Function: To provide information on the stock and structure of all assets, liabilities and shareholders' equity (own capital) owned by a company at a given point in time.
Assets = Liabilities + Shareholders' Equity
Function: To help managers understand the size and structure of assets and liabilities and their quantitative correspondence at a certain point in time, to clarify the fiduciary responsibilities and obligations of individuals and enterprises, and to make judgments and decisions to optimize the structure, reduce the risks, and improve the efficiency of operations.
Assets represent the occupation of funds, including:
Liabilities and shareholders' equity represent the source of funds, including:
The role of the balance sheet:
The balance sheet of the "four to see the four analysis":
Horizontal analysis, vertical analysis, project analysis.
Observe the configuration of enterprise assets, pay special attention to the proportion of current and non-current assets, analysis can be compared with the average level of the industry or the asset structure of comparable enterprises, to make a judgment on the liquidity of the enterprise's assets and the risk of the assets, and then make an evaluation of the reasonableness of the enterprise's asset structure.
Analyze the changes in the assets of the enterprise, evaluate the stability of the asset structure of the enterprise, and then evaluate the adjustment of the asset structure of the enterprise.
Case 1: Static analysis of the composition of assets
Read the balance sheets of enterprises in different industries (China Merchants Bank, Sichuan Changhong, Guangdong Electric Power A, UFIDA Software) and analyze the differences in the composition of assets.
Case 2: rationalization of asset changes
In 2008, fixed assets of Dongfang Electric decreased quarter by quarter, and construction in progress increased quarter by quarter.
Reason: the subsidiary plant collapsed due to the earthquake. Therefore, Dongfang Electric made a large impairment provision.
Observe the composition of the capital, measure the financial strength of the enterprise, evaluate the financial risk of the enterprise, and at the same time, combined with the enterprise's profitability and business risk, to evaluate the reasonableness of its capital structure (look at the proportion of shareholders' equity and liabilities).
Analyze the changes in the capital structure of the enterprise, and evaluate the adjustment of the capital structure and the possible impact on shareholders' earnings (look at the changes in the shareholders' equity and the proportion of liabilities)
Monetary funds refer to the funds that exist in the form of money, including cash on hand, bank deposits and other monetary funds.
When an enterprise obtains cash investments, accepts cash donations, obtains bank borrowings, and receives payment income from the sale of products, etc., it will form the income of money funds; when it purchases materials, pays wages to pay other expenses, returns borrowings, and pays taxes, etc., it will form the money expenses.
In all asset classes, money funds have the highest liquidity, but at the same time, its profitability is also the lowest, usually can only get the interest income of bank deposits.
The goal of enterprise monetary funds management is to make a choice between cash liquidity and profitability in order to maximize profits or maximize enterprise value. That is, under the premise of ensuring the operational efficiency and effectiveness of the enterprise, as far as possible to reduce the investment in cash.
Case: In 2009, Gree Electric's money funds increased significantly.
In order to maintain the normal operation of the company's business activities, the company must keep a certain balance of money funds.
There are three main motives for companies to hold cash:
The "money funds" analysis is mainly a structural analysis, that is, the enterprise "money funds" accounted for the proportion of total assets and the average level of the industry to be compared. If the value is significantly higher than the average level of the industry, it means that there is too much cash, and the enterprise needs to find a way out for the excess reserves of money funds to optimize the asset structure of the enterprise.
For companies in different industries, the reasonable size of money funds will vary.
Case: Guizhou Maotai 2011 money funds analysis.
Case: Golden Flower held large amounts of money funds for a long time from 2002 to 2005, while total liabilities increased significantly.
Analysis: The company announced that its 285 million yuan of currency funds were occupied by major shareholders and affiliates.
Typical phenomenon of money fund problems in enterprises: high cash and high debt coexist at the same time.
Case: Jindi Group's currency funding policy.
Analysis: reserve money funds in advance to prepare for the recovery of the industry.
Bills receivable are bills held by an enterprise that are not yet due and have not yet been honored. The note receivable is the right of the enterprise to receive payment in the future and is legally binding.
Bills receivable reflect the face amount of commercial paper held by the enterprise, net of an allowance for bad debts.
It is highly liquid and of high quality.
Points to note for analysis:
Focus on its possible negative impact on the financial position of the enterprise.
Case: Analysis of Hangzhou Steel Corporation's Bills Receivable in 2005
Analysis:
Accounts receivable refers to the amount of money receivable from the purchasing unit due to the sale of commodities, products, provision of labor services and other businesses in the normal course of business.
The item "Accounts receivable" reflects the amounts due from purchasing units for the sale of goods, products, and the provision of services, less the net amount of the provision for bad debts.
Accounts receivable is a kind of commercial credit. Due to the increase of accounts receivable, it can expand the sales of the enterprise and increase the profitability of the enterprise, but at the same time, it will also increase the cost of the enterprise (such as the cost of capital utilization, the cost of collection, the cost of bad debt, etc.). Therefore the goal of enterprise accounts receivable management is to make a trade-off between the increased profitability of the accounts receivable credit policy and the cost of such a policy in order to maximize the profitability of the enterprise or maximize the enterprise value.
Accounts receivable is a very large risk point on the asset side of a business, and rapidly increasing accounts receivable often signals performance risk.
Comparative, structural, and ratio analyses can be used to determine whether accounts receivable are excessive.
Compare the change in accounts receivable with the change in sales revenue. If the growth rate of accounts receivable is significantly greater than the growth rate of sales revenue, accounts receivable is excessive.
Compare the ratio of accounts receivable to total assets with other companies in the same industry. If the value is significantly higher than the general level of the industry, it tends to indicate excessive accounts receivable.
Compare the accounts receivable turnover ratio with the rest of the industry. If the value is significantly lower than the general level of the same industry, it is often an indication of too many accounts receivable and slow turnover.
In addition, it is important to note the change in the bad debt provisioning ratio.
Case: Xiaxin Electronics significantly changed the bad debt provision ratio, significantly different from the industry average.
Analysis:
This practice is generally referred to as "taking a bath". If the current year's operating performance is poor and losses are high, by increasing the various accrual ratios, you can make the losses look higher, thus laying the groundwork in advance for the next year's turnaround.
Aging analysis can further determine the risk of accounts receivable.
The aging of accounts receivable is the time elapsed from the date the sale is realized and the receivable is generated to the balance sheet date, in short, the time the receivable stays on the books of the business.
The purpose of the ageing analysis: to analyze the length of time the customer owes the account and the possibility of bad debt.
Case: Baida Group aging structure analysis
Analysis:
The company's accounts receivable of 2-3 years at the beginning of the period almost all of the accounts receivable at the end of the period into more than 3 years receivable, the risk of bad debt is greater. And different age of the bad debt provision rate of 5% is not reasonable, the age of the accounts should be high rate should also be high. 2001, the company's management to make changes in accounting estimates, and the full write-off of accounts receivable aged more than 3 years, resulting in a reduction of profits of about 5 million yuan in that year.
Case: Jilin Chemical in 2000, revenue rose, profit loss.
Analysis:
It can be seen through the interim report, the enterprise accounts receivable increased significantly, short-term borrowing increased significantly, it can be seen that the enterprise's daily operating capital shortfall through short-term borrowing to achieve a large amount of interest on borrowing, which affects the profit.
Case: Lantian's accounts receivable accounted for a very low percentage in 2000. The company argued that it had more cash settlements.
Analysis: sales revenue may have been inflated or accounts receivable may have been concealed.
Prepayments are payments made in advance to supplying units by a company in accordance with the provisions of the purchase contract.
Prepayments generally include prepayments for materials and commodities purchases, prepayments for purchase deposits, and prepayments for construction work in engineering construction.
Case 1: The sharp increase of prepayment of Dong'a Gum
Case 2: The authenticity of prepayment. 2012 data of prepayment and construction in progress of Wanfu Shengke is questionable.
Inventory refers to finished goods or commodities held for sale in the daily activities of an enterprise, products in the production process, materials and supplies consumed in the production process or in the provision of labor services.
In the balance sheet, the item "Inventories" reflects the net realizable value of inventories in stock, in transit and in process at the end of the period, including various materials, commodities, products in process, etc.
The item "Inventories" refers to other inventories held for sale in the ordinary activities of the enterprise.
It refers to all basic materials purchased by other enterprises and used in the production and operation of the enterprise.
Refers to inventories in the process of production and manufacturing, which are finished goods to be further processed.
Refers to products that have been processed and are awaiting sale.
Inventory Analysis
Analyzes the effect of the inventory system on recognizing the quantity and value of inventory.
Changes in the quantity of inventory are the basic factors affecting the balance sheet inventory items. There are two main methods available for determining the quantity of an enterprise's inventory: the periodic (field) inventory method and the perpetual inventory method.
The two different methods of recognizing inventory quantities will cause differences in the balance sheet inventory items, which are not caused by changes in inventory quantities themselves, but by different methods of accounting for the recognition of inventory quantities.
The choice of inventory accounting method has a direct impact on reflecting the financial position and operating results of the enterprise. China's current accounting standards provide for three valuation methods: FIFO, individual valuation method, weighted average method.
Under the condition of inflation, the comparison of different valuation methods
Accounting standards require enterprises to use the "lower of cost or net realizable value" to determine the value of inventory at the end of the period.
When the net realizable value of inventories falls below cost, a provision for inventory decline should be made for the portion of the net realizable value below cost.
The goal of inventory management is to try to make a trade-off between the cost of holding various inventories and the cost of shortages in order to maximize the profit of the enterprise or maximize the value of the enterprise.
Rapidly increasing inventory often signals performance risk.
Three aspects of determining whether inventory is excessive: comparative analysis, structural analysis, and ratio analysis
If the rate of growth of inventory is significantly greater than the rate of growth of revenue, then inventory is excessive.
If the proportion of inventory to total assets is significantly higher than the general level of the industry, it is often an indication of excessive inventory.
If the company's inventory turnover ratio is significantly lower than the general level of the industry, it is often an indication of excessive inventory and slow turnover.
Case: Ruifeng photoelectric
Analysis: data show that the company's product sales rate is greater than 100%, the product demand exceeds supply, although the cost of production from 2008 to 2010 and sales prices in the decline, but the company announced that its gross profit margin in 2009 has increased by 4.37%. At the same time, the company's "inventory - finished goods" account at the end of 2010 rose sharply year-on-year. This indicates that the quantity of finished goods is increasing, which contradicts the company's 2010 production and sales ratio of 109% (the quantity of finished goods should decrease because demand exceeds supply). This shows that the published information is not true.
Classification of financial assets:
For non-financial companies, financial assets are mostly unrelated to their main business and are non-core assets. Therefore, gains and losses from financial assets, including gains and losses from changes in fair value, investment income and other comprehensive income, are mostly non-operating and non-recurring items, and should be excluded from the analysis of their normal and sustainable profitability.
If a company holds a large number of financial assets, a large change in their fair value can exacerbate the volatility of net assets.
Case: the impact of changes in the fair value of financial assets on net assets of Sugo Corporation.
For companies with more available-for-sale financial assets, attention needs to be paid to whether there is a deliberate use of available-for-sale financial assets to adjust profits.
Case: Fujian Cement utilized available-for-sale financial assets to adjust profits.
Long-term equity investment, refers to the investor's equity investment in the investee unit to implement control, significant influence, and equity investment in its joint venture.
In general, if the investor holds more than 50% of the voting rights (equity) of the investee, it can be judged as control.
In general, if the investor holds greater than or equal to 20%, but less than 50% of the voting rights of the investee and is not part of a joint venture, it can be judged as significant influence.
An enterprise that exercises ****same control over an investee together with other joint venturers.
Applicable cases: enterprises or subsidiaries where the investor is able to exercise control (i.e. shareholding of 50% or more).
Application: the investor's long-term equity investment in joint ventures and associates.
Case: Jiuyang's diversification and expansion
Analysis: Long-term equity investments grew from 2011 to 2013, but earnings declined.
Investment property is real estate held to earn rent or capital appreciation, or both, including leased land use rights, land use rights held and ready to be transferred after appreciation, and leased buildings.
Accounts corresponding to real estate held for different purposes
Usually, holding investment real estate is a normal business activity for real estate companies, and the rental income or transfer of value-added income is recognized as the main business income of the enterprise.
For non-real estate enterprises, holding investment properties is other business activities related to operating activities, and the rental income or transfer of value-added gains are recognized as other business income of the enterprise.
When making subsequent measurements, the enterprise has two models to choose from: the cost model should normally be used, and the fair value measurement model is allowed only if there is conclusive evidence that its fair value can be obtained reliably on a continuous basis.
The same enterprise can only use one model for the subsequent measurement of all investment properties, not both measurement models, and once the measurement model is determined, can not be changed. The conversion of the cost model to the fair value model should be treated as a change in accounting policy. If the fair value model has been adopted, it shall not be converted to the cost model.
Comparison of two modes of measurement of investment properties
Different modes of measurement will have different impacts on the income statement and balance sheet.
Case: Due to different accounting standards, North Star Industrial adopted different measurement models in A-share and H-share
Case: Red Star Macalline adopted the fair value measurement model for its investment properties. If the cost model is used, the book value will be reduced by more than half and the net profit will be reduced by more than half.
Analysis: By adopting the fair value measurement model, the company appeared to have a larger enterprise, low gearing ratio and high net profit, which was conducive to obtaining a higher issue price.
Fixed assets are tangible assets held for the production of goods, provision of services, leasing or business management with a useful life of more than one fiscal year.
The standard method of investment project evaluation and selection is the discounted cash flow method, in which the value of an investment project is equal to its net present value, which is the sum of the present values of the net cash flows of all periods of the project.
The net present value is the sum of the present values of the net cash flows of all periods of the project.
todo:NPV formula
NPV is used in the rejection-acceptance decision-making criteria: if the NPV is greater than 0, the project is accepted; if the NPV is less than 0, the project is rejected. NPV is used in the ranking decision-making criteria: the larger the NPV, the higher the priority.
Considering the option, the formula of project value is:
Project value = NPV + option value
Fixed assets in terms of size, configuration and distribution of corporate strategy in line with the degree of its direct impact on the profitability, turnover and liquidity.
Fixed asset turnover analysis: looking for underutilized fixed assets and minimizing such fixed assets.
The main financial indicator to determine whether the structure is reasonable is the proportion of fixed assets to total assets.
Fixed Assets to Total Assets = Fixed Assets / Total Assets
The composition of fixed assets may show different structural characteristics depending on the industry.
Case: China Merchants Bank, Sichuan Changhong, UFIDA Software, Guangdong Electric Power A fixed assets structure analysis.
Analyze the rationality of the depreciation method of fixed assets.
China's current accounting standards provide that an enterprise may depreciate using the average annual life method, workload method, double-declining balance method, and sum-of-the-years method.
Analyze the continuity of an enterprise's fixed asset depreciation policy.
Analyze the reasonableness of the estimated useful life and estimated net residual value of fixed assets.
Example: Yuegan Expressway used the total workload method (traffic flow method) for depreciation in 2001. If the average annual life method had been used, the profit for the period would have been reduced by half.
Case: The difference in depreciation between China Railway and China Railway Construction. Different depreciation parameters were chosen, resulting in a large difference in depreciation.
The evaluation of the quality of a fixed asset depends largely on the state of the business activity that the asset can drive.
High-quality fixed assets should be characterized by:
Intangible assets refer to identifiable non-monetary assets owned or controlled by the enterprise that are not in physical form.
The main components:
No physical form but exclusive;
It is acquired by the enterprise through transfers, purchases and other reimbursement, and is not easily realizable at book value;
It provides future economic benefits with uncertainty;
There is no direct link between its potential economic value and its book value.
Profitability analysis of intangible assets: their profitability is highly uncertain. The profitability of an intangible asset is highly uncertain and varies by attribute.
For example, patents, trademarks, copyrights, land use rights, franchises have a clear legal protection of time, profitability is easier to judge, while proprietary technology is not protected by law, its profitability is not so good to determine, but also prone to asset bubbles.
Analysis of the realizability of intangible assets: there is a large uncertainty in the realizable value.
The analysis of the realizability of intangible assets is mainly based on three considerations:
Case: Amortization of royalties of LeTV
Analysis: LeTV's intangible assets, royalties accounted for more than 90%, and amortization is done by the straight-line method. LeTV generally buys copyrights for 3-7 years, and distribution contracts are basically signed once a year. This practice is suspected of beautifying profits. Because the newer the movie and television drama broadcast volume is higher, the greater the earnings. The earnings of movie and TV dramas usually diminish gradually over time. The straight-line method of amortization is contrary to the principle of matching revenues and costs in accounting standards, the use of accelerated amortization is more reasonable.
Case: The impact of impairment of intangible assets on profit in China Metallurgical.
Development expenditures, that is, the expenditures of internal research and development projects, should be distinguished between research stage expenditures and development stage expenditures are accounted for separately.
Research refers to the original and planned investigations for the acquisition and understanding of new scientific or technological knowledge, such as activities for the acquisition of knowledge, the results of research or other knowledge of the application of research, materials, equipment, products, processes, systems or services alternatives to the research and so on.
Development is the application of research results or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, etc., prior to commercial production or use, such as the design, construction, and testing of prototypes and models prior to production or use, and the design of tooling, molds, etc., that incorporate new technology.
Expenditures in the research phase should be expensed to current profit or loss (administrative expenses).
The development phase of the expenditure, if eligible for capitalization, can be capitalized, included in the development expenditures, in order to achieve the intended use of the state, transferred to intangible assets; if not eligible for capitalization, it should still be expensed to the current profit and loss.
Difficulties:
The conditions for capitalization of expenditures in the development phase of an enterprise:
Capitalization is not very operational in practice, and relies heavily on the subjective judgment of the financial staff. However, it is very difficult to accurately classify.
Case: the change in development expenditures in 2012.
Analysis: development expenditure before 2012 was expensed, and development expenditure in 2012 was capitalized. Reflected in the financial data is an increase in profits, which is conducive to enhancing the company's share price. In fact, after the release of the company's restricted shares, the company's directors reduced their holdings and cashed in to get cash income of about 100 million yuan.
Case: Hang Seng Electronics vs KDDI
Analysis:
This refers to the expenses that have been incurred by the enterprise, but the amortization period is more than 1 year, including the improvement expenses of leased fixed assets and the amortization period of more than 1 year of fixed assets overhaul expenses, the issuance of shares and so on.
Case: Xiang E's long-term pending amortization expenses disguised as an increase in current profit results.
If long-term amortization expense remains high for a long period of time, you need to be alert to the possibility of profit manipulation.
Short-term borrowing is the enterprise from the bank or other units borrowed for a period of less than 1 year of various loans, including short-term working capital loans, settlement loans, bill discount loans, as well as the enterprise borrowed borrowing period of 1 year or longer than 1 year of an operating cycle within the trial production of new products borrowing, the introduction of technology borrowing, imported raw materials, short-term foreign exchange borrowing and so on. These loans are to meet the short-term needs of daily production and operation of the borrowing, and its interest costs as the enterprise's financial expenses, charged to current profit and loss.
Production and operation needs, changes in corporate debt financing policy.
Reasons for the specific changes:
Advantages: flexibility of use, lower interest rates, simpler acquisition procedures.
Disadvantages: short-term to be returned, the need to ensure the liquidity of assets to meet certain current ratio, quick ratio requirements.
The higher the current ratio and quick ratio, the stronger the short-term solvency of the enterprise, and the weaker the opposite. It must be analyzed in relation to the characteristics of the industry. The requirements for ratios will be different for different industries.
The need to prevent short-term borrowing for long-term use, i.e. "short-term loans and long-term investment".
Case in point: the short-term borrowing composition of the 2017 half-year report of LeTV has changed significantly. Pledged borrowing has greatly increased.
Analysis:
Accounts payable refers to the amount payable to the supply unit by the enterprise due to the purchase of raw materials and other materials on credit or the acceptance of labor supply. It is caused by the inconsistency between the time of purchase of goods or acceptance of labor services and other business occurrences and the time of payment.
The appropriate expansion of the size of accounts payable is beneficial to the enterprise. First, compared with short-term borrowing, accounts payable is a liability that does not have to pay interest, which can be said to be a zero-cost liability; second, compared with notes payable, accounts payable is relatively soft constraints.
Once the repayment period of accounts payable is lengthened, it often signals financial risk. Be on the lookout for an abnormal increase in the size of accounts payable and an abnormal lengthening of the average payment period for accounts payable.
Case: Hualian Supermarket
Analysis: the biggest financial characteristics of the supermarket chain is a high gearing ratio.
Case: Hua Hong Ji Tong is suspected of concealing accounts payable data and inflating net assets.
Advance receipts refers to the enterprise in accordance with the provisions of the contract or the agreement of the two parties to the transaction, and to the purchasing unit or the unit to accept the labor service in the non-issuance of goods or provide labor services in advance of the money.
The higher the proportion of advance receipts to liabilities, the better the sales environment. This is because advance receipts, as a short-term source of funds for the enterprise, can be used without charge before the enterprise sends goods or provides labor services; immediately after the enterprise sends goods or provides labor services, they are transferred to the enterprise's income.
For project-based industries, such as real estate development, it is possible to analyze the progress of the project and the amount of advance receipts to determine the trend of future revenue.
A high level of advance receipts indicates that the enterprise's products or services are selling well and the market is in short supply. Or due to the enterprise relative to the downstream customers are more powerful, the industry formed the practice of collecting money before consumption. For example, telecom operators have long practiced the policy of recharging first and consuming later in large numbers due to the monopoly of the industry, so they will have more advance receipts.
As a short-term source of funds, advance receipts can be used at no cost before the enterprise sends goods or provides labor services, so it can be said to be a zero-cost source of funds.
Case: Vanke's advance receipts rise year by year, and the share price also rises year by year
Case: Guizhou Maotai's advance receipts rise year by year, and the share price also rises year by year
Taxes payable refers to the various taxes and fees payable by an enterprise based on the operating income and profits realized in a certain period of time, and in accordance with the provisions of the current tax law, the use of a certain method of tax accruals.
Taxes and fees payable include value-added tax, consumption tax, business tax, enterprise income tax, resource tax, land value-added tax, urban maintenance and construction tax, property tax, land use tax, vehicle and vessel tax, surcharge on education fee, mineral resources compensation fee, stamp duty, cultivated land occupancy tax and other taxes, as well as personal income tax collected by the enterprise on behalf of the state before payment.
Taxes payable reflect various taxes and surcharges payable by enterprises, including turnover tax, income tax and various surcharges. Changes in taxes payable are related to changes in the enterprise's operating income and profit.
The analysis should pay attention to find out whether the enterprise has defaulted on state taxes.
Typical characteristics of the IPO company's statement: "Taxes payable" has a balance, and "taxes paid" in the years before the IPO is less than the current year's
"Income tax expense
Case in point: the legacy tax issue of Fishguard Medical.
Long-term borrowing refers to loans from banks or other financial institutions with a maturity of more than one year (excluding one year) or more than one year of a business cycle. China's joint-stock enterprises are mainly long-term loans to financial institutions, such as loans from various specialized banks, commercial banks; in addition, it also includes financial companies, investment companies and other financial enterprises to borrow money.
The interest rate on long-term borrowing is usually higher than that on short-term borrowing, and in addition, the borrowing enterprise will be charged by the bank for other costs, such as commitment fees for the implementation of the revolving credit agreement, and overhead costs resulting from the requirement for the borrowing enterprise to maintain a compensated balance with the bank, etc., which will increase the cost of long-term borrowing. A large amount of long-term borrowing will bring a heavy debt burden to the enterprise and greatly erode the profits of the enterprise.
Case in point: the dramatic increase in long-term borrowings of LeEco.
Analysis:
LeTV's long-term borrowings were obtained through the pledge of equity.
The risk of pledge borrowing is the pledge rate, the warning line, and the closing line.
The pledge rate is the ratio of the funds financed by the equity pledge to the market value of the equity of the pledge, i.e. the ratio of the discount of the pledged assets. Generally the pledge rate is 55% for the Main Board, 50% for SMEs and 45% for GEMs.
Performance guarantee ratio = Market value of pledged stock / Borrowing amount
The warning line is generally set at 140%~150% of the performance guarantee ratio.
The closing line is usually set at 120%~130% of the performance guarantee ratio.
When the result is below the warning line, the borrower must add collateral. When the result is lower than the closing line, the borrower must repurchase or add additional collateral and other performance guarantee measures in advance on the next trading day to bring the performance guarantee ratio back to above the alert line. Otherwise, the contributor will have to submit an application for default disposal to the exchange, and the position can be closed out compulsorily after consent.
Projected liabilities refer to all projected liabilities recognized in accordance with relevant guidelines such as contingencies, including projected liabilities arising from guarantees provided to external parties, pending
lawsuits, product quality assurance, restructuring obligations, and obligations to abandon fixed assets and mineral interests.
Anticipated liabilities are obligations related to contingencies, the recognition of which requires the simultaneous satisfaction of the following three conditions:
Probability Criteria
The recognition of an anticipated liability is somewhat subjective.
The recognition of projected liabilities has an impact on the net profit, assets and liabilities of the enterprise.
Case: China COSCO
Analysis: The company not only suffered a huge floating loss from FFA, but also recognized a high amount of projected liabilities at the end of the year.
A contingent liability is a potential obligation arising from past transactions or events, the existence of which must be recognized by the occurrence or non-occurrence of an uncertain future event, or a present obligation arising from past transactions or events, the performance of which is not probable to result in an outflow of economic benefits to the enterprise or the amount of which cannot be measured reliably.
Characteristics:
Disclosure principle: The principle of prudence is generally followed with respect to the disclosure of contingent liabilities. Contingent liabilities that are highly unlikely to result in an outflow of economic benefits are generally not disclosed.
Shareholders' equity (owners' equity) is the residual interest attributable to owners after assets are deducted from liabilities, i.e., the net amount of resources owned or controllable by an accounting entity at a given period of time that have future economic benefits. It is the difference between all the assets of the enterprise minus all the liabilities, reflecting the property rights of the enterprise.
Assets - Liabilities = Shareholders' Equity (Net Assets)
This equation expresses the basic meaning and measurement of shareholders' equity, as well as the order in which shareholders' equity is paid.
Shareholders' equity consists of four main components: share capital (paid-in capital), capital surplus, surplus and undistributed profits.
A business has 10 shares of stock with a par value of $1 each.
Balance Sheet
The business earned a net profit of $20 at the end of the year from its operating activities, and the profit carried forward at the end of the period will increase shareholders' equity.
Balance Sheet
Shareholders' equity will be reduced by the payment of cash dividends and the repurchase of stock.
The two main aspects:
In the composition of shareholders' equity, the changes in equity and capital surplus come mainly from the input of external equity funds of the enterprise, and the changes in retained earnings come mainly from internal retention and profit distribution. If the enterprise's shareholders' equity grows rapidly, it is necessary to analyze structurally whether the increase is caused by the input of external equity capital or by the internal accumulation of retained profits.
Case in point: the dramatic increase in shareholders' equity of Guizhou Maotai from 2012 to 2017.
Analysis: The rapid increase in Guizhou Maotai's shareholders' equity was caused by the retained accumulation of internal profits (surplus reserves and undistributed profits), reflecting the company's good profitability.
The following has been added to the Circular of the Ministry of Finance on the Revision and Issuance of the Format of Financial Statements of General Enterprises (Caijing [2017] No. 30):
Notes. Financial Statement Analysis . Chapters 1-2
Notes. Financial Statement Analysis . Chapter 4