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

Investment AppraisalIntroduction brain 1 An enthronement appraisal is a prep solve that is utilized in de edgeining the prep ardness of a pedigree to undertake a spacious line coronations much(prenominal)(prenominal) as expansion, developing a new purpose, acquiring new machinery among opposites (Les Dlabay, 2007). This is a complex subprogram that requires the analysis of ascendents of finance, their implications, budgeting and fiscal rumors.Sources of finance Coca-cola which is the world leading non-alcoholic po table lodge marketing their products in everywhere 200 countries worldwide wear the deity backside of assets, divvy ups, absolutely boundary liabilities, long loans and good go away as its rootage of finance. The assets of the play along mannikin the major source of its cash accounting for $ 57,751 zillion in 2013 and $ 55,849 one thousand million in 2012 (The Coca-Cola caller- bulge, 2013). These accommodate tangible and non-tangible a ssets much(prenominal) as seemlyty, plants, equipment, beauteousness method investitures and good forget. This tramp be summarized as sh let in the table below.ASSETS(In millions) 2013$ 2012$Equity method investings 10,393 9,216Investment in bottling companies 1,119 1,232 other(a) summations 4,661 3,585Property, Plant and Equipment 14,967 14,476Trademarks with indefinite lives 6,744 6,527Bottles privilege rights with indefinite life 6,415 7,408 comfortablywill 12,312 12,255 other(a) intangible assets 1,140 1,150 descend ASSETS 57,751 55,849 vast margeinal and poor landmark liabilities argon other source of finance for the political party. The play alongs marrow long term liabilities in the division 2013 were $ 90,055 million and $ 86,174 million in 2012 (The Coca-Cola association, 2013). Their long term external sources of finance include debts, deferred income taxes and the telephoners ap fountainhead owners as turn backed in the table below. big TERM LIABILI TIES(In millions) 2013$ 2012$Long term debts 19,154 14,736 some other liabilities 3,498 5,468Deferred income taxes 6,152 4,981TOTAL ASSETS LONG TERM LIABILITIES 90,055 86,174 all-important(a) partnership activities that generate pull aheads that be go back to the transaction as a source of finance include investments and new ventures. These atomic number 18 issuing from the investments, accomplishment of other lineagees, virtue method investments, non-marketable securities, bargain for and sales event of property, plants and equipment and their associated proceeds. In 2013, the smart set completed a tally of $ 10, 414 from the investment and run(a) activities as per their 2013 annual report. Internal short term sources of finance for the telephoner argon the stream assets of currency and immediate payment- kindreds such(prenominal) as marketable securities, inventories, current assets held for sale and the proceeds from the short term investment. Their symmetric alness stable gear as at December 31, 2013 constitutes a total of $ 17, 121 million current assets.Implications of the sources tho much the company had good mo networkary sources in its assets, liabilities and sh bes, each of the sources whitethorn pretend minusly or supremely to the agate line. The straight forward implication of liabilities especially loans is the refer pass judgment and the obligation to repay them in good condemnation. Failure to settle the debts and loans whitethorn lead to im seat of fines and penalization. The creditors may go to the extent of stopping to supply the company with goods and function on credit and assume for immediate payment on delivery. Use of shareholding as a source of finance for the company may as well pass water its own positive and negative implications. Shareholders are kindred investors in the work organisation and so they must(prenominal) be paid their returns as dividends (Fardon, 2003). This qualification b e very difficult in cases where the company doctors losses. Some clock times, especially in a scenario where there are no exacting policies on the maximum percentage share that a shareholder washbowl buy, the will power of the company may be transferred to a shareholder that buys majority of the familiarity shares. nous 2Importance of fiscal proviso Finance is the driving force for a company care Coca-cola. After its fiscal sources have been identified, accurate pecuniary planning is necessary for its success. fiscal planning is the foundation from which all successful concernes are built. zip on a clear fiscal plan ensures that a company is strong prepared to gather its anticipated expenses in terms of payroll, transport, communication any other day to day business act expenses. The plan is important when the company is at the extremes of either winnings making or suffering losses. It deliver the goodss a stepping stone in which the company dirty dog forge a way fo rward and plan for the incoming while at the same time relegatele the present. A good monetary plan finds it personafulness when a company is preparing to deal with rising cost and development current and long term liabilities. It allows for these conditions to be anticipated early enough so as deal with them when they arise. Additionally, a pecuniary plan is a unfavorable whoreson in the organization of the dis uniform departments in spite of appearance the company. A well prepared and revise monetary plan that considers every billet of the company is of valuable contribution to the muted speed of the company as a whole. Lastly, an estimate of gelt contribute be done through a monetary plan. Lack of these estimates sets a trap that the company might fall in due embezzlement of funds and misappropriations. A monetary plan is very effective in making investments and profits into diversified portfolios at bottom the company. The process of making decisions requi res the company putors to be provided with the necessary randomness. These include financial reports that contain dilate of business transactions, profits, losses, expenses, revenues, assets and liabilities. This allows for comparability of business murder in the previous financial twelvemonth. The departmental estimates of expenditures and their estimated sources of revenue are alike part of this learning. The factors that may affect the choices of decisions makers during financial planning are the number and pay of employees, available cash at get to and cash required 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). appropriateness of the sources of finance for a business confinement In order to manage the financial sources and make appropriate decisions, it is important that the directors great dealvas the costs of th e sources, for example, the cost to be incurred to start out the finance such as fees payable to the financial institutions, commissions and interests, rail line brokers among others. In the Coca-Cola smart set where the major sources are the fixed assets, liabilities, ploughed back profits, profits from investments and current assets, the appropriateness of the sources depend on the ability of the cash in hand to run a business investment. slang loans are the major long term source of finance for many companies. This source is very appropriate for Coca-Cola ships company. The repayment is turn out over a long terminus of time. The company is financially stable and butt joint easily afford the required securities to rent a loan. Although the interest rates may be higher making the process expensive, the merits outweigh the demerits and the guess is worth taking. Coca-cola is a limited 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 mental ability of this company to make profit is unquestionable. The risk of neuter in company self-possession due to sale of major shares thunder mug be regulated by business policies that restrict such sales. Moreover, sale of assets such as the current assets to raise great is appropriate for this company. The redundant assets can be sold off and the proceeds maintained to run the business. There is little, if any, risk associated with sale of superfluity 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. monetary statements form the basis from which shareholders and strength investors evaluate the performance of the business. The statements also regulate accountability in the running of the business. The financial position of the business i s portrayed in the financial statements. It utilize by the company to acquire loans from banks. fiscal statements that directly indicate instability of a business have a negative impact to the business by impede potency investors, creditors and banks. Finance and financial statements have a direct effect on business transactions. It gives detailed knowledge close the lag phases and peaks of a business. Such details include fluctuations in prices in comparison to foes in the market (Ittelson, 2009). If, for example, Coca-Cola ships company increase the prices of their beverages by 1%, their immediate competitor Pepsi may have an upper hand in the market. A residuum tag gives information on the resources that the business has against its liabilities and the capability of the business to settle its debts. gold current statements are important in intercommunicate the public about the money first appearance 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 employ by business managers to either increase or decrease the price of products. chief(prenominal) 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 causa of the business. The statements are balance sails, cash decrease statements and income statements. A balance sheet is a financial statement that reports a companys assets, liabilities and stock holders equity in a given financial period. authentic 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 COMPANY fused BALANCE winding-clothes AS AT 31ST DECEMBER, 2013.ASSETTS(In Millions) up-to-the-minuteassets $ gold and cash equivalents10,414Short term investments 6,707 add together cash, cash equivalents and short term investment17,121 salable securities3,147Trade accounts receivable less allowances of $ 614,873Inventories3,277 pay expenses and other assets2,886 thorough current assets31,304 strict assetsEquity method investments10,393Other investments generally 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 $Accounts payable and accrued expenses9,577Loans and notes payable16,901Current maturities of long term debt1,024Accrued income taxes 309Total current liabilities27,811Long term debts19,154Other long term liabilities 3,498Shareholders equity total33,440TOTAL LIABILITIES AND EQUITY90.055 The balance sheet is similar regardless of the size and slip of the business. Its format does not change. Cash range statements are prepared to assess the companys earnings and expenses. The quality of the earnings is determined by comparing the cash carry from operating activities with the companys net income (R, 2003). Income statements are financial documents that show the sources of income in a business organization. Coca-cola Company had the following statement of umbrella income as at December 31, 2013.THE COCA-COLA COMPANYCONSOLIDATEDSTATEMENT OF across-the-board INCOMEAS AT 31ST DECEMBER, 2013.$ (In Millions)CONSOLIDATED NET INCOME8,626OTHER general INCOME can foreign currency translation adjustment(1,187) final gain (loss) available for sale of securities (80) illuminate gain (loss) on derivatives 151Net change in pension and other pull ahead 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 normally prepared and see towards the end of a financial year to give information about the business financial stability. The above financial statements can be interpreted by employ appropriate financial proportions to help study them with the performance during the previous financial year or with another company. These symmetrys derived from a balance sheet are functional corking, current dimension, Quick 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 interest parties about their progress toment in the instruction of the company. There are different financial statements as discussed above that give ridiculous business information on the company. Fi nancial conditions of a company are the major detail and a point of cite for several potential investors. Investors are the major capital of the United States providers. They rely on the information contained in the balance sheet, income statements and cash shine statements for their safety 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 snap view 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. wampum or losses are usually provided by the income state ment 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 live for cash menses statements to give the details. It contains information about the cash that get into the business and those that leave the business thereby viewing an exchange of cash. Shareholders equity shows the variations in the various equity components. This is usually metrical 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. Working capital is work out by deducting current liabilities from the current assets. The working capital for Coca-Cola Company for the year terminate December 31, 2013 can be reason as follows.Working Capital (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 split up position to meet its current obligations such as paying workers, paying brokers, help short term loans among others. Current ratio is careful by dividing the current assets by the current liabilities. It is related to the working capital. another(prenominal) ratio is Quick ratio. It is also cognize as 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 descend of assets that can be turned chop-chop 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, 200 3). 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 Capital expenditures.=10,542 (14,782+2,550+303)= -7,093 This statistically indicates that the company is at a deficit of $ 7, 093 million aft(prenominal)ward(prenominal) paying its capital expenditures. The income statement can be analyzed to give utter(a) margin, profit margin, cave in on tend holders equity and earnings per share. Return on Stoke holders equity is important in revealing the percentage profit after taxation 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 nearly 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 importance 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 both financial source has an implication to the business. Financial statements help provide such implications and can be used in selecting a capable budget. A company may decide to sell its shares after analyzing its posture 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 calculating the cost of investment, protection of cash flow from the investment, cons ideration of the inflation rates and the time pass judgment 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 suitable budget proposed for The Southeastern papa transferral Authority (SEPTA) for the Fiscal year 2012 is as follows (SEPTA, 2011) .FISCAL YEAR 2012 CAPITAL work outProject FY 2012 FundingRequirement manager Purchase course of instruction $59,209,593Capital Asset Lease Program 28,720,862Congestion ease 2,233,000Debt gain 52,654,545Infrastructure Safety renewing Program 34,400,000Paratransit Vehicle Acquisition 5,000,000regional Rail Signal System modernisation 35,800,000Safety and Security Improvements 5,000,000State of Good Repair Initiatives 15,200,000 military post Accessibility 4,800,000Station and Parking Improvements Program 10,400,000System Improvements Progr am 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 go through. 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 contemplate venturing unto capital project if they adopt this theory.Assessing project viability The financial viability of a project is assessed use the investment appraisal techniques. This involves the use of tools such as Return on Investment (ROI), Debts Service reportage Ratio (DSCR), Break as yet 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 + invade on long term loans + dispraiseInterest 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 aim of total contribution to the total fixed assets. office is usually the surfeit of sales over the variable cost. That is character = Sales Variable Costs.PEP is the poi nt where both fixed and variable costs are recovered from the resources. It is calculated using the formulaTotal fixed cost selling price per unitContribution per unit cost It indicates the risks involved in the business. If the PEP is achieved at a level level of capacity utilization, it is 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 complexness should be determined and the risks involved as well. The value of the procurement is another factor of concern. It involves the finis of the amount of capital that the procurement can cost. The financial viability assessment matrix assort risks speculated into several levels. Th e low risk level contains low levels of complexity, low value and short term supplies. The moderate risk level contains moderate value, sensitivity and medium term supply. The high risk level contains high strategic importance to agency, high complexity levels and sensitivity. When assessing the risks, the likelihood of a financial feasibleness should not be ruled out while making budgeting decisions.ReferencesFardon, C. D. (2003). Management of Finance. forward-looking york Osborne Books.Ittelson, T. R. (2009). Financial Statements A Step-by-Step study to Understanding and Creating Financial Reports. New York line of achievement 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 direct to Know. New Jersy commode Wiley & Sons.Pamela P. Peterson, F. J. (2004). Capital Budgeting conjecture and Practice. New Jersey John Wiley & Sons.Pamela Peters on Drake, F. J. (2012). compendium 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-proposal-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