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

Investment AppraisalIntroductionQuestion 1 An investiture appraisal is a provision process that is utilized in de considerationining the forwardness of a personal line of credit to undertake a long term investitures much(prenominal)(prenominal) as expansion, developing a new meet, acquiring new machinery among others (Les Dlabay, 2007). This is a Byzantine process that requires the analysis of citations of finance, their conditional relations, budgeting and pecuniary statements.Sources of finance Coca-cola which is the world leading non-alcoholic beverage gild marketing their products in over 200 countries worldwide have the idol foundation of assets, sh atomic number 18s, suddenly term liabilities, long-term loans and good allow for as its source of finance. The assets of the conjunction cast the major source of its finances accounting for $ 57,751 million in 2013 and $ 55,849 million in 2012 (The Coca-Cola keep connection, 2013). These include tangible and non-t angible assets such as property, endts, equipment, truth method investments and goodwill. This digest be summarized as shown in the table below.ASSETS(In millions) 2013$ 2012$Equity method investments 10,393 9,216Investment in bottling companies 1,119 1,232Other Assets 4,661 3,585Property, Plant and Equipment 14,967 14,476Trademarks with indefinite lives 6,744 6,527Bottles franchise rights with indefinite life 6,415 7,408Goodwill 12,312 12,255Other intangible assets 1,140 1,150 entirety ASSETS 57,751 55,849 Long term and abruptly term liabilities ar another source of finance for the connection. The companys total 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 companys share owners as contained in the table below.LONG TERM LIABILITIES(In millions) 2013$ 2012$Long term debts 19,154 14,736Other liabilities 3,498 5,468D eferred income taxes 6,152 4,981TOTAL ASSETS LONG TERM LIABILITIES 90,055 86,174 Important company activities that generate take ins that are ploughed back to the transaction as a source of finance include investments and new ventures. These are proceeds from the investments, acquisition of other carees, integrity method investments, non-marketable securities, purchase and sale of property, plants and equipment and their associated proceeds. In 2013, the company realized a total of $ 10, 414 from the investment and operating activities as per their 2013 annual report. Internal short term sources of finance for the company are the original assets of property and cash-equivalents such as marketable securities, inventories, live assets held for sale and the proceeds from the short term investment. Their counterpoise sheet as at December 31, 2013 shows a total of $ 17, 121 million current assets.Implications of the sources However much the company had good monetary sources in its assets, liabilities and shares, each of the sources whitethorn impact negatively or positively to the business. The straight forward implication of liabilities especially loans is the interest rates and the obligation to repay them in good eon. Failure to settle the debts and loans may lead to imposition of fines and penalization. The creditors may go to the finis of stopping to supply the company with goods and services on credit and demand for cash on deli very(prenominal). Use of shareholding as a source of finance for the company may also have its own positive and negative implications. Shareholders are like investors in the business and thereof they must be paid their returns as dividends (Fardon, 2003). This might be very difficult in cases where the company dissembles losings. Sometimes, especially in a scenario where there are no strict policies on the maximum percentage share that a shareholder can buy, the ownership of the company may be transferred to a sharehol der that buys majority of the Company shares.Question 2Importance of financial planning Finance is the driving force for a company like Coca-cola. After its financial sources have been identified, accurate financial planning is necessary for its success. fiscal planning is the foundation from which all successful businesses are built. Running on a clear financial plan ensures that a company is well prepared to meet its anticipated expenses in terms of payroll, transport, communication any other day to day business operation expenses. The plan is primary(prenominal) when the company is at the extremes of either profit making or suffering losses. It provides a stepping stone in which the company can forge a route 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 costs and increasing current and long term liabilities. It allows for these conditions to be anticipated ear ly enough 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 quarter of the company is of valuable contribution to the smooth running of the company as a whole. Lastly, an estimate of earnings can be do through 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 diversified portfolios within the company. The process of making decisions requires the company directors to be provided with the necessary tuition. These include financial reports that contain details of business transactions, profits, losses, expenses, revenues, assets and liabilities. This allows for comparison of business functioning in the previous financial year. The departmental estimates of expen ditures and their estimated sources of revenue are also part of this information. The factors that may affect the choices of decisions makers during financial planning are the number and wages of employees, available cash at hand 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 project In order to manage 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 payable to the financial institutions, commissions and interests, stock brokers among others. In the Coca-Cola Company where the major sources are the stubborn assets, liabilities, ploughed back profits, profits from investments and current assets, the appropriateness of the sources depend on the ability 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 period of time. The company is financially stable and can easily afford the required securities to withdraw a loan. Although the interest rates may be spicyer making the process expensive, the merits outweigh the demerits and the risk 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 capacity of this company to make profit is unquestionable. The risk of change in company ownership due to sale of major shares can be regulated by business policies that fasten such sales. Moreover, sale of assets such as the current assets to raise big(p) is appropriate for this compa ny. The surplus assets can be sold off and the proceeds kept up(p) to run the business. There 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 emf investors evaluate 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 shoot loans from banks. Financial statements that directly indicate 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 instals detailed information about the lag phases and peaks of a business. Such deta ils include fluctuations in prices in comparison to competitors in the market (Ittelson, 2009). If, for example, Coca-Cola Company increased the prices of their beverages by 1%, their immediate competitor Pepsi may have an upper hand in the market. A balance sheet gives information on the resources that the business has a light upst its liabilities and the capacity of the business to settle its debts. Cash extend statements are important in informing the public about the money entering and difference 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 increase or decrease the price of products.Main financial statements In aim 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 flow 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. menstruation 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 COMPANYCONSOLIDATED BALANCE planeAS AT 31ST DECEMBER, 2013.ASSETTS(In Millions)Currentassets $Cash and cash equivalents10,414Short term investments 6,707Total cash, cash equivalents and short term investment17,121Marketable securities3,147Trade accounts receivable slight allowances of $ 614,873Inventories3,277Prepaid expenses and other assets2,886Total 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 $Accounts payable and accrued expenses9,577Loans and notes payable16,901Current maturities of long term debt1,024Accrued income taxes 309Total current liabilities27,811Long term debts19,154Other long term liabilities 3,498Shareholders equity total33,440TOTAL LIABILITIES AND EQUITY90.055 The balance sheet is similar regardless of the size and type of the business. Its format does not change. Cash flow statements are prepared to assess the companys earnings and expenses. The quality of the earnings is determined by comparing the cash flow from operating activities with the companys net income (R, 2003). Income statements are financial documents that show the sources of income in a business organization. Coca-cola Company had the following statement of comprehensive income as at December 31, 2013.THE COCA-C OLA COMPANYCONSOLIDATEDSTATEMENT OF world-wide INCOMEAS AT 31ST DECEMBER, 2013.$ (In Millions)CONSOLIDATED NET INCOME8,626OTHER COMPREHENSIVE 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 usually 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 help compare them with the performance during the previous financial year or with another company. These ratios derived from a balance sheet are functio nal capital, current ratio, lovesome 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 point of concern for several potential investors. Investors are the major capital providers. They rely on the information contained in the balance sheet, income statements and cash flow 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 shot of a companys assets in comparison to liabilitie s 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 display an exchange of cash. Shareholders equity shows the variations in the various equity components. This is usually careful by deducting total liabilities from the total assets of the company. A compa ny 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 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 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 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 acid test ratio and is calculated as followsQuick ratio = Cash + ephemeral 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 pith 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 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 after paying its capital expenditures. The income statement can be analyzed to give gross margin, profit margin, furnish on Stoke holders equity and earnings per share. Return on Stoke holders equity is important in revealing the percentage profit after taxation and therefore th e 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 taxes comely 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 most 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 Every financial source has an implication to the business. Financial statements help provid e such implications and can be used in selecting a suitable budget. A company may decide to sell its shares after analyzing its effectiveness in genteelness 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 figure 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 suitable budget proposed for The Southeastern Pennsylvania Transportation Authority (SEPTA) for the Fiscal year 2012 is as follows (SEPTA, 2011) .FISCAL YEAR 2012 CAPITAL BUDGETProject FY 2012 patronageRequirementBus Purchase syllabus $59,209,593Capital Asset Lease Program 28,720,862Co ngestion Relief 2,233,000Debt Service 52,654,545Infrastructure Safety Renewal Program 34,400,000Paratransit Vehicle Acquisition 5,000,000Regional Rail Signal System Modernization 35,800,000Safety and Security Improvements 5,000,000State of Good Repair Initiatives 15,200,000 space 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 contemplate ventur ing 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 Service Coverage proportion (DSCR), Break Even 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 serene 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 + please on long term loans + Dep reciationInterest 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. part is usually the excess of sales over the variable 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 unitContribution per unit cost It indicates the risks involved in the business. If the PEP is achieved at a lower 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 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 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 feasibility should not be ruled out while making budgeting decisions.ReferencesFardon, C. D. (2003). Management of Finance. sunrise(prenominal) york Osborne Books.Ittelson, T. R. (2009). Financial Statements A Step-by-Step Guide to Understanding and Creating Financial Reports. New Yor k 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 John 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-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