stocks get established
• Knowledge of the stock market is important to anyone directly managing a business
• Financial managers strive to maximize their firm's stock prices

Capital Market - Stock Exchanges

• Conducting markets in designated securities
• Usually involve physical entities
• Larger exchanges usually occupy their own building
• Allow a limited number of people to trade
• Have elected governing bodies or boards

Over-The-Counter (OTC)

• Consist of a collection of brokers/dealers, connected electronically that provides for trading in unlisted securities
• A larger number of stocks trade outside exchanges
• Involves all facilities needed to conduct security transactions
• Transactions are not made on the physical-location exchanges

Dealer Market Participants

• Few dealers who hold inventories of securities and help make a market
• Thousands of brokers who act as agents together with investors
• Computers, terminals and electronic networks that allow communication

Equity Valuation

• Estimating a firm's value of its security
• Any value technique is that a securities value is driven by underlying fundamental business performance

Equity Valuation - Comparables Approach

• A company's equity value should be similar to other equities in similar classes
• Entails comparing a company's equity to others in the sector

Discounted Cash Flow

• Projected value helps determine a company's equity, net with present value
• Approach is useful if there is a strong data for creating future forecasts

Precedent Transactions

• A historical view of M&A
• Used to see what prices of completed transactions depend on involving similar companies
• Relevant if similar entities have all been recently valued

Assets and Book Value

• Values depend on their recent acquisition costs
• Is relevant for companies for minimal growth

Capital Structure

• Investor-supplied funds including debt, preferred, common stock and retained earnings
• NOT accounts payable/accruals
• A firm's capital structure is defined as a percentage of every type and the total being 100%

Capital Structure - Optimal

• The mix of debt, preferred stock, and common equity
• Maximizes the stock's intrinsic value
• Minimizes the weighted average cost of capital (WACC)

Behavioral Finance

• Encompasses 5 concepts:
• Study of psychological factors that impact financial markets

Mental Accounting

• Refers to people allocating money for specific purposes
• Emotional gap involves decision-making based on emotions
• Overconfidence in one's knowledge or skill
• Attributing Self
• People tend to mimic financial behavior

Finance - Anchoring

• Attaching a different spending level to a certain reference
• People have a tendency to want to accept information that confirms held belief in investments
• Occurs when investors' memories of recent events leads their decisions
• Recency bias (availability bias)

Bias

• Investors might place a concern and a greater pleasure on making the gains in the market.

Markets and Timing

• Asset bubbles and market crashes are tied to the timing of your involvement and when you divest or invest

Market Analysis

• There may also be information known to others that you lack which makes profiting from investing difficult
• Market timing involves proper asset allocation

Efficient Market Hypothesis

• Views all stock prices as efficiently valued based on accessible and current information
• Studies have shown phenomena that contradict what rational investors would do

Banking Regulations

• Bank rules and guidelines setting
• Objectives include limiting systemic risk for banks or banking fraud
• The regulations differ throughout countries
• The main purpose of regulation is to protect consumers, ensure a certain stability in the financial system, and prevent any and all financial crime
• It does such by promoting safe banking

US Regulation

• Handled by the Office of the Comptroller
• FDIC insures deposits, the Federal Reserve System regulates state-chartered banks, and the Consumer Financial Protection Bureau

Benefits

• By maintaining and adequate level of capital
• By disclosing risks
• By allowing credible sources of credit to help businesses and households

Consequences

• They can be a target of crime which would require a great range of money to be used.
• Could lead to devastating consequences . Monitor banks and provide support

Regulations & Rules

• Must have the money to lend, how to convert to cash, requirements for investment Banking Regulations
• A process where supervisors oversee the happenings in banks.

Financial Analysis

• Financial statements maintained by businesses daily to evaluate performance Horizontal - Analyzed with information over multiple years to compare different categories

Ratio Analysis

• Can also be used
• A central piece to see how performance improves

Investment Analysis

• Ratios also help evaluate and assess investment
• Looks at previous financial values to see historical trends

Free Flow

• Important to determine is if they generate enough cash out of the current capital expenditures to use for investments and dividends

Statement

• It is also a crucial report that demonstrates incoming money of any operation

Statement Review

• Allows for a review to improve on the current systems and procedures

Accounts

• Helps to keep track of any changes of transactions that have been recorded.

Liquidity

• Should banks not be able to access any funds that they need due to claims that it could result to them selling long term assets in the hopes that their debt will be covered

Roles and Responsibilities

• Issue notes and conduct policies and provide money to the government
• The government also has to know that banks are maintaining relationships to them

Determinants of Market Interest Rates

• The Real Risk-Free Rate of Interest, R* The rate of interest that would exist on default-free US Treasury if no inflation were expected
• The Nominal, or Quoted, Risk-Free Rate of Interest The rate of interest on a security that is free of all risk rRF is proxied by the T-bill rate or the T-bond rate rRF includes an inflation premium
• Inflation Premium (IP) an equal premium that investors add to the real risk-free rate of return.
• Default Risk Premium (DRP) A corporate bond and a US Treasury bond
• Liquidity Premium (LP) Added to the equilibrium rate so that that security is turned to cash at fair market value
• Interest Rate Risk Potential for risk

Monetary policy

• the ability to control the money of a country and promote economic growth • Contractionary - Increases interest rates and limits the money in supply slow • Expansionary - policy during times of slower activity in economic business

Types of Monetary Policy

• It is meant to temper inflation and make sure there is less money circulating
• Expansionary - increases the amount of money in circulation
• Exchange Rates The fluctuations between domestic and foreign can be affected by monetary policy

Tools of Monetary Policy

• OMO - To change numbers and to give the economy as a whole more securities and money government The objective of OMOs is to maintain the short-term interest rates and effect others • Interest Rates - Central banks have the power to change these • RR- Authorities have the ability to use reserve requirements with customers to be sure there are less deficits

Yield

A graph for slope overtime

Corporate Taxation

• Collected by the government as a source of income based on taxable income
• Deductions that are applied to lower taxable income based on specific business expenses

Corporate Tax Deductions

• Employee pay: health, benefits, bonuses, and any tax related prep Special
• Corporations are tasked with being extremely efficient in tax situations
• The business can pass it down to individual tax payers

Individual Taxation

• The state puts more on individuals based on what they earn and other income tax
• What Percent of Tax is Taxed What you earn makes it dependent with your income
• How to Calculate - Will need all taxable income over the year The net result is that you have to subtract deductions

Taxes & Success

• Should there be a chance in financial planning, ensure they are working in coordination
• This would have to be more efficient in making that you need to invest Copyright © CPACE Philippines®. All rights reserved