Reformatting
Reformatting the financial statements involves
classifying every Income Statement and Balance Sheet
account as either an Operating or Financing activity
How to determine if something is Operating or
Financing?
Financing activities have interest payments associated
with them
Operating activities are all the other activites
22319 Financial Statement Analysis 22
Reformatting
All financial statements must be consistent
At-1 = Lt-1 + OEt-1
At = Lt + OEt
OEt = OEt-1 + CIt – dt + ΔOit
Comprehensive income (CI)
Comprehensive income (CI) = net income (NI) + other comprehensive income
(OCI)
Examples of OCI: Foreign currency translation gains/losses, Cash flow hedges,
Pension plan gains/losses
Net payments to shareholders (d)
Includes all contributions by and distributions to owners
Examples: dividends, share-based payments, share buy-back
Change in ownership interest (ΔOIt)
22319 Financial Statement Analysis 23
Reformatting – Steps
- From Statement of Changes in Equity, identify comprehensive income
(CI), net payments to shareholders (d) and changes in ownership interest
(ΔOi).
Equity(t-1) + CI – d + ΔOi = Equity(t) - Split the balance sheet into operating and financing
NOA – NFO = Equity - Split the P&L into operating and financing
NOPAT – NFEat = NI
NI + OCI = CI - Calculate FCFs and check that they equal!
22319 Financial Statement Analysis 24 - Qantas 2015
OE1 = OE0 + CI1 – d1 + ΔOI1
3,447 = 2,866 + CI1 – d1 + ΔOI1
22319 Financial Statement Analysis 25 - Qantas 2016
22319 Financial Statement Analysis 26
OE0 = 2,866
CI1 = 558
d1 = -19
ΔOI1 = 4
OE1 = 3,447 - Qantas 2015
OE1 = OE0 + CI1 – d1 +ΔOI1
3,447 = 2,866 + 558 – (-19) + 4
22319 Financial Statement Analysis 27
Reformatting – Balance Sheet
Classify every account as either an Operating or
Financing activity
Assets – Liabilities = Owners Equity
Net Operating Assets (NOA) – Net Financial
Obligations (NFO) = Owners Equity
22319 Financial Statement Analysis 28
Reformatting – Balance Sheet - Identify which assets and liabilities are
financing (generally anything interest
bearing) and calculate net financing
obligations (NFO) - All other items are identified as
operating and calculate net operating
assets (NOA) - Confirm that balance sheet still balances
(OE = NOA – NFO)
22319 Financial Statement Analysis 29
Reformatted
Balance Sheet
Year, t
NOAt
- NFOt
Equityt
Standard Balance Sheet 2012 2013
Operating assets 8,000 10,100
Marketable securities 1,600 800
Operating liabilities (400) (1,200)
Bonds payable (5,600) (5,200)
Book value (net) 3,600 4,500
22319 Financial Statement Analysis 30
Reformatting – Balance Sheet
Reformatted balance sheet 2013
Operating assets 10,100
Operating liabilities (1,200)
Net operating assets (NOA) 8,900
Marketable securities 800
Bonds payable (5,200)
Net Financing Obligations (NFO) (4,400)
Book value of equity 4,500
22319 Financial Statement Analysis 31
Reformatting – Balance Sheet
Reformatting – P&L
Classify every account as either an Operating or
Financing activity
Revenues – Expenses = Net Profit
Net Operating Profit After Tax (NOPAT) – Net Financial
Expense After Tax (NFEat) = Net Profit
Net Profit + OCI = Comprehensive Income
22319 Financial Statement Analysis 32
Reformatting – P&L.
- Identify what is financing (interest paid or
received + any others?) and calculate net interest
expense. - Adjust net interest expense for tax shelter to
calculate an net financing expense after tax (i.e.,
NFE = Net interest x (1 – tax rate (i.e., 30%)) - Identify other revenues and expenses as
operating and calculate operating profit before
tax - Adjust reported tax expense for tax shelter on net
interest to calculate net operating profit after tax
(NOPAT) - NI=NOPAT – NFEat
- If there is other comprehensive income,
CI=NOPAT – NFEat + OCI
22319 Financial Statement Analysis 33
Income
Statement
Year, t
NOPATt
NFEatt
NIt
2013
Sales 8,900
Operating expenses (6,668)
Interest revenue 108
Interest expense (548)
Tax expense (rate = 30%) (424)
Net Income 1,368
Other comprehensive
income
10
Comprehensive income 1,378
22319 Financial Statement Analysis 34
Reformatting – P&L.
2013
Sales 8,900
Operating expenses (6,668)
2,232
Tax expense (424+132) (556)
NOPAT 1,676
Interest expense (548)
Interest Revenue 108
(440)
Tax Shelter (30%) 132
Net Financing Expense (308)
Net Income 1368
Other comprehensive income 10
Comprehensive income 1,378
22319 Financial Statement Analysis 35
Reformatting – P&L.
Reformatting – Free Cash Flows
Calculate Free Cash Flow (FCF) and make sure they
equal calculating both ways
Free Cash Flow generated by operations
FCF = NOPAT – ChangeNOA + OCI
Free Cash Flow spent on financing
FCF = NFEat – NFO + d – DOI
22319 Financial Statement Analysis 36
Reformatting – Free Cash Flows
Assume no changes in OI in the example:
Et = Et-1 + CI – d (d: net payments to shareholders)
4,500 = 3,600 + 1,378 – d
d = 478
FCF = NOPAT – NOA + OCI
FCF = 1676 – (8,900- 7,600)+10
FCF = 386
FCF = NFEat – NFO + d – DOI
FCF = 308 – (4,400- 4,000)+478-0
FCF = 386
In assignment need to show the FCF check.
22319 Financial Statement Analysis 37
Customers
Suppliers
Net
Operating
Assets
(NOA)
Net
Financial
Obligations
(NFO)
Debtholders
Or
Debt issuers
Shareholders
Product and
Input Markets The Firm Capital Markets
Operating
Revenue
Operating
Expense
F
d
Operating Rev – Operating Exp = NOPAT
NOPAT – △NOA = FCF
FCF = NFEat – △NFO + d
Operating Activities Financing Activities
F = Net cash flow to debtholders and issuers
NFO = Net financial obligations d = Net cash flow to shareholders
NOPAT = Net operating profit after tax NOA = Net operating assets
NFEAT = Net financial expense after tax
*Note: assuming no other comprehensive income (OCI) and no changes in ownership interest (OI)
22319 Financial Statement Analysis 38
22319 Financial Statement Analysis 39
STOCKS
Balance Sheet
Last Year, t-1
NOAt-1
NFOt-1
Equityt-1
STOCKS
Balance Sheet
Current Year, t
NOAt
NFOt
Equityt
Income
Statement
Year, t
NOPATt
NFEatt
CIt
Cash Flow
Statement
Year, t
Ct
It
FCFt
FLOWS
NOPAT – FCFt =
NFEatt – FCFt + dt =
=. CI – d =
FCF = NOPAT – NOA
FCF = NFEat – NFO + d
*Note: assuming no other comprehensive income (OCI) and no changes in ownership interest (OI)
C = Cash flow from operations
I = Cash investment
Common mistakes!
“Why don’t my two FCF formulas give the same result?”
Reason 1: not all financial statements items are included in the reformatted statements, or double count
items
Make sure you go item by item when doing reformatting
Make sure footnote subtotals add up to the total amount in original financial statements when using footnote
information
Reason 2: tax allocation is incorrect when reformatting income statement.
Tax saving (shelter) is a revenue while tax expense is an expense.
Make sure tax allocated to operating and financing activities add up to the original tax amount.
Reason 3: net payments to shareholders (d) is calculated incorrectly.
d should include all contributions by and distributions to owners, not just dividends!
Reason 4: confuse item signs with the formula signs in reformatting.
Don’t get confused with the positive/negative signs.
Always think whether the item is an expense or a revenue? An assets or a liability?
Even if you wrongly classify Operating and financing activities, you should still have the same two FCF
results. 22319 Financial Statement Analysis 40
Conclusions
Firms create value when they earn a return (ROE)
higher than their cost of capital.
Value is created through operating activities
Advanced DuPont Analysis (next week) requires us to
have reformatted the financial statements
22319 Financial Statement Analysis 41
Lecture 4
Part C:
Demonstration of reformatting
financial statements
Excel demonstration
Please see the excel spreadsheet on UTSOnline with
Gale Pacific reformatted financial statements
22319 Financial Statement Analysis 43
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